It’s not easy for foreign firms to get work in China, and local is everything. In both China and Hong Kong, having restructuring advisers and lawyers who understand the local market is invaluable. GRR presents a guide to the firms who are most active and most respected in both jurisdictions.
“Even now it’s still dominated by the local Chinese law firms at the national level,” Deloitte’s Wesley Kong explains of the Chinese legal market. “In every city and in every province, they have a lot of their own local firms.”
In a country where the average medium-sized city is bigger than many global capitals, local is everything. “When I instruct PRC lawyers, they are typically good for their own jurisdictions,” Eversheds Sutherland’s Kingsley Ong says. “If I instruct a Shanghai lawyer, they may be familiar with the Shanghai courts and bankruptcy judges, but usually less familiar with different cities.”
One of the key positions is bankruptcy administrator, to which – unlike in Hong Kong – both law firms and accounting firms can be appointed. The selection is done by invitation from the court, which will open something akin to a tendering process when a matter comes up that requires a bankruptcy administrator. This often ends up with the joint appointment of a law firm and an accounting firm, or a law firm appointed that then retains an accounting firm as a financial adviser, or vice versa.
“It’s like a lottery,” says YWK’s Lillian Zhang says. “If I want you to be my company’s administrator, no, the court will randomly pick one. But for sizable companies, for example state-owned companies, the court might agree to accept selected administrators if they’re big enough. So they’ll probably say, ‘We want a law firm with a big name, or wealthy industry experience because this company is very significant’.”
Local presence is essential. “They’ll look at the number of people you have in that particular city,” Kong says. “Not just the number of persons you have, but the experience they have.” Courts in smaller cities are more likely to want a local name.
To be considered, a firm needs to be on an individual court’s register for administrators, and to qualify for that requires mainland experience. “It’s not easy because they look into your experience in the mainland, not overseas, to be qualified,” says Derek Lai at Deloitte.
As the market becomes bigger, the Chinese courts are attempting to raise the quality of the administrators they’re appointing, with some – such as in Guangdong – imposing tests and exams for candidates before they qualify. But Kong says the “quality and capability” of administrators is still uneven in China’s cities and regions.
But for all this, the work isn’t always rewarding, and administrators can even make a loss on their instruction. Fees are calculated based on a percentage of the debtors’ unencumbered assets – but as Chinese banks always take securities, very few assets are in the event unencumbered. Administrators can also charge fees while working on secured assets, but these can only be up to a maximum of 10% of their total fees.
Happily, the fees for the big cases are sufficient that many firms are willing to take a loss on the smaller ones so that they are on the court’s radar for when a big ticket comes up.
Courts have traditionally preferred the local firms to international ones. But the big cases in recent years have seen them cast a wider net, beginning in 2014 when the Shanghai courts appointed KPMG as co-administrator in Chaori Solar alongside King & Wood Mallesons. Chaori set a pattern for the bigger cases, in which a local Chinese firm will share a mandate with a Big Four accounting firm to get the benefit of overseas experience.
For individual party appointments, Zhang says the relative paucity of examples of successful workouts in China means some potential clients still need convincing that they should get professional help. “Still people are wondering, for example, whether a debt-for-equity swap can help a company out. So they just think, ‘Why do we need the professionals to help out; we have been running this company’.”
Creditors’ committees might similarly be reluctant to hire restructuring professionals who are not experts in a particular industry, she says. And many are impatient for results. “They can see instant value from legal services because they feel secure after the lawyers review documents for them. But for us, we can’t turn a company around overnight – it will take three to six months minimum, while the longest will be two to three years. Many of them cannot wait.”
At the same time, the accounting firms have an advantage of scale over the law firms.
The legal market is dominated on the restructuring side by Dacheng Dentons, King & Wood Mallesons and Fangda. While the former two are international firms by virtue of recent mergers, their position in the Chinese market predates their mergers and is principally due to the strength of their local legacy firms, Dacheng and King & Wood.
James He, at Deloitte in Beijing, says the benefit of these mergers to the international firm is sometimes clearer than the benefit to the local firm. “It’s not easy for an international firm to start up a practice here. So mergers tend to be one of the faster and perceived as one of the more effective ways to do it.”
Partnering up provides know-how, too, for new entrants. “Generally offshore investors are not very familiar with Chinese bankruptcy, and they’re put off by the uncertainty and unpredictability,” says Fangda’s Wang Lingqi. “Doing a large restructuring in China requires not just financial power or resources, but also knowledge in the industry. So a good angle for offshore investors is to find good local partners that have a good industrial knowledge, and also networks for them to work together.”
During the past half decade or so, a lot of private equity and other foreign funds have had an eye on the country’s massive non-performing loan market, and for several years now, special situation funds have begun investing in restructuring projects. One such is Chongqing Iron & Steel, whose white knight proved to be a consortium involving a local state-owned enterprise and a US-based special situations fund.
“That case has drawn great attention in China, and it shows that China is willing to provide investment and cooperation opportunities for foreign parties,” Dentons Dacheng partner Yin Xiuchao says.
Outside finance is “always interested”, Zhang says, “but they face the difficulty of how to invest, how to choose the right target. They might have local teams, but they are not really involved in dealing with all those issues that are faced by companies in difficulty. And also, due to the legal environment in some of the regions, some of them might be scared off.”
More opportunities may lie ahead. There’s talk of establishing a market for trading claims in bankruptcy proceedings, which China doesn’t yet have. Practitioners say it’s also likely that there will be more opportunities during the coming year to invest in real estate restructurings, where the pressure the sector is facing at the moment is compelling investors to issue bonds at record high yields.
So what does China need more of? Hao Zhaohui at King & Wood Mallesons says, to date, domestic restructurings have used domestic firms. “But with more and more foreign investors involved, there is more space for foreign accounting firms, foreign law firms and consulting firms to take part in Chinese proceedings as the foreign investors’ advisers,” he says.
“I think there is a shortage of restructuring professionals, because the market is still mainly dominated by the lawyers, and many of them are not that experienced in doing the real restructuring work because restructuring is still a fairly new word in China,” Zhang says. “They need to combine financial, legal, operational, a combination of knowledge, and I see a shortage of that.”
View the list of China’s names to know here: