North Asia ALB May 2012 by Yvette Chiu

O f f s h o r e Fo c u s : T h e s e c r e t t o B V I ’ s p o p u l a r it y

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may2012

NORTH ASIA EDITION

Cambodia Share trading launch marks new era PAGE 12

Halfway measures

Confidence undimmed

INSIDE

The rise of CDR in India

China’s slowing growth worries few

n Deals SPOTLIGHT

n THE BIG STORY

n LEAGUE TABLES

n SUNDRIES

PAGE 28

PAGE 32

CONTENTS

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“From a law firm’s point of view, those who have been able to do well in the equity markets in China now need to figure out how they can put the right resources to work across a range of cross border debt products.”

Eugene Gregor, Davis Polk & Wardwell

18 COVER STORY

NEWS 46

Growing appetite The last two years have witnessed a swift and dramatic rise in the dim sum bond market, with hungry investors capitalising on an appreciating yuan. As corporations increasingly enter the market to finance their China operations, the appetite for dim sums is going global, finds Kanishk Verghese

FEATURES Cambodian promise

Kicking off its stock exchange with the country’s first IPO, investor interest surges in Cambodia. Throw in a new civil code, friendly business environment and the rise of well-regarded local firms, and the country is quickly developing, finds Seher Hussain

A different kind of offshore

The British Virgin Islands thrives on its liberal business laws to be the favourite offshore joint venture destination. These include ignoring the basic principles of corporate governance by legally permitting the directors to disregard companies’ interests, reports Raghavendra Verma

CDR on the rise

With India’s growth rate slowing, bad loans have started stacking up in the country. Not helping matters much are repeated interest rate rises and rocketing commodity prices. As a result, India is seeing a wave of high-profile applications for corporate debt restructuring (CDR), finds Ranajit Dam

Countering the slowdown

Recent economic growth data show that China’s economy is growing at its slowest since the global financial crisis. But the prospect of a hard economic landing has not diminished lawyers’ confidence in China as a market, thanks to the profession’s countercyclical characteristics, writes Liu Zhen

Japan Law Awards The finalists revealed

DEALS

BRIEFS

LEAGUE TABLES

APPOINTMENTS

INDEX

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ASIAN LEGAL BUSINESS MAY 2012

KELVIN CHIA PARTNERSHIP

SOLUTIONS FOR A COMPLEX NEIGHBOURHOOD Kelvin Chia Partnership has been providing legal and commercial solutions for our international clientele in Indochina for over 20 years. We are a commercial law firm, headquartered in Singapore, with offices and a presence throughout the Southeast Asian region, including in Hanoi and Ho Chi Minh City, Yangon, Phnom Penh and Bangkok. Additionally, Kelvin Chia Partnership works with Martia & Anggraini Partnership for its growing Indonesia practice and also has strong affiliations with law firms in the Philippines, Malaysia and Laos, and can provide legal and commercial solutions in those jurisdictions as well. Our regional practice groups understand the complex business, legal and regulatory environment faced by investors in Indochina. To provide turnkey solutions for our clients, our team of lawyers work seamlessly across jurisdictions to provide integrated legal and business solutions to support our clients’ growth in the region. Our international team of lawyers possess extensive experience in both cross-border and local transactions, and are qualified in Singapore, Vietnam, Thailand, Australia, United States, Japan, Philippines, Indonesia, Malaysia, England, Cambodia, the People’s Republic of China and Myanmar. We provide brief details of some of our regional practice groups below. Vietnam We have more than 20 years of experience advising clients on doing business and undertaking investments in Vietnam. Our two offices in Hanoi and Ho Chi Minh City, established in 1993, actively advise a diverse client base consisting of multinationals, government-linked and local companies and from industries ranging from construction, engineering, logistics, telecommunications, real estate to healthcare. Our team of local and foreign lawyers possess the necessary expertise to advise on complex areas of setting up businesses and structuring investments, from investing in green-field projects, compliance with labour and employment laws to advising on acquisitions of foreign or locally invested enterprises, securities laws and real estate transactions. Our Managing Partner, Kelvin Chia has been instrumental in growing our Vietnam practice and jointly heads our Vietnam offices with Partner and Country Manager Le Thi Hoa as well as Partner Lee Ying Ying. Together, these partners have over 40 years of combined experience advising on and carrying out Vietnamese transactions. Myanmar Our Myanmar office, Kelvin Chia Yangon Ltd. (“KCY”), is a full service foreign legal consultancy firm established in Yangon in 1995. It is the oldest foreign legal consultancy firm in Myanmar with years of experience assisting clients and investors in various corporate and commercial matters. One of its unique strengths is that it brings together the expertise of local Myanmar-qualified lawyers and foreign consulting attorneys, in order to meet the needs of clients from multiple jurisdictions, particularly in complex local and cross-border transactions. KCY also has significant expertise and extensive experience in assisting foreign clients in investing in Myanmar, including structuring and setting up investments, and assisting with dealings with authorities and applications

for permits and licenses; advising on business transactions and preparing/reviewing commercial agreements; conducting legal due diligence and assisting in acquisition exercises; and advising on a full range of legal issues. In particular, KCY is familiar with the energy/oil and gas, natural resources and mining, real estate, banking and agricultural sectors in Myanmar. Our Myanmar practice is managed by Cheah Swee Gim, KCY Director and head of KCP Singapore’s Corporate Department, and key members of the team include U Than Maung, a senior member of the Myanmar bar, and Marlon Wui, a Foreign Consulting Attorney at KCY and a Partner at KCP Singapore. Kelvin Chia also actively assists our clients in identifying and structuring investment opportunities in Myanmar. Cambodia Our experience in navigating the Cambodian legal environment since 2005 has provided our clients with a full range of corporate work, from the incorporation of companies, restructuring of investments to advising on partnership agreements and regulatory compliance. Beyond legal solutions, our team of locally qualified lawyers are also experienced in identifying investment opportunities and local business partners for clients. Furthermore, KCP Cambodia also possesses specific experience in real estate and property related transactions, with in-depth knowledge dealing with land ownership structures, land registration system and other related agreements. KCP Cambodia is headed by Jay Cohen. Jay is called to the California Bar and is also fluent in Khmer and Mandarin Chinese. Bangkok Our office in Bangkok has rendered investment advisory services for a wide range of corporate transactions, from incorporating new investments to the establishment of joint ventures between foreign investors and local companies. We continue to support clients throughout the duration of their investment by providing corporate secretarial services, and advising on governmental licenses and permits, labour matters and commercial contracts, as well as acting on behalf of clients in civil and commercial litigation. In addition to inward bound Thai investments, we have also developed a special focus on assisting Thai and other multi-national businesses as they venture into investments in Indochina from Bangkok. Our Bangkok office is headed by Angie Wachira, a Thai qualified lawyer with nearly 15 years of commercial and IP experience.

