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New South Wales trained associate Andrew Behman joined Addleshaw Goddard (AG) in August 2020. Instantly he was central to a vast project that will test the effectiveness of ‘keepwell deeds’ protecting an estimated $586bn Chinese offshore bonds issued for PRC onshore companies, after a record $30bn of bonds defaulted.

“It is the first of its kind in terms of testing keepwell arrangements, and that makes it both unique and very significant. It has the potential to make history – the outcome will have knock-on effects for a half-trillion-dollar industry. It will also have a significant impact – whatever happens – on offshore investment in the Chinese market. What made it stand out for me was how quickly we were able to take the matter from a position where bondholders had 0% chance of seeing any return (before we were instructed) to having a possibility of seeing some of their money again,” Behman explains.

Andrew Behman, Addleshaw Goddard
Andrew Behman, Addleshaw Goddard

“The main takeaways have been how to coordinate and move over 100 clients towards a common goal and how to co-ordinate with many different lawyers and other parties across six jurisdictions. This has been an eye-opener in terms of planning to make the best use of timing – as well as how to capitalise on the knowledge and skills of so many expert colleagues.”

Peking University Founder Group (PUFG) defaulted and entered administration in Beijing in early 2020, announcing plans to restructure its US$13bn debt. The PRC administrators rejected the offshore bond trustees’ claim based upon the keepwell deed as an unenforceable obligation.

The PUFG keepwell bonds total $1.7bn across five tranches, and 20 per cent of the bondholders in each tranche would need to instruct the bond trustees to issue an appeal of such rejection. The Beijing court fees for each tranche exceeded $1m, with a similar figure being requested for the bond trustee’s fees as well as an indemnity secured by a $1m deposit.

Several International law firms sought instructions from bondholders exceeding the requisite 20 per cent of each keepwell tranche to advance the appeal, but the bondholders proved reluctant to contemplate the significant court fee/costs given the uncertainty of success.

AG took a different approach. The five keepwell bond tranches had been issued respectively by two BVI special purpose vehicles (BVI Issuers) and each of those has a parent which is a trading entity in Hong Kong (HK Guarantors). As part of the keepwell deed arrangements PUFG, the ultimate parent, provided a separate contractual indemnity to provide sufficient funds to discharge the obligations to the bond trustee (BVI Issuer) or the guarantee of that obligation (HK Guarantor) together with a deed of equity interest purchase undertaking (EIPU) operating, broadly, to ensure solvency.

AG actively proposed a solution based on the separate indemnities recommending: the bond trustee keepwell deed rejection, should not be appealed due to high costs, weak grounds and unpredictability of outcome in the Beijing court. The firm recommended the urgent appointment of provisional liquidators to the BVI Issuers and HK Guarantors allowing each to make claims against PUFG under the indemnity/EIPU terms described above for the sum needed to pay the bond trustee obligations with interest and costs (BVI Issuer) or the guarantee of that sum (HK Guarantor).

AG also arranged cheaper costing as the bond trustee would only need sufficient to apply for the appointment of Provisional Liquidators and AG would undertake the first drafts and defer part of its costs pending a successful return. The firm recommended that only 1 per cent of the face value of participating bondholders would need to be provided for it to act and with the corollary advantages that the Liquidators when appointed would be able to proceed on a self-funded basis, as both of the HK Guarantors had significant balance sheets and their actions would have an impact on the PRC Administrators’ intended Restructuring Plan making a settlement more likely.

Finally, should the PRC Administrators progress a Restructuring Plan excluding keepwell bondholders, then such bondholders would have recoveries via the Liquidation estates including potential restitutionary and other claims.

For AG to target this developing market in which it had little brand recognition, it put together a cross-border team to capitalise on its corporate and bond expertise in Hong Kong and its international restructuring team co-ordinated via London.

Having formulated a strategy, the firm persuaded the bond trustee and its advisors of the benefit of offering bondholders a solution. They agreed that AG could attend their bondholder telephone conferences on a ‘non recommended’ basis to set out its proposal. The firm also provided information via Reorg and Debtwire as more clients started to engage it.

The firm signed up more than 100 bondholder clients across all five keepwell bond tranches on the basis of a budgeted funding target. Each put forward 1 per cent of their bond face value as a fee. From this we worked closely with the bond trustee, their legal team (including BVI lawyers) and loaned sufficient to them, combined with AG’s underlying drafts to allow both BVI Issuers and both HK Guarantors to be placed into liquidation (some via a provisional liquidation) and make direct claims against the PRC Administration prior to the deadline for claims and the publishing of the PUFG Restructuring Proposal in April 2021.

