Builder China Aoyuan Seeks Debt Restructuring Recognition In U.S.

(Bloomberg) -- China Aoyuan Group Ltd. filed for Chapter 15 bankruptcy in New York on Wednesday, a move by the defaulted property developer to seek US court recognition for its offshore debt restructuring and ward off litigation. 

The Guangzhou-based developer, which had about $6 billion of total offshore interest-bearing liabilities as of the end of 2022, is undergoing restructuring in Hong Kong, Cayman Islands and the British Virgin Islands after deciding last year to forgo paying debt. 

Its board has been advised by its advisers to “seek recognition of the Hong Kong proceedings and related relief from the US Bankruptcy Court for the Southern District of New York,” according to a company filing with the court. Without US court recognition, “there is litigation risk that dissenting holders of the existing public notes may file actions to enforce their claims in the US courts even after the Hong Kong schemes are sanctioned by the Hong Kong court,” it said.

Aoyuan joins a small but growing list Chinese developers — as well as other non-US debtors — to tap Chapter 15 bankruptcy system to more efficiently deal with offshore creditors or handle cross-border assets. China Evergrande Group, whose 2021 default accelerated the country’s property debt crisis, called the move a “normal procedure” since its dollar bonds are governed by New York law.

A Chapter 15 recognition proceeding is a legal step for the US court to formally recognize the effectiveness of the restructuring in foreign jurisdictions, according to an insight note by law firm Sidley Austin LLP in October. 

Companies don’t necessarily need material US assets in order to seek such recognition, and often the only liabilities of Chapter 15 debtors are US-law governed bonds, the note said, in explaining the differences with the better-known Chapter 11 filings.

Aoyuan’s dollar bonds — trading at below 2 cents to indicate investors’ low expectations for recovery — are governed by New York law, Bloomberg-compiled data show.

In July, the company detailed a restructuring plan with a number of new debt instruments and other measures to address creditors’ demands, including notes with payment-in-kind interests, new equity shares, zero-coupon mandatory convertible bonds and perpetual securities. 

Aoyuan last month said it obtained sufficient support from creditors to approve its restructuring plans, and would seek Hong Kong, Cayman and BVI courts’ approval for the plan in December and January. 

Aoyuan, ranked 110th by sales among Chinese developers in the first half this year, said its decision not to pay the debts was due to the need “to preserve its limited cash resources and maintain fairness among all of its creditors pending a holistic debt restructuring.” 

The case is China Aoyuan Group Ltd, 23-12030, US Bankruptcy Court for the Southern District of New York (Manhattan).

(Updates with filing quotes in third paragraph, Chapter 15 explanation)

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