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offshore

ASIAN LEGAL BUSINESS MAY 2012

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ccording to Section 120(4) of the British Virgin Islands (BVI) Business Companies Act, 2004, “A director of a (joint venture) company... (may) act in a manner which he believes is in the best interests of a shareholder... even though it may not be in the best interests of the company”. COMMERCIAL REALITY By including this special provision in the company law, the BVI authorities have essentially accepted the commercial reality that in international joint ventures, the directors seldom move against the wishes of the shareholders who appoint them. Mostly, these directors are senior employees of the holding company and, therefore, their loyalties remain with the parent company. Stuart Baldwin, a senior associate at Walkers who has been practising BVI law for the past 30 years in Singapore, has been involved in two transactions where the companies decided to set up a joint venture in the BVI solely because of this provision. According to him, there is no other offshore jurisdiction that has anything similar to this, with New Zealand being the only onshore exception after it introduced it a few years before the BVI. “Whenever I get a joint venture proposal, I never forget to mention this special provision,” he says.

offshore

In a 50-50 joint venture, this provision enables the appointees of the two shareholders – usually two directors each – to protect their respective interests without worrying about the breach of fiduciary duties. “Though an actual conflict issue does not arise often, (but) it gives the directors extra comfort,” says Baldwin. Presenting an example, Robert Briant, partner and head of Conyers Dill & Pearman’s BVI office, says that if there is a good investment opportunity for the company, its directors are duty-bound to approve it. However, if for some reason, one of the shareholders opposes it and his nominee directors do not approve it, that director runs the personal risk of being sued by the other side for the breach of his fiduciary duty. “Though in such an eventuality, the shareholders are likely to indemnify their directors”, he says. Another situation that could, for instance, arise is when a private equity company and a high-end casino chain come together to start a new joint-venture company that caters to the lower end of the market. If this venture succeeds and there is a profitable proposition to expand the business into the higher end of the market, the nominee directors of the parent casino chain may oppose it because such a move could threaten its own market position. According to Simon Bushell, London-based partner at Herbert Smith who leads its corporate fraud and asset training practice, the provision was probably intended to reduce the number of disputes and controversies for BVI directors who were following shareholder instructions. According to him, foreign companies often appoint local administrators as directors of the BVI-based joint ventures on the understanding that they will follow instructions given by non-resident shareholders. Even though there are no indications that such a provision would ever be adopted in other jurisdictions, lawyers can find its applicability across the world, even in rigid regulatory frameworks such as India. Speaking on the topic, Essaji Vahanvati, Mumbai-based partner at

A DIFFERENT KIND OF OFFSHORE THE BRITISH VIRGIN ISLANDS THRIVES ON ITS LIBERAL BUSINESS LAWS TO BE THE FAVOURITE OFFSHORE JOINT VENTURE DESTINATION. THESE INCLUDE IGNORING THE BASIC PRINCIPLES OF CORPORATE GOVERNANCE BY LEGALLY PERMITTING THE DIRECTORS TO DISREGARD COMPANIES’ INTERESTS. IT MAY SOUND UNREAL, BUT THE FACT OF THE MATTER IS THAT LAWYERS CONSIDER SUCH A PROVISION AS MODERN AND PRAGMATIC. RAGHAVENDRA VERMA REPORTS

Offshore

ASIAN LEGAL BUSINESS may 2012

AZB & Partners, says: “Very often, we face challenges (in India) when companies’ promoters want a particular thing, but directors have to decide independently.” “So to have a choice would be good, but only in limited circumstances like 50-50 joint ventures where the decisions are based on the two principal shareholders.” MINORITY INTERESTS Usually, in large public corporations, a typical promoter stake is much smaller and the minority shareholders rely upon the corporate governance structures to protect their investments. For this reason, Vahanvati says that in such companies, it is better to have the conventional system where the fiduciary duty of the directors requires them to act in the interest of the company. “It is a tried and tested principle, which is based on common law and upheld in various court decisions in India and abroad,” he says. The effect of this provision on the interest of the minority shareholders is an issue even in a BVI-based joint venture. According to Bushell, at least in theory, the protection to minority shareholders would still be available, but it will inevitably be harder to secure that while applying this provision. “If the majority shareholder(s) wanted to purchase some assets of the company and the agreed price is not found to be appropriate by the minority shareholder, then what protection is there for the minority?” A problem could also arise when for some reason, one side in a joint venture does not fully appreciate the issues or perhaps the structure of the company changes in due course, says Bushell. “What if one of the 50 percent shareholders sells his interest to somebody else who does not have the same understanding, or if the stake is split and sold to two parties?” With such concerns still unresolved, lawyers do not take too many chances with the provision. Baldwin himself has rejected it in certain cases. “Recently, in a proposed joint venture deal, I advised my client to exclude this provision because he had a minority stake,” he says. Bushell is also uncomfortable with the fact that this provision removes the supervisory function of the board of directors and the independent nature of their duties. “This is the fundamental principle that we need to think about while considering whether this is a good thing or a bad thing,” he says. There are also other factors that restrict the lawyers and businesses from fully appreciating the benefits of the provision. In the

REUTERS/Yuriko Nakao

last eight years since this law came into effect in the BVI, it has not been tested even once in a court of law. “There is no case law on it, and sometimes companies do not want to venture into an unknown area,” says Briant. For providing extra protection to their clients’ interests in joint ventures, lawyers have other legal approaches to achieve nearly similar results. According to Bushell, one alternative could be to increase the number of issues that require the shareholders’ approval. “Such a step will effectively limit the areas where the directors have to exercise their duties,” he says. Adding to this, Bushell says: “We regularly modify directors’ duties by requiring certain issues to be referred to shareholders, or precluding shareholders from suing a director who follows the instructions of his appointing shareholder.” However, he says that the BVI provision removes many doubts about the exposure of a director. Even though it is not a widely publicised provision, Briant says: “When companies come to the BVI and lawyers explain them its benefits, more often than not, they choose to take advantage.” According to him, it is a “very important factor in making the BVI a total product for a competitive joint ventures jurisdiction.” INTERNATIONAL APPROACH There are 486,000 registered companies in this Caribbean Island territory of Great Britain, and many of them are large international joint ventures vehicles from United States, China and Russia. It is often compared with another British overseas territory and a popular offshore financial centre, the Cayman Islands, which according to Briant, is more popular for hedge funds and securitisation vehicles. However, he says that the BVI law is more international and has a very efficient insolvency act that is based on the English Act. It all started in the early 1980s when the BVI replicated the very liberal and successful business law model of the state of Delaware in the United States. “When the client asks, ‘can we do this?’, the answer is always yes,” says Baldwin. “After setting up the vehicle, the foreign joint venture partners have to only worry about paying tax in their home jurisdiction and the jurisdiction where they run their operations.” In the BVI, they only have to pay a fixed annual government fee of $350

