The debt load in China, and in Emerging Markets generally, has been in the news lately with amounts of debt anticipated to go into default reaching an estimated $1.3 trillion.1 Much of this debt is “offshore,” meaning bonds issued by a corporate holding company organized in a what may have been described as a tax haven, such as the British Virgin Islands or the Cayman Islands, which are subject to New York law as a choice of law and typically denominated in U.S. dollars. This offshore debt is often widely held. While the choice of law suggests that the United States and New York, in particular, should be the forum for restructuring, the domicile of the issuer and the forum of the enterprise operations are also available choices. In contrast to the “offshore debt” issued by a holding company, the debt issued by the entity owning the operations is referred to as the “onshore” debt. A default on the “offshore” debt may not affect the operations. Creditor remedies are limited, and local insolvency regimes are untested or ineffective. Indeed, borrowers likely will not undertake a restructuring unless and until there is a disruption (such as a liquidity crisis) at the operating level. Rather than the multi-billion default at the holding company level, it is the need for new money onshore, as well as avoiding enforceable defaults under onshore debt, that cause a court-centered restructuring of the offshore debt.2
At least one situation has confirmed the expectation. In choosing a jurisdiction for its restructuring, rather than rely upon the forum identified in the debt documents as the choice of law to address the obligations under the bonds, the holding company at the helm of a global enterprise relied upon the jurisdictions of its domicile and where it was listed. This enterprise is a Chinese real estate developer Kaisa Group.3 Kaisa Group owns various heavily-leveraged real estate developments in China through a series of entities. It financed its operations through “offshore” and “onshore” debt. The operating entity debt was described as “onshore” debt. To provide additional acquisition capital, Kaisa Group, through its Cayman-domiciled holding company, Kaisa Holdings, which is listed on the Hong Kong exchange, issued bond debt, predominately governed by New York law, denominated in U.S. dollars, primarily to U.S.-based investors. This debt was referred to as “offshore debt.”
