Asia Aluminum’s failed attempt to buy back its bonds for a third of their price from offshore bondholders will finally test China’s Enterprise Bankruptcy Law.
Foreign bondholders have strongly opposed the company’s offer, arguing that it is unrealistic, with a lack of financial disclosure. The plan includes an offer to buy back US$450m in high-yield bonds for 27.5 cents in the dollar and to repurchase US$727m payment-in-kind notes for 13.5 per cent of face value.
The battle between the troubled company, which makes aluminium extrusions, and its offshore investors is proving a test case for the law which came into effect in June 2007.
The legislation introduced the ability for creditors to take control of a company when it was in distress. It also gave equitable protection for both offshore and onshore investors. Previously, bankruptcies were government administered.
Under Asia Aluminum’s plans, the chairman of the company, who also owns 97% of the equity, would remain in charge if the buyback is successful. But following the bondholders’ rejection of the tender on Tuesday, the company should theoretically go into liquidation.
If Asia Aluminum does liquidate, the ensuing workout would be China’s first major test of its investor recovery framework under the law, which was modelled on the US’s Chapter 11 that gives companies room to continue operating and pay creditors, including foreign ones.
“Despite the public slanging match between the bondholders and the company, there is a far more important point, which is how the bankruptcy laws will stand up,” said a source close to the deal.
Investors will be aware that the consequences of their rejection to tender could be severe. Despite the unfavourable terms of the buyback, the alternative of a court-led liquidation – which are notoriously opaque – could easily leave the offshore investors with nothing.
There are positive examples to draw on, though. Ferro China, a galvanized steel producer, filed for bankruptcy in November last year and although the process is still in its early stages, both domestic and
foreign creditors appear to be treated equally.
“The restructuring is being done with a good deal of transparency, creditors meetings are clear and there are good provisions of information as well as future projections,” said a Hong Kong-based auditor who is involved in the restructuring.
Tom Young