Offshore

ASIAN LEGAL BUSINESS may 2012

“VERY OFTEN, WE FACE CHALLENGES (IN INDIA) WHEN COMPANIES’ PROMOTERS WANT A PARTICULAR THING, BUT DIRECTORS HAVE TO DECIDE INDEPENDENTLY. SO TO HAVE A CHOICE WOULD BE GOOD, BUT ONLY IN LIMITED CIRCUMSTANCES LIKE 50-50 JOINT VENTURES WHERE THE DECISIONS ARE BASED ON THE TWO PRINCIPAL SHAREHOLDERS.“ ESSAJI VAHANVATI, AZB & Partners

or $1,100 depending upon the number of shares they are authorised to issue. The results of adopting this regulatory system have been very positive. After Hong Kong, the BVI is the second-largest foreign investor in China. Attaining that position in the world’s second-largest economy and most populous country on the other side of the globe is quite exceptional for an island territory that has a population of just 25,000, and a gross domestic product of $1 billion. In addition to a modern legislation, the BVI also has reliable commercial courts and an ultimate court of appeal in the Privy Council of the United Kingdom, which provides an added comfort to foreign joint venture partners.

Furthermore, the repatriation of income and getting money in and out of the jurisdiction is also quite easy as there are no exchange controls, and the territory uses the United States dollar as its official currency. MONEY LAUNDERING The liberal regulations and minimum interference in business activities also makes the jurisdiction venerable to money laundering activities. In fact, the BVI has been on the radar of international anti-money laundering agencies for some time now. According to the 2008 assessment report of the Paris-based inter-governmental body Financial Action Task Force, though the BVI legal framework of combating money laundering and terrorism financing is comprehensive, the low number of money laundering prosecutions suggests a limited implementation of the legal framework. It also points out that insider trading and market manipulation are not specifically criminalised in the BVI.

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Offshore

ASIAN LEGAL BUSINESS may 2012

Regarding the money laundering relevance of the particular provision relating to directors’ responsibility, Baldwin says that it does not, in any way, make it easier for or encourage illegal activities. “When people are already committing a fraud or engaging in illegal activities, I do not think they are going to be worrying about directors’ fiduciary duties,” he says. Furthermore, Baldwin says that the BVI is as strict in combating the money laundering activities as any other jurisdiction. “All the lawyers and the registered agent(s) of (the) companies must know their clients,” he says. He adds to this: “We closely look at the substantial shareholders, all the directors, and then satisfy ourselves that the deal is legitimate.” However, he opines that in reality this has never come up as an issue. But not ever yone agrees. According to Jay Jhaveri, head of Asia at research agency World-Check in Singapore (now part of Governance, Risk and Compliance at Thomson Reuters), the BVI companies are perhaps more likely to be used as conduits for money laundering because the regulations

REUTERS/Reinhard Krause

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Offshore

ASIAN LEGAL BUSINESS may 2012

“IF THE MAJORITY SHAREHOLDER(S) WANTED TO PURCHASE SOME ASSETS OF THE COMPANY AND THE AGREED PRICE IS NOT FOUND TO BE APPROPRIATE BY THE MINORITY SHAREHOLDER, THEN WHAT PROTECTION IS THERE FOR THE MINORITY?“ SIMON BUSHELL, Herbert Smith

in the jurisdiction make it easier to mask the ultimate beneficial owner of a company. “If the ultimate beneficiary shareholder is not an authorised signatory or a director or a shareholder, then the bank would not necessarily have all his details,” he says. “It is not always that the banks insist on knowing the ultimate beneficial owner; (and) he can also be masked.” Such masking, according to Jhaveri, is done by requesting the agent who is establishing the BVI company to also provide services of appointing nominee shareholders, directors, authorised signatories, company secretary – which is not obligatory for BVI companies – and an office address. “Once

these nominees are in place, then one can open a bank account for the company, albeit not always easily,” he says. Furthermore, the BVI companies are not even obligated to maintain accounts and it is extremely simple to set up a new company. “Person(s) need not go to the BVI, as a company can be established over the phone through an agent in less than 20 minutes,” says Jhaveri. The commercial secrecy maintained by the authorities could also be an issue. According to Jhaveri, it is not possible, even from the registrar of companies, to get any information about any company, its directors, its shareholders, and if they are nominees or not. The sheer scale of the operations and the nature of the vehicles are the other factors that make it easier for those who want to mask the ultimate beneficial ownership. The magnitude of the problem, says Jhaveri, can be gauged from the fact that “with half a million companies in existence, finding an unregistered name of a new company in the BVI is already a challenge”.

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news

REUTERS

Analysis: Low cost era over for China’s workshops to the world By Clare Jim and Jonathan Standing

Foxconn Technology’s agreement to improve the lot of its 1.2 million workers in China who make Apple Inc’s iPads and iPhones is a signal that China is losing its title as the world’s lowest-cost producer of everything. It is not a pure economic argument, but an ethical one too that is gaining momentum following Apple’s unprecedented decision to allow the largest investigation ever into a U.S. company’s operations abroad. After years of squeezing the profit margins of contract manufacturers making the gadgets beloved by consumers worldwide, the time is drawing nearer when big brand names may have to forego some of their profits to overcome criticism their products are built off the back of mistreated Chinese workers. “The time of low costs and cheap labour in China has come to an end,” said Jay Huang, chief financial officer of Taiwan’s Wintek, a maker of touch panels for Apple and other brands with annual revenues last year of about $3 billion. “People think the market should offer cheap products; in the past they came at the cost of cheap labour in China and workers’ rest time and welfare. But now we all agree that things have to improve, and as an ethical manufacturer, we must improve the welfare of employees.” Wintek has boosted amenities for its workers, including the installation of video conferencing to call their families. Another Apple contract manufacturer, Pegatron, has reorganised some workers away from singletask jobs into multiskilled teams.

of thousands of new workers, eliminate illegal overtime, improve safety protocols, and upgrade workers’ accommodation and other amenities. Apple is not the first big brand to respond to criticism over how its products are made. Nike Inc made sweeping changes in the 1990s after being rocked by similar criticism. China’s economics and policy direction now suggest workers are a more powerful force though. Labor shortages and double-digit wage inflation give workers more choice. They are more likely to jump to another job to secure higher pay. The government has pledged to lift migrant factory workers wages to ease wealth inequalities in the country. In response, many manufacturers are shifting to cheaper inland regions to keep costs down. “What makes it different this time is that there are more internal reasons,” said Zhigang Tao, professor in the Faculty of Business and Economics at the University of Hong Kong. “In the past, they were foreigners such as U.S. labour groups who flagged awareness of China’s labour rights; but now, the bigger driving force is from inside China - a rising yuan, social harmony and wealth redistribution.” China has to change from low-cost and pollutive production to further its development. “It’s a turning point for the whole country. It’s also part of the overall strategy to change to more domestic consumption and less exporting.”

