How Exposed are Holders of Offshore Chinese Bonds?

by Latham & Watkins LLP

In late 2013, Latham & Watkins hosted a restructuring conference, Maximizing Outcomes in Upcoming Asia Restructurings, at the Asia Society in Hong Kong. The conference featured a series of keynote speakers and panel discussions. Latham partner Eugene Lee moderated the panel “How Exposed are Holders of Offshore Chinese Bonds?”

In this Q&A interview Lee discusses the risk investors buying offshore Chinese bonds face, explains the bonds ongoing popularity and offers his advice to potential buyers.

What lessons can be learned from the Sino Forest and Asia Aluminum cases?

Lee: I think the lessons learned are that structural subordination is a real issue and hinders the ability of bond holders to maximize recovery in a workout scenario. A lot of bond issuances by China-based companies, whose operations are in China, are issued using an offshore entity. Unfortunately, regulatory constraints limit the ability of bond holders to obtain credit support or security, such as upstream guarantees, from the operating subsidiaries in China holding the real assets. 

In the eyes of some cynical commentators, bond holders of offshore entities basically rank the same as equity. So, some may say that they basically are buying equity but without the upside of equity. However, I think that despite the risk, there has been a great demand for these bonds because the quantitative easing and the recent doldrums in the equity markets have resulted in people chasing yield, driving the demand for these types of securities.

It is a difficult structure. If you look at the recovery rates for bonds in Sino Forest and Asia Aluminum, I don’t think bond holders got a good deal. If they had a better structure they probably would have had better recovery rates.

What advice would you give to those considering investing in offshore Chinese bonds? Is there a large amount of risk?

Lee: I think hopefully they will price in the risk. A lot of the recent demand is driven by high net worth individuals. If you look at how many of these bonds are sold, a large portion of them are sold through private banks to their clients. So, again it is basically driven by a chase for yield. Some of these bonds offer rates like 13 to 14 percent. The structural challenges are pretty hard to overcome because they are based on regulatory constraints, so I think people should invest in them knowing the risk and hopefully the yield is sufficient to compensate for that higher risk.

In most European restructurings, the operating companies do not file for formal insolvency and all the financial restructuring is done at the level of the holding company who holds the debt. In one of the recent Chinese restructurings, the principal Chinese operating subsidiary of Suntech, which defaulted on an offshore bond payment, filed for bankruptcy in Chinese courts. This only brings additional uncertainty to the process in addition to the structural subordination issue.

Does Chinese law offer any protection for offshore bond holders in the case of a bankruptcy?

Lee: Chinese law has a similar regime to the United States — China also has a similar chapter 11 protection. But, as I said, because of structural subordination the bondholders are not direct creditors of Chinese companies. So, effectively if something were to happen to the offshore entity the bond holders would basically be treated as equity holders of the offshore entity, effectively ranking at the bottom of the capital structure of the Chinese companies. Furthermore, although China has a chapter 11-like procedure, Chinese courts will likely apply it in a different manner and so distressed investors should not assume that they will get the same outcome as they would in the United States. We are not aware of any Chinese precedent, and as Chinese courts are not used to the new procedure, it is difficult to predict the outcome, implementation or timing.

Are there any new developments or structural changes in Chinese bonds?

Lee: The recent development is that some people are trying to get some form of credit enhancements from onshore entities. These are used primarily in transactions involving large China-incorporated parents issuing offshore bonds through overseas subsidiaries. The form of credit support, such as a keepwell deed, is short of a guarantee. Unfortunately, these types of credit enhancement have not been tested and are not foolproof. You even see risk factors in the offering documents warning that they might not be enforceable. This area is still evolving and we’re continuing to see market innovation. Having said that, we rarely see the structure used in the bond transactions involving China-based issuers who are actually the offshore listed parents.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP

Latham & Watkins LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.