This Phase 1 included client take on for more than 100 clients, with funding clearance, establishment of a steering group from whom to take instructions pursuant to the firm’s engagement terms, finalising arrangements and funding with the bond trustee and their lawyers in Singapore and BVI, as well as the initial drafts of legal process.

The firm also ran a process for the steering group of bondholders to select potential liquidators, it effected their appointments and ensured the filing of the four indemnity claims representing the principal liability, interest and costs under the keepwell bonds made by the Issuers to PUFG, and the same sum representing a guarantee liability from the HK Guarantors against PUFG. This was all effected in less than six months.

“The main technical sticking point was finding alternative ways to cause bondholders claims to be made against PUFG when they had already been rejected,” Behman says. “We overcame that by taking control of major parts of the PUFG structure, through winding up the issuers and guarantors and causing them to make substantially similar claims against PUFG.”

However, there were the laws of the People’s Republic of China to tackle. “It was only possible to do this by ensuring we were working with the right people and sharing knowledge effectively. Having worked on this matter gives me a really good grounding for managing large matters involving multiple parties across several different jurisdictions,” he adds.

“The main issue was the unusual keepwell arrangement and the fact that it had never been tested before – with all of the ongoing implications for what the outcome would mean. However, this was not the only unique aspect to this matter. The strategy we employed to bring so many moving parts together – and at such very short notice – was also a first-of-its-kind case. And finally, having to interact between PRC, Hong Kong, UK and BVI law was certainly a unique experience for me.”

The PRC project

The success of Phase 1 was to establish a platform; four liquidations from which claims had been made into the PRC Administrators of PUFG in an urgent timescale before they issued their Restructuring Plan at the end of April 2021.

Phase 2 is the part of the original strategy that delivers value to the bondholders and is controlled by the liquidators. It is made up of two elements: The first involves seeking to persuade the PRC Administrators to accept the claims that have been made into the estate. As the obligations in this bond and indemnity structure are all under UK law and enforceable solely in Hong Kong, process is being issued in the Hong Kong courts in relation to all four entities with recognition in Hong Kong having been obtained for the BVI Issuers and relevant court sanction been granted for this process. With input from leading counsel in London and Hong Kong this will prove the best opportunity to persuade the PRC Administrators to alter their view and allow these claims to rank in their Restructuring Plan. The firm’s intention is that the PRC Administrators have the opportunity to consider a Hong Kong court analysis of the legal claim that has been put.

The second part of the strategy involves the recovery of funds and the development of a restitution strategy should the proof of debt claims not be accepted and/or to make good any shortfall in payment. This has already resulted in one of the BVI Issuers in liquidation receiving confirmation (following a court process) of receipts totalling approximately $600m. The Hong Kong Guarantor for the other keepwell bonds has already received court approval to sell listed shares valued at up to $50m. This process continues and a detailed forensic analysis is being undertaken.

The bondholders whom we originally acted for have moved from a position where their investments appeared to be worth little and the prospects of any funded review of the Bond Trustee’s keepwell claim rejection appeared unlikely. Their estimated returns have already materially increased.

Prior to joining AG, Behman, who qualified in Australia in 2014, hadn’t worked with any of the UK AG partners, only in those in Australia. “I’ve been able to work on a number of deals at AG that have covered a variety of different challenges. This has ranged from the recovery of misappropriated patents on behalf of a liquidator to advising an examinee before parliamentary enquiries. I’ve also acted for a trustee in bankruptcy to challenge the security of a creditor over a bankrupt’s real property. Almost every matter is different in some new and interesting way,” he says.

Joining the firm during the pandemic did make it harder to meet and get to know the team, the explains. “Especially their individual skillsets and personalities – if you have never met or worked with them in person. The usual methods of communication were not available owing to the pandemic restrictions, and this was certainly a challenge.

“That said, most of us became a lot more adept with technology, which actually meant that some areas were more streamlined and efficient, because they had to be – which might well have contributed to the speed and effectiveness with which we were able to work. Finally, it meant that when we had some major tasks to focus on, working remotely meant that everything was quiet! This meant we could really concentrate without the interruptions and distractions one might normally expect in a busy office environment.”

Who’s Who: the Addleshaw Goddard team

Paul Fleming, Lance Jiang, Karl Clowry (restructuring); Janie Wong (commercial litigation)

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