LANDMARK AGREEMENT In a landmark agreement last week, Apple and Foxconn agreed to tackle violations of conditions among the Chinese workers assembling the iconic gadgets of the American firm. Taiwan’s Foxconn, which also makes products for other names, including Dell Inc, Hewlett-Packard and Sony Corp, agreed to the changes after the independent Free Labor Association surveyed three plants and 35,000 workers. Foxconn, whose subsidiary Hon Hai Precision Industry is the main assembler of Apple products in factories in China, will hire tens

WHO PAYS? It remains to be seen how much major brands will give up so that their contract manufacturers can afford to upgrade conditions for workers. Critics say there is often a gap between the rhetoric of high-flying corporate social responsibility and actual practices on the ground. “In the past, there has been a brief moment of expose and outrage around revelations and promises are made. Then everything goes back to business as usual,” said Thea Lee, deputy chief of staff for the U.S. AFL-CIO labor union group.

Hon Hai’s results show it produced a profit margin in 2011 of 2.94 percent, down from more than 9 percent in 2001. Analysts say the profit margin on Apple contracts is possibly as much as 4 percent. A teardown costing of Apple’s iPad 2 by electronics market research firm IHS iSuppli shows a version that retails for $600 may cost less than $300 in components and just under $10 for manufacturing, leaving Foxconn with less than 2 percent of the retail price. “Even though I don’t expect dramatic changes, the critique right now helps contract makers to improve working environment,” said Charles Lin, chief financial officer of Pegatron, which also supplies Taiwan’s Acer Inc and Japan’s Toshiba Corp. “It’s a social problem, so it shouldn’t be just the contract makers’ job to bear the burden. They have to have enough profit before they can make the improvements.” HP Chief Executive Meg Whitman, for one, recognises that Foxconn may have little room for maneuver on cost. “If Foxconn’s labour cost goes up ... that will be an industrywide phenomenon, and then we have to decide how much do we pass on to our customers versus how much cost do we absorb,” she told Reuters in February. Meanwhile, contract makers are looking for solutions. In two factories, Pegatron staff work in a group and rotate through multiple tasks rather than doing a repetitive task on a traditional conveyer line. “The pay is higher because of the multiple skills required in a worker, but then the productivity is also higher,” Lin said. Pegatron had revenues last year of almost $13 billion. As well as the video conferencing, Wintek has added new entertainment facilities in worker dormitories, including weight training machines, pool tables, table tennis and audio facilities. It has even increased food choices, for example Western style breakfasts.

The rest of this report can be found on Reuters.com

india restructuring

ASIAN LEGAL BUSINESS MAY 2012

CDR ON THE THE INDIAN ECONOMY, UNTIL RECENTLY RATTLING ALONG AT AN ENVIABLE PACE, HAS BEGUN TO FALTER. WITH THE GROWTH RATE SLIPPING BELOW 7 PERCENT, THE AMOUNT OF BAD LOANS IN THE COUNTRY HAS STARTED STACKING UP. AS A RESULT, INDIA IS SEEING A WAVE OF HIGH-PROFILE APPLICATIONS FOR CORPORATE DEBT RESTRUCTURING (CDR), FINDS RANAJIT DAM

t was not that long ago that Kingfisher Airlines was the poster child for the New India. Helmed by a flamboyant liquor baron with a penchant for showmanship, it was brash, innovative and ambitious. About a year ago, it operated more than 370 flights daily and owned more than 60 aircraft, and until late 2011, it had the second-largest share of the Indian aviation market. The swagger, however, could not conceal the fact that it had never turned in a profit since it commenced flights back in 2005. Now, this in itself was no grave problem; of India’s six major airlines, only one – the efficiently run budget carrier IndiGo – is profitable, and the country’s

flag carrier Air India is facing its own set of woes. But Kingfisher’s rapid descent from a symbol of the country’s progress to one of India Inc’s most high-profile basket cases has been more than a bit sobering. As of last month, it was operating 100 flights a day, and owned just 16 aircraft; its total outstanding debt stood at somewhere between 70 billion ($1.4 billion) and 80 billion rupees, and the company was desperately looking to foreign investors to bail it out. In January, the airline’s creditors, including the State Bank of India, IDBI Bank, the Bank of Baroda, Bank of India and ICICI Bank, announced they were considering classifying their exposures to Kingfisher as nonperforming assets, which would result in it being referred for corporate debt restructuring (CDR), according to the Economic Times. The interesting thing, however, is that the airlines had been referred for restructuring – seen as a halfway house between payment and default – once earlier in late 2010, but had been unable to turn a corner, instead

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india restructuring

A Kingfisher Airlines’ aircraft takes off from Mumbai’s domestic airport REUTERS/Vivek Prakash

leaving its bankers with a raw deal in terms of the equity they received. With CDR cases rising to historic levels, the mechanism has come under scrutiny: while some deride it as a method of bailing out inefficient companies like Kingfisher, others justify it as a way for banks to recover some of their dues instead of nothing at all. What is hard to deny, though, is that it gives beleaguered Indian companies a lifeline in difficult times. CDR IN FOCUS Much like Kingfisher’s rise reflected a powerful India, its fall – albeit in exaggerated fashion – has put into focus the problems of Indian industry, which since the halcyon days of breakneck growth, has begun to stutter and slow down. The growth rate has dipped below 7 percent, and bad loans are on the rise. Credit rating firm CARE Ratings estimated in March that 17 public and private Indian banks had some $25.7 billion in bad loans at the end of last year, and that figure has certainly risen since then. Exacerbating things are continu-

ously rising commodity prices – India’s inflation rate was just under 7 percent in February – and the repeated interest rises to combat this inflation, which have severely hampered borrowers’ ability to repay their loans, and repay them on time. With neither borrower nor lender benefitting from a default, it is no surprise that CDRs are on the rise. A mechanism sanctioned by the Reserve Bank of India (RBI) in 2001, CDR reduces the debt burden on a struggling company, either by decreasing the interest rates it has to pay or by extending the repayment period of loans or both. As a compromise between payment and default, it helps the company increase its ability to meet the obligations. CDR is used to help companies banking with multiple institutions under consortium arrangements; the mechanism gives the multiple banks and financial institutions surety on repayment to a certain extent. Sometimes, the debt may be exchanged for an equity position in the company; in other occasions, a debt moratorium is an option. As India’s economy slows, borrowing companies have been seeking CDR in larger numbers than ever before. Approximately 762 billion rupees of debt was referred to the RBI’s CDR cell in the financial year ending March 31, 2012, and that number exceeded the combined debt referred to the cell over the past six years. In terms of case numbers, it was eight times the figure in 2008. Among the big names to have either sought approval from their company boards for corporate debt restructuring or to have already restructured their debt are Bharati Shipyard, GTL, Hindustan Construction, Air India, Electrotherm India,

india restructuring

ASIAN LEGAL BUSINESS MAY 2012

Villagers sit outside the premises of a newly inaugurated solar farm at Gunthawada village REUTERS/Amit Dave

