Asia Bondholders Face Pain as Bankruptcies Climb, Lawyers Say

June 10 (Bloomberg) -- The number of failed companies in Asia, particularly in China and Indonesia, will rise sharply in coming months, leaving many bondholders with little chance of recovering their money, according to insolvency lawyers.

“I’m getting one to two decent-sized jobs a month and I don’t see the pipeline turning off anytime soon,” Neil McDonald, a Hong Kong-based business restructuring and insolvency partner with Lovells LLP, said in an interview today.

Defaults and bankruptcies in the Asia-Pacific region have risen to 67 this year, from 16 in the same period last year, according to data compiled by Bloomberg, while banks in Asia have written off $38.5 billion since the global credit crisis began in 2007. Petitions to wind up companies in Hong Kong jumped 57 percent from March to April, according to the Official Receiver’s Office, bringing the total number of petitions and winding-up orders in the city this year to 408.

McDonald, who has worked on insolvencies including NV De Indonesische Overzeese Bank, PT Central Proteinaprima and Anglo Starlite Insurance Co., said a constant problem for bondholders is the way many companies were set up, with an operating entity in either mainland China or Indonesia, and the parent company based offshore in the British Virgin or Cayman Islands.

“That’s the classic holding structure of many companies in Asia. You appoint a liquidator in Hong Kong and all the local banks jump on the assets in China,” he said. “These companies have structures which for any practical purpose put bondholders out of the money from day one.”

Banks First

Bondholders of Asia Aluminum Holdings Ltd. could get 20 cents on the dollar or less while Chinese banks will probably recoup all they’re owed, the metal company’s provisional liquidators Ferrier Hodgson Ltd. said on May 14. Asia Aluminum was placed into provisional liquidation by a Hong Kong court in March after bondholders rejected a debt restructuring plan.

Shareholders of Indonesian shrimp producer PT Central Proteinaprima, or CP Prima as it is known, agreed on May 12 to a debt-conversion plan and rights offer which bondholder groups, including one known as Red Dragon, say may cause overseas noteholders to lose control of the company, a claim CP Prima denies. The Jakarta-based company owes bondholders $525 million, according to Bloomberg data.

David Zemans, managing partner of Milbank Tweed Hadley & McCloy LLP’s Singapore office, said it was often difficult for bondholders with strong cases to rely on local legal systems. Many of the bondholders he represents are owed money in Indonesia, he said.

Legal Systems

“It’s unlike other jurisdictions, where you have some reasonable sense of confidence documents will be interpreted in accordance with how they’re meant to be interpreted,” Zemans said. “You have to go in with your eyes wide open.”

Non-performing loans in Indonesia, the largest Southeast nation, rose 11 percent this year to 61.7 trillion rupiah ($6.1 billion), the central bank’s data shows.

In Singapore, the number of petitions filed to wind up companies rose 55 percent from March to April, according to the city-state’s Insolvency & Public Trustee’s Office, a unit of the Ministry of Law.

Offers from struggling companies to buy back debt at low prices are on the rise, McDonald said.

On June 4, China Glass Holdings Ltd. had its rating cut to Ca, the second-lowest level, by Moody’s Investors Service, after China’s second-largest maker of flat glass offered to buy back $100 million bonds maturing in 2012 for up to 50 cents on the dollar.

Caving In

“Moody’s views the transaction as a distressed exchange and the Ca rating reflects the high economic loss for the noteholders,” Moody’s analyst Wonnie Chu said in an e-mailed statement yesterday.

Distressed companies often hope bondholders would simply “cave in,” McDonald said. “If the noteholders are banks it’s a little different as they have strong risk committees and can’t, or will not, just write off money like that. Others do end up saying ‘Well, we need the cash, we’d rather write it off and move on,’” he said.

Bigger groups had more chance of success, according to Zemans.

“There are always situations where bondholders decide to cut bait, but in situations where there are unifying factors, like a very difficult borrower and/or clear upside to holding the bonds, bondholders are usually able to find common ground,” he said.

The absence of any formal structure to deal with companies on the brink of bankruptcy in Asia is a huge issue, McDonald said. Countries including China and Indonesia have no Chapter 11 equivalent, or any other similar reorganization proceedings to deal with businesses finding it hard to stay solvent, he said.

“When a business gets sick, the first thing it needs is emergency working capital,” said McDonald. “But unless there’s some certainty surrounding the security you obtain when you do put money in, why would anyone help?”