Tanner De Witt instructed on groundbreaking restructuring case: Kaisa Group Holdings Limited29Aug2016
Tanner De Witt (“TDW”) recently advised Kaisa Group Holdings Limited (“Kaisa”) in the multi-jurisdictional restructuring of the company’s offshore debt of approximately USD 2.6 billion (nearly RMB 17 billion). Kaisa is a Cayman Islands incorporated company and is listed on the Main Board of the Hong Kong Stock Exchange. The company is a leading large-scale integrated property developer in the People’s Republic of China (“PRC”), with a presence spanning 30 cities in more than 5 regions of the PRC through its large group of subsidiaries.
Kaisa hit the headlines in late 2014 when the company announced that some of its property projects had been affected by certain actions taken by local government bodies in Shenzhen. Such actions subsequently seriously affected the group’s cash-flow. Later, in April 2015, Kaisa defaulted on interest payments due on certain high-yield notes it had issued a few years previously, making it the first Chinese property developer to default on USD denominated bonds.
“This has been an important restructuring for Hong Kong which will hopefully help other cross-border restructurings in the future”
Robin Darton, case lead at Tanner De Witt
The group had substantial debt both onshore (within the PRC) and offshore, with the offshore debt consisting of 5 series of New York law governed senior high-yield notes; English law governed convertible bonds; an English law governed swap agreement; and Hong Kong law governed bilateral loans. The offshore debt was also guaranteed by a number of subsidiaries, incorporated mainly in the British Virgin Islands (“BVI”) and Hong Kong. There was a diverse population of creditors holding the offshore debt, with the senior high-yield notes and convertible bonds being traded on the Singapore Stock Exchange (“SGX-ST”) as well as being privately traded in the debt markets. The fact the debt was represented by these varied obligations across different jurisdictions and with different governing laws made the company’s restructuring efforts challenging both as a matter of commercial negotiation and from a legal perspective, as a number of the legal issues faced had either not been considered at all by the Hong Kong Court or had only arisen on one or two occasions. For example, the jurisdictional issues arising from Kaisa being a non-Hong Kong company; the governing laws being different; potential issues arising from the restructuring support agreement and use of a consent fee; and third party releases.
TDW assisted the company in putting together a successful restructuring of its offshore debt, working with other professionals engaged by Kaisa (including Houlihan Lokey as financial advisers, US law firm Ropes and Gray, Harneys as Cayman and BVI Counsel, Deloitte and AlixPartners).
Principally, the restructuring was effected through linked and inter-conditional schemes of arrangement in Hong Kong and the Cayman Islands, with the Hong Kong Scheme then being recognised as a foreign main proceeding in New York under Chapter 15 of the US Bankruptcy Code (Title 11 of the United States Code). The restructuring involved the cancellation of the existing off-shore debt instruments, which were replaced with new instruments, namely: (i) 5 new series of high-yield notes listed on the SGX-ST; (ii) contingent value rights instruments (pursuant to which holders are entitled to a cash payment if the company’s share price reaches certain levels after the shares resume trading on the Stock Exchange); and (iii) Mandatorily Exchangeable Bonds (which will automatically be exchanged for new convertible bonds when certain conditions are met, including the resumption of trading of the company’s shares on the Stock Exchange).
With the help of its legal and financial advisers, Kaisa negotiated a restructuring support agreement with certain scheme creditors and their advisers which set out the main commercial terms of the restructuring and permitted participants to be paid a consent fee in return for committing their support to the restructuring.
TDW then made the necessary applications to the Hong Kong court pursuant to s.673 and 674 of the Companies Ordinance (Cap. 622) and worked closely with Harneys in respect of the parallel application in the Cayman Islands. Antony Zacaroli QC of leading insolvency and restructuring chambers South Square in London was instructed. Jose Maurellet SC of the Hong Kong bar also assisted in respect of the hearings in Hong Kong.
Meetings of scheme creditors were subsequently held on 20 May 2016 with leave for such meetings having been given in orders made by the Hon. Mr. Justice Harris of the High Court of Hong Kong and the Hon. Mr. Justice McMillan of the Grand Court in the Cayman Islands. Both schemes received overwhelming support as scheme creditors holding more than 96% of the value of the debt to be restructured voted at the scheme meetings. Scheme creditors holding more than 99% of the value of the debt present and voting at the scheme meetings (either in person or by proxy) voted in favour of the schemes. The statutory requirement as to majorities is the same in both Hong Kong and in Cayman, namely that approval of a scheme requires a majority in number representing at least 75% in value of the creditors present (in person or by proxy) and voting to vote in favour of the scheme.
The Cayman Islands and Hong Kong schemes of arrangement were then sanctioned respectively by the Grand Court on 9 June 2016 and the High Court of Hong Kong on 10 June 2016 and became effective after registration with the respective companies registries.
On 3 June 2016 the Hong Kong proceedings relating to Hong Kong Scheme were recognised in the U.S Bankruptcy Court for the Southern District of New York as a foreign main proceeding under Chapter 15 of the Bankrutpcy Code, with a further order being made on 14 July 2016 to recognise and enforce the Hong Kong Scheme itself (as sanctioned) in New York. TDW assisted in this process by providing evidence on the relevant Hong Kong law aspects.
Implications for Hong Kong?
The restructuring of Kaisa’s offshore debt through the use of schemes of arrangement is a positive development for Hong Kong restructurings. Many of the companies listed on the Hong Kong Stock Exchange are incorporated outside of Hong Kong (including many in the Cayman Islands), with a number primarily conducting their business in the PRC. Furthermore, a number of such companies are exposed to New York law governed debt instruments or other debts with governing law other than Hong Kong law. Kaisa’s scheme of arrangement demonstrates the High Court’s willingness to exercise its jurisdiction to sanction schemes for ‘foreign companies’ provided there is ‘sufficient connection’ with Hong Kong following Re LDK Solar Co. Ltd  1 HKLRD 458.
The tools used and certain of the issues arising in the Kaisa restructuring have not previously been addressed a great deal in the Hong Kong courts, with either no or very limited Hong Kong authority to guide the way. Fortunately, the Hong Kong Companies Judge (the Hon. Mr. Justice Harris) was receptive to the English jurisprudence on cross-border schemes of arrangement that has developed over the past few years, including where (as here) the law governing the debt to be restructured includes laws other than Hong Kong law.
The Tanner De Witt team was led by Robin Darton, joint head of the firm’s Insolvency and Restructuring Practice, assisted by Corporate and Commercial partner Edmond Leung; and associates Rachel Hui, Tim Au and Herman Pang.
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