Jai Balaji, Hotel Leela, Moser Baer and, of course, Kingfisher Airlines. A research report by Barclays Capital that was published in the Financial Times has also highlighted more than two dozen highly leveraged large borrowers, including Adani Power, Essar Oil and Tata Communications, many of which may require future debt restructuring. “Recently, we have noticed a significant increase in the number of restructuring cases being reported for CDR to the CDR cell,” says Devidas Banerji, Mumbai-based partner at Khaitan & Co. “Sectors in which there have been a large number of CDRs include iron and steel, textiles, road and aviation.” Dina Wadia, partner at J Sagar Associates, says that the trend of CDR has really picked up in the last quarter of 2011, affecting a number of sectors. “We expect to see this continue over the next 12 to 18 months,” she adds. “Already, a lot more CDR applications are in the works, and we can expect to hear about these soon.” According to Banerji, this increasing trend can be attributed to a variety of factors, including the prolonged liquidity crunch on account of the economic downturn, dislocation of raw material supplies, falling demand, high interest-bearing domestic loans, external commercial borrowings becoming dearer on account of adverse currency rates, and the absence of equity infusions. “Looking at the stress in the sectors mentioned above and the increasing number of CDR cases, banks are treading carefully by closely monitoring defaulting borrowers and identifying the ailing borrowers in time so that a revival can be achieved before all is lost,” he says. “Therefore, the banks on one end are reeling under the fall in credit demand, and on the other hand, keeping a close vigil on the depreciating quality of the security

tended by existing borrowers.” A MORE CORDIAL PROCESS Both Wadia and Banerji are of the opinion that of the options open to companies in financial distress, CDR has a number of positives that make it worth recommending. “It is certainly a better alternative to going to court, or approaching the Board for Industrial and Financial Reconstruction (BIFR),” says Wadia. “For one, it is not adversarial in nature. Parties can sit down and work out a way of modifying the loan terms so as to give the borrower a better chance of repaying the debt.” Banerji says he believes that the CDR process, when compared to other restructuring and recovery options, aligns the interest of the company with that of the creditors, thereby making the process “more cordial” and, in turn, longstanding and effective. “Despite being a voluntary arrangement lacking statutory force, CDR cases have been far more successful than those referred to the BIFR, as banks devise schemes whereby they offer moratorium on the repayment of existing debt and when required, infuse additional funds to help the corporation retain its enterprise

“THE CDR MECHANISM, NO DOUBT, SUBJECTS THE DISTRESSED COMPANY TO STRINGENT CONTROL AND LACK OF FINANCIAL FLEXIBILITY. BUT IT ENSURES THAT THE OBJECTIVE AND ACTIONS OF THE LENDERS AND THE MANAGEMENT ARE IN TANDEM, AND ARE IN THE DIRECTION OF CREATING VALUE FOR EVERY STAKE HOLDER. NEARLY 85 PERCENT OF THE RESTRUCTURED LOANS ARE BEING SERVICED IN TIME.” DEVIDAS BANERJI, Khaitan & Co

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value,” he says. “The CDR mechanism, no doubt, subjects the distressed company to stringent control and lack of financial flexibility. But it ensures that the objective and actions of the lenders and the management are in tandem, and are in the direction of creating value for every stake holder. Nearly 85 percent of the restructured loans are being serviced in time. This speaks volumes of the success and efficacy of the process.” According to the statistics released by the CDR cell, the mechanism has had some success since its inception. Between 2001 and 2005, the cell restructured more than 120 cases involving an aggregate debt of over 700 billion rupees. Of these, 75 percent got out of CDR in due course, and in a few cases, bankers enforced a change of management. Wadia says that an important part of the CDR process is that banks conduct their due diligence, and ascertain that the company’s track record is indeed good enough for it to be referred for restructuring. “The banks need to scrutinise the balance sheet carefully to make sure the company is indeed worth saving,” she says. NOTICEABLE WORK According to Wadia, her firm has seen a noticeable amount of work coming in as a result of the increase in CDRs in India. “It was a trickle earlier, and while it is not a flood yet, there is definitely some amount of work coming through in this space,” she says. To meet this demand, J Sagar Associates have set up a specialised team called the Stressed Assets Group that handles this work. “These are still early days, but we want to be prepared,” says Wadia. “So it is not just the banking guys, but people in other practice areas like litigation, corporate and so on who have been sounded out about the potential work that we expect to come in.” Banerji says that an increase in CDR work provides a silver lining for what is a fairly gloomy time for the Indian legal sector at present. “Most credit rating companies have predicted reduced asset quality and earnings across the sector in 2012, and have predicted the credit growth to be registered at a rate much lower than last year,” he says. A reflection of these trends, in the form of reduced rupee loan and project finance transactions, is thus being witnessed by the law firms across sectors. However, these troubled times are not without a silver lining. Firms across the sector are now looking at an increasing number of CDR cases and at an increasing trend of additional credit being infused in the companies already undergoing the CDR process, thereby facilitating the process of CDR exit.

india restructuring

THE LEGAL BASIS OF CDR From: The Corporate Debt Restructuring website (www.cdrindia.org) The legal basis of the CDR System is provided by the DebtorCreditor Agreement (DCA) and the Inter-Creditor Agreement (ICA). All banks and financial institutions in the CDR system are required to enter into the legally binding ICA with necessary enforcement and penal provisions. The most important part of the CDR mechanism, which is the critical element of ICA, is the provision that if 75 percent of creditors (by value) agree to a debt restructuring package, the same would be binding on the remaining creditors. Similarly, debtors are required to execute the DCA, either at the time of reference to the CDR cell or at the time of original loan documentation (for future cases). The DCA has a legally enforceable “stand still” agreement binding for 90/180 days, whereby both the debtor and creditor(s) agree to “stand still” and commit themselves to not take recourse to any legal action during the period. This “stand still” is necessary for enabling the CDR system to undertake the necessary debt restructuring exercise without any outside intervention; judicial or otherwise. However, the “stand still” is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action. Apart from this, the borrower needs to undertake that during the “stand-still” period, the documents will stand extended for the purpose of limitation and that he will not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the “stand still” period. He adds that Indian law firms are witnessing a “phenomenal increase” in the number of transactions happening on the restructuring and refinancing front. “The law firms are active not only in preparing proper documentation for CDR, but also in advising on viability of CDR packages from a legal perspective,” says Banerji. “In addition, many law firms are busy representing their clients (who do not become part of the CDR) at appropriate forums.” Looking ahead, he sees financial stress in various sectors like power, road, aviation, and real estate. “We expect a lot of cases from these sectors to apply for restructuring, though some cooling off may be expected with a downward trend in the interest cycle.” READY TO FLY There is a possibility that Kingfisher Airlines will not avoid defaulting, even if it is sent to CDR again. Apart from its internal problems, it faces a number of challenges in the form of high fuel prices and cutthroat fare competition in a price-sensitive Indian market. If it were to become a non-performing asset NPA, it would confirm a lot of the apprehensions of CDR’s critics, some of whom see up to half of all CDR cases being unable to make it back into the black. Historically though, about 15 to 20 percent of restructured loans have become non-performing assets (NPAs), and banks are not unduly worried. With interest rates looking like they will ease going forward and the economy expected to gradually improve, many of these loans may get upgraded and are likely to become standard over the next few years. So while being sent to the CDR cell might make a company look like it is in dire straits, there is less of a chance it will be another Kingfisher, and more of a chance that it can take off again.

China Country Report

ASIAN LEGAL BUSINESS may 2012

Countering the Recent economic growth data show that China’s economy is growing at its slowest since the global financial crisis. But the prospect of a hard economic landing has not diminished lawyers’ confidence in China as a market, thanks to the profession’s countercyclical characteristics, writes Liu zhen

China Country Report

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slowdown Hard Landing? Worries of a possible “hard landing” of the world’s second-largest economy have risen as China’s quarterly growth rate dropped to its slowest in three years. The National Bureau of Statistics on April 13 announced that the annual rate of GDP growth in the first quarter slowed to 8.1 percent from 8.9 percent in the previous three months, and a run rate below the official 7.5 percent 2012 target. Meanwhile, more doubts were cast upon the world’s number one exporter by the subpar trade figures. China has set a 10 percent growth rate for exports and imports in 2012, but both targets were missed in March, with imports expanding just 5.3 percent from a year ago while exports grew 8.9 percent. Worse still, the global demand for China’s exports may remain weak as its two biggest trading partners – the European Union and the United States remain wobbly and strained under concerns of unemployment. Some economists say Beijing is actively pursuing a slower growth strategy to create room for structural economic reforms without sparking a surge in inflation. The official forecast for 2012 GDP growth has been cut to 7.5 percent, an eight-year low. Businesses are making adjustments in anticipation of a slowdown, but for the legal industry in China, it is business as usual. “The business of providing legal services has the characteristics to counter the economic cycle,” Michael Qi, a partner at Fangda Partners, tells ALB. “Even the in best market environment there are money-losing firms; and in the worst market there are profit-making firms.”

REUTERS/Stringer Shanghai

Cooling off However, legal firms do feel the pinch as business from sectors hardest hit by the slowdown begins to trickle - for example real estate, which accounts for 13 percent of China’s GDP in 2011. Over the past two years, the government has applied strict policies to reduce rampant property speculation, which helped push up inflation. Chinese Premier Wen Jiabao recently said that restrictions to curb speculation in the real estate market will stay firmly in place, as

China Country Report home prices, which have soared tenfold in the last decade, remained “far from returning to reasonable levels.” China’s average new home price fell 0.7 percent last month from a year earlier, the first decline in two years, according to a Reuters calculation. Investment in the sector grew 19.6 percent in March from a year earlier, down from 27.8 percent in the first two months of the year. “Real estate is an industry dependent on the international environment and domestic policies. The recent restricting policies have caused great difficulties for developers,” says Xue Yunhua, an executive partner of Guangda Law Firm, which has significant interest in the real estate sector. “The need for legal services in this sector has gone down, following the serious decrease in land acquisition, trade, house leasing, mortgage, financing, and so on.” Some lawyers say that the impact of the slowdown in the property sector could, to some extent, be compensated by heavy investment in infrastructure construction. A large part of China’s 4 trillion yuan ($635 billion) stimulus package, plus some 20 trillion yuan of funds from local government borrowings since 2009, has poured into public infrastructure projects such as the high-speed rail, city underground transportation, and water-diversion programmes. “The Chinese government is reputedly still the richest in the world,” says Tong Xin, a partner of Guanghe Law Firm. ”There is still business for us in government-backed construction projects.”

“The business of providing legal services has the characteristics to counter the economic cycle. Even in the best market environment there are money-losing firms; and in the worst market there are profit-making firms.” Michael Qi, Fangda Partners Countercyclical characteristics The capital and securities markets haven’t escaped the slowdown either. The tight monetary policy adopted to curb inflation has squeezed liquidity, leading to the suspension or cancellation of many initial public offerings (IPOs). But lawyers can make money in a sluggish market as much as in a prosperous one, says Qi, citing the examples from 2008 and 2009. Instead of IPOs, delistings have created business for attorneys, particularly by those Chinese companies that have been barely hanging onto the U.S. stock markets with hopelessly high costs and low share prices. Seven Chinese companies applied to delist from the U.S. stock exchanges in the first two months of 2012, in addition to six in 2011, notes Diane Frankle, a partner at Kaye Scholer. Other practices that have newly become lucrative for law firms include corporate restructuring and litigation, as well as mergers and acquisitions. “The strongest survive, with the weak dying out and being swallowed up. The pace of industrial consolidation goes up in the chilly winter,” says Qi. Similar phenomena are taking place also in the legal industry, adds David Fu, a partner at Global Law Office. He highlights the recent trend of mergers among law firms, in particular international ones, since the crisis broke out in 2008. “A firm has to be full service to survive different economic climates,” says Fu. “For instance, a firm relying too much on the capital markets practice would be badly hurt under the monetary contraction.” According to Fu, a firm should proactively expand its portfolio of

ASIAN LEGAL BUSINESS may 2012

practices to reach a “reasonable combination” either by self development or by merger with others. “We may also see more mergers among Chinese firms,” he says. Focusing on Beijing clients With state-owned enterprises relatively unscathed by the economic slowdown, law firms have set their sights on cultivating their SOE clientele. As such, many law firms have offices in Beijing to remain close to their clients, who also have their headquarters in the capital. “Other cities have their own advantages, like Shanghai is the location of the securities markets and Shenzhen boasts many private enterprises. But these industries have been affected by the crisis while the central SOEs remain strong and cash-rich,” says Fu. “Their decisions and transactions have to be made in Beijing and the payment to the lawyers takes place here.” In addition, the top government departments overseeing businesses are in Beijing, such as the banking, securities and insurance regulatory commissions, as well as the powerful central planning body, National Development and Reform Commission. “The client would think Beijing firms have the advantages as all the relevant government authorities are in Beijing,” says Xue. For a firm with a strong governance focus like Bingham McCutchen, Beijing is “the appropriate place to start,” says Jay Zimmerman, the firm’s global chairman. Bingham McCutchen recently opened an office in Beijing. By the end of 2008, Beijing had 18,635 lawyers working for 1,121 firms, and in Shanghai there were 10,071 lawyers and 889 firms. Moreover, 95 percent of the 188 foreign firms in China are registered in the two cities. As of 2009, Beijing had 74 and Shanghai had 104. Revenue-wise, however, Beijing firms earned twice as much as Shanghai-based firms in 2010, at 11.3 billion yuan ($1.79 billion) and 5.8 billion yuan ($0.92 billion). In comparison, another Chinese municipality, Tianjin had only 590 million yuan ($ 93.6 million) revenue, according to Westlaw China research. Investing abroad Aside from opportunities in the domestic market, firms can also leverage on China’s increasing overseas investments. “The Chinese government has made it clear that it is a matter of policy that they will be increasing foreign direct investment. They’ve also made it clear that they will be increasing a focus on tangible investment, for example,

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China Country Report

Vehicles move on the Guomao Bridge in Beijing. REUTERS/Jason Lee

government bonds. Furthermore, China’s continuing growing need for agriculturerelated products and services, for energy, for technology and communications, are all bound to produce increasing cross-border commerce,” Zimmerman tells ALB. The crisis has created a favourable environment as many overseas companies are in dire need of capital and offer plenty of undervalued high-quality assets. Large SOEs have made their mark in energy, petrol, minerals and other commodities investments across Africa, Latin America, and elsewhere. Most recently, State Grid International Development took a 25 percent stake in Redes Energéticas Nacionais, SGPS, S.A. of Portugal. “The timing is right for the Chinese companies to go out to the U.S., Europe, and to many other countries. The Chinese companies have the capability, financially and operationally, and have the willingness to do it,” adds Ye Xiaowei, Bingham’s Beijing co-head. Private enterprises have also increasingly taken part in this overseas investment rush, with more and more deals closed in manufacturing and consumer goods production, which is part of the “national strategy” in

order to accelerate the “industrial upgrading”, says Fu. He notes the example of privately-owned Geely Automobile, which took over Swedish premium brand Volvo from Ford Motor Co in 2010. However, not all overseas ventures have been successful. In 2004, China’s Legend Holdings acquired IBM’s PC business but has struggled on the world stage, especially in developed markets despite its Lenovo PC’s domination in the home market. “The manufacturing industries are getting smarter with time,” says Qi. “With the lessons learnt from the failed attempts of purchasing the production bases and retailing channels, now the Chinese companies cautiously buy only the technology, patents and brands, and keep the production and the market domestic.” The developed management experience and systems of the Western companies are attractive for the Chinese investors, according to Fu. Domestic competition is getting tough in times of crisis but many believe potential and opportunities exist in other continents. Meanwhile, Western investment in China would continue, as Zimmerman suggests, because the size and growth of the Chinese market are too large to be ignored by international corporations. But the preferential policies for foreign capital that had lasted for decades might only be reserved for high-tech, green, medical and high-end service industries, and a few other sectors, according to the 2011 version of the Guideline of Foreign Investment Industry List published by the National Development and Reform Commission. “The Chinese government has become picky towards foreign investment,” says Fu. “But even with the raised bar, a continued strong growth in cross-border mergers and acquisitions, both outbound and inbound, in the next years is very likely.”

japan Law Awards

ASIAN LEGAL BUSINESS may 2012

japan Law Awards

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THE FINALISTS REVEALED Diners Club ALB Japan Law Awards 2012 recognises the excellence and outstanding achievements of Japan’s leading law firms and in-house legal teams, as well as the top deals and dealmakers of 2011. ALB congratulates all the finalists across 24 categories.

DEAL CATEGORIES Debt Market Deal of the Year FINALISTs • Bain Capital Debt Financing for its Acquisition of Skylark Firms: Baker & McKenzie GJBJ; Mori Hamada & Matsumoto; Nagashima Ohno & Tsunematsu; Nishimura & Asahi; Ropes & Gray Bank: Mizuho Corporate Bank • eAccess Refinancing with High-Yield Senior Notes Offering and Syndicated Loan Firms: Anderson Mori & Tomotsune; Clifford Chance; Davis Polk & Wardwell; Nishimura & Asahi; Shearman & Sterling; White & Case Banks: Aozora Bank; Crédit Agricole Corporate and Investment Bank; Goldman Sachs; ING Bank; Mizuho Bank; Société Générale; Sumitomo Mitsui Banking Corporation; UBS Accountant: KPMG AZSA & Co. • Japan Finance Corporation SEC-registered guaranteed global bonds offering Firms: Nagashima Ohno & Tsunematsu; Sullivan & Cromwell Banks: Bank of America Merrill Lynch; BNP Paribas; Daiwa Capital Markets; JP Morgan • KDDI Corporation issuance of Zero Coupon Convertible Bonds due 2015 Firms: Clifford Chance; Tokyo Aoyama Aoki Koma Law Office Banks: Daiwa Capital Markets; Mizuho International; Morgan Stanley MUFG Securities; Nomura Accountant: Kyoto Audit Corporation • Softbank Retail Offering of Corporate Hybrid Securities Firms: Linklaters Tokyo; Maples and Calder; Mori Hamada & Matsumoto; Morrison & Foerster Bank: Mizuho Securities • Sumitomo Mitsui Banking Corporation Concurrent Bond Offerings Firms: Davis Polk & Wardwell; Nagashima Ohno & Tsunematsu; Simpson Thacher & Bartlett Banks: Barclays Bank; Citigroup Global Markets; Deutsche Bank Group; Goldman Sachs; JP Morgan; Nikko Cordial Securities

japan Law Awards

Equity Market Deal of the Year FINALISTs • Hutchison Port Holdings Trust IPO Firms: Allen & Gledhill; Allen & Overy; Anderson Mori & Tomotsune; Freshfields Bruckhaus Deringer; Jun He; King & Wood Mallesons; Nagashima Ohno & Tsunematsu • Nexon IPO Firms: Anderson Mori & Tomotsune; Ito & Mitomi; Morrison & Foerster; Sullivan & Cromwell Banks: Barclays Bank; Goldman Sachs; Morgan Stanley MUFG Securities; Nomura Accountant: PricewaterhouseCoopers Aarata • Otsuka Holdings IPO Firm: Simpson Thacher & Bartlett Banks: Morgan Stanley MUFG Securities; Nomura; UBS • Resona Holdings Global Offering Firms: Anderson Mori & Tomotsune; Linklaters Tokyo; Nagashima Ohno & Tsunematsu; Simpson Thacher & Bartlett

Energy & Resources Deal of the Year

ASIAN LEGAL BUSINESS may 2012

FINALISTs • Caserones Copper and Molybdenum Mining Project Firms: Farris, Vaughan, Wills & Murphy; Jara del Favero; Loyens & Loeff; Milbank, Tweed, Hadley & McCloy; Morrison & Foerster; Nishimura & Asahi; Philippi, Yrarrázaval, Pulido & Brunner Banks: BTMU; HSBC; Japan Bank For International Cooperation; Mizuho Corporate Bank; SMBC Accountant: Ernst & Young Solutions • Japan-Korea Consortium Minority Investment in CBMM Firm: Simpson Thacher & Bartlett • Jurong Aromatics Petrochemical Project Firms: Latham & Watkins Gaikokuho Joint Enterprise; Milbank, Tweed, Hadley & McCloy Banks: Australia & New Zealand Bank; Australia and New Zealand Banking Group; BNP Paribas; DnB Nor Bank ASA; DZ Bank; ING Bank; Intesa Sanpaolo SpA; NATIXIS; Royal Bank of Scotland; Standard Chartered Bank • Sale of Landis+Gyr to Toshiba Firms: Bär & Karrer; Morrison & Foerster; Niederer, Kraft and Frey; Skadden, Arps, Slate, Magher & Flom Banks: Credit Suisse; Deutsche Bank Group; Goldman Sachs; JP Morgan; Lazard

japan Law Awards

• Tokyo Gas LNG Purchase and Equity Interest in Australia Queensland Curtis LNG Project Firms: Baker & McKenzie GJBJ; King & Wood Mallesons; Linklaters Tokyo

