Distressed Debt: Friend or Foe or an Opportunity

I’m honoured to have been asked to moderate a panel of NPL and distressed debt investors at the inaugural forum organised by COINS on “Distressed Debt Investing – Finding Value & Opportunities In A Hot Market” last week. 

COINS stands for The Company and Insolvency Law Society and is a non-profit platform for exchange of views on the development and practice of company and insolvency law. It also has the privilege of having The Hon Mr Justice Harris, Court of First Instance, High Court, Hong Kong as its Honorary President. 

Undoubtedly, the size of the debt market is eye-poppingly huge. According to authoritative recent reports, China has around:

?   US$3 trillion total external debt representing three times GDP;

?   US$300 billion of NPLs held by commercial banks — a 10-year high; and 

?   US$750 billion of corporate debt 

Given the continuing tightening of credit, there are also huge opportunities for direct lending, particularly in view of the growing number of SMEs in China. According to sources, there are nearly 90 million SMEs in China, accounting for over 60 per cent of GDP. 

We are only some 20 days into the year and the press has already reported five Chinese companies likely to default on debts worth a total of US$450 million. 

A continued slowdown in China coupled with US-China (if not all out trade war) ongoing tension will exacerbate the China debt situation. 

Whilst many may see opportunities for profit, investing in distressed debt is at best a niche market for the experienced with real skills, commitment and deep knowledge of how to navigate the China enforcement landscape. 

Hong Kong’s legal tools to deal with stressed or distressed companies have been incomplete. This puts us at a disadvantage compared to Australia, the United States, Singapore and even Mainland China. The first dedicated bankruptcy court was launched in Shenzhen last week to expedite restructuring and liquidation of distressed businesses including cross border lawsuits involving entities in Hong Kong.  

After a 20+ year wait and two attempts to bring new legislation to plug this gap, it looks as if Hong Kong will finally see a statutory corporate rescue mechanism enacted. This is expected to be available to both Hong Kong incorporated and non-Hong Kong incorporated but registered companies, though the proposed regime will not apply to certain regulated financial institutions like banks and insurance companies. 

A much awaited moratorium under which actions against companies would stay for some 45 working days (subject to extension) look to be the direction of travel. 

Whilst we are eagerly awaiting other details of the draft bill, especially the treatment of employees’ outstanding entitlements (being arguably the most controversial issue during the last bill in 2001) and the proposed secured creditors' veto (which may put spanner in the works to a lot of well-meaning corporate rescue plans), there seems to be real determination on the part of the Hong Kong government to bring about this statutory corporate rescue regime, hopefully before the end of this year. 

Insolvent trading provisions are also being considered at the same time which will be welcomed and will bring us in line with other common law jurisdictions that have already established such provisions. 

Like everywhere else, Hong Kong has its fair share of challenges and setbacks in bringing about legislative changes over the years to help innovate itself, to stay competitive and to reap the opportunities arising from the region. 

We do hope that the looming uncertainties between US and China on many fronts in 2019 will give Hong Kong a strong impetus to come up with the right statutory framework to facilitate potential corporate rescues - so that there is a chance for win-win solutions for businesses, employees and creditors alike.

The Hon Mr Justice Harris, Court of First Instance, High Court, Hong Kong and Look Chan Ho, Secretariat and Co-Founder of COINS with Freshfields' Nick Stern, Counsel, Neil Golding, Partner, Teresa Ko, China Chairman and Bing Guan, Head of China DCM.