Challenges faced by foreign creditors of Suntech

The bankruptcy of Suntech Power Holdings Co. Ltd. ("Suntech") is a reminder of the challenges that foreign creditors face when a Chinese company goes into bankruptcy.
As a result of Suntech's default on its convertible bonds in March 2013, cross-defaults on its debt obligations in China were triggered. A number of banks subsequently petitioned for the insolvency and restructuring of Suntech's principal operating subsidiary in China, Wuxi Suntech Power Co. Ltd ("Wuxi Suntech"). In April 2014, Hong Kong-listed Shunfeng Photovoltaic International Ltd. approved an acquisition of Wuxi Suntech. However, the bondholders, who are creditors of Suntech and not Wuxi Suntech, still face a rough road ahead.
Challenges
Foreign creditors have historically had an uphill struggle in Chinese bankruptcies and restructurings, with domestic creditors taking the largest slice of the pie, or even the entire pie. This article takes a look at some of the challenges that Suntech's bondholders face.
Structural subordination
One of the main problems that foreign creditors of Chinese companies face is structural subordination. Structural subordination arises where the creditors of a company do not have access to the assets of the company's subsidiary until the creditors of the subsidiary have been paid off and there are assets remaining which can be paid up to the equity holders of the subsidiary. In the case of Suntech, the bondholders are creditors of Suntech, the offshore holding company, and not Wuxi Suntech, the onshore operating subsidiary. As the majority of Suntech's assets are held by Wuxi Suntech, the sale of Wuxi Suntech will effectively render Suntech an empty shell.
Government policies
Another source of challenge to foreign creditors is the heavy intervention of the Chinese government in restructurings involving Chinese companies. For example, in the restructuring of the Asia Aluminum Group ("Asia Aluminum") in 2009, Norsk Hydro ASA, a Norwegian company, withdrew its rescue offer for Asia Aluminum due to the Chinese government's unfavorable reaction. Asia Aluminum was eventually restructured via a management buyout, which had obtained the approval of the Chinese government as the restructuring was able to maintain social stability and employment – both key considerations for the Chinese government. At one stage, Suntech received a letter of intent from a state-owned enterprise, Wuxi Guolian Development Group Co. Ltd., offering to make a USD150 million injection into Suntech to support Suntech's comprehensive rehabilitation and restructuring of its financial and operational affairs. This was likely a move by the local Wuxi government to try to ensure that it had a role in any restructuring of Suntech and may have been part of an attempt to avoid a forced liquidation of Suntech.
3 Restructuring & Insolvency Newsletter June 2014
Outlook
After the sale of Wuxi Suntech, it is very unlikely that the bondholders will recover anything. Their only recourse may be to look to the potential restructuring of Suntech in the Cayman Islands (where it is incorporated) involving a debt-to-equity swap and proposals to convert the company from a manufacturer of solar panels into a distributor. The case of Suntech confirms the difficulties faced by foreign creditors when Chinese companies become bankrupt, even where there is support from the Chinese government. Given these difficulties, investors are reminded to conduct thorough due diligence of companies to ascertain the long term cash flow status of the company they have invested in, the location of operations and assets within the corporate group structure and the nature of support by the Chinese government.