M&A Deal of the Year FINALISTs • Chuo Mitsui Trust Holdings and Sumitomo Trust & Banking Management Integration Firms: Davis Polk & Wardwell; Mori Hamada & Matsumoto; Morrison & Foerster; Nagashima Ohno & Tsunematsu; Shearman & Sterling; Simpson Thacher & Bartlett; Sullivan & Cromwell Banks: Daiwa Securities Capital Markets; JP Morgan; Nomura; UBS • Panasonic Corporation Acquisition of all shares of Panasonic Electric Works and SANYO Electric Firms: Kikkawa Law Offices; Mori Hamada & Matsumoto; Nagashima Ohno & Tsunematsu; Shearman & Sterling; Sullivan & Cromwell Bank: Morgan Stanley MUFG Securities • Sumitomo Mitsui Financial Group Tender Offer of Promise Co Firms: Davis Polk & Wardwell; Nagashima Ohno & Tsunematsu; Nishimura & Asahi; Simpson Thacher & Bartlett

ASIAN LEGAL BUSINESS may 2012

Bank: Sumitomo Mitsui Financial Group • Takeda Pharmaceutical Acquisition of Nycomed Firms: Allen & Overy; Freshfields Bruckhaus Deringer Banks: Credit Suisse; Deutsche Bank Group; Goldman Sachs; Moelis; Nomura

Real Estate Deal of the Year FINALISTs • CIC & GLP JV Acquisition of Modern Logistics Facilities in Japan Firms: Anderson Mori & Tomotsune; City Yuwa Partners; Milbank, Tweed, Hadley & McCloy; Morrison & Foerster; Nagashima Ohno & Tsunematsu; Walkers Bank: M3 Capital Accountant: KPMG • FC Residential Investment Acquisition of Ichigo Real Estate Investment Firms: Mori Hamada & Matsumoto; Nijubashi Partners; Nishimura & Asahi; Sullivan & Cromwell Banks: Deutsche Bank Group; SMBC Nikko Securities • TMK (managed by a foreign equity investor) disposition of 12 Real Properties Firm: Atsumi & Sakai

japan Law Awards

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• United Urban Investment Corporation Global offering Firms: Ito & Mitomi; Morrison & Foerster; Nagashima Ohno & Tsunematsu; Nishimura & Asahi Banks: Citigroup Global Markets; Deutsche Securities; SMBC Nikko Securities

Structured Finance Deal of the Year FINALISTs • JAL Turnaround Financing Firms: Clifford Chance; Mori Hamada & Matsumoto; Okuno and Partners Banks: Development Bank of Japan; Japan Bank of International Cooperation • Korea Development Bank M&A financing Firms: McDermott, Will and Emery; Orrick, Herrington & Sutcliffe; Walkers Bank: Korea Development Bank • M&M Holdings Syndicated Loan for the Acquisition of Culture Convenience Club Firms: Nagashima Ohno & Tsunematsu; Nakamura, Tsunoda & Matsumoto; Nishimura & Asahi Banks: GCA Savvian Group Corporation; Mizuho Corporate Bank; Sumitomo Mitsui Banking Corporation • Refinancing of Intelligence Acquisition Firms: Clifford Chance; Maples and Calder; Matheson Ormsby Prentice; Mori Hamada & Matsumoto; Simpson Thacher & Bartlett Bank: Mizuho Corporate Bank Accountant: Deloitte Tohmatsu FAS • Restructuring and Enforcement over Tokyo Star Bank Firms: Anderson Mori & Tomotsune; Clifford Chance; Linklaters Tokyo; Mori Hamada & Matsumoto; Morrison & Foerster; Nishimura & Asahi; Uryu & Itoga; Vinson & Elkins; Walkers Banks: Bank of America Merrill Lynch; Bank of New York Mellon; Crédit Agricole Corporate & Investment Bank; Development Bank of Japan; Hudson Japan K.K.; Shinsei Bank Accountant: Deloitte Tohmatsu FAS

Technology, Media & Telecoms Deal of the Year FINALISTs • eAccess Refinancing with High-Yield Senior Notes Offering and Syndicated Loan Firms: Anderson Mori & Tomotsune; Clifford Chance; Davis Polk & Wardwell; Nishimura & Asahi; Shearman & Sterling; White & Case Banks: Aozora Bank; Crédit Agricole Corporate and Investment Bank; Goldman Sachs; ING Bank; Mizuho Bank; Société Générale; Sumitomo Mitsui Banking Corporation; UBS

Accountant: KPMG AZSA & Co. • KDDI Corporation Tender offer to acquire all outstanding shares of common stock of WebMoney Corporation Firms: Nagashima Ohno & Tsunematsu; Nishimura & Asahi; TMI Banks: Daiwa Securities; Nomura; Pinnacle • KDDI Corporation Zero Coupon Convertible Bonds due 2015 Firms: Clifford Chance; Tokyo Aoyama Aoki Koma Law Office Banks: Daiwa Capital Markets; Mizuho International; Morgan Stanley MUFG Securities; Nomura Accountant: Kyoto Audit Corporation • Lenovo - NEC Joint Venture Firms: Clifford Chance; Freshfields Bruckhaus Deringer • Nexon IPO Firms: Anderson Mori & Tomotsune; Ito & Mitomi; Morrison & Foerster; Sullivan & Cromwell Banks: Barclays Bank; Goldman Sachs; Morgan Stanley MUFG Securities; Nomura Accountant: PricewaterhouseCoopers Aarata

Diners Club Award Japan Deal of the Year Finalists to be announced

IN-HOUSE CATEGORIES the japan in-house counsel network award Banking & Financial Services In-House Team of the Year FINALISTs • Mitsubishi UFJ • Shinsei Bank • Sumitomo Mitsui Financial Group

Japanese Investment Bank In-House Team of the Year FINALISTs • Daiwa Securities Capital Markets • Mitsubishi UFJ Securities • Nomura • SMBC Nikko Securities

International Investment Bank In-House Team of the Year FINALISTs

42 • • • • • • •

japan Law Awards

Bank of America Merrill Lynch Citibank Deutsche Bank Group Goldman Sachs JP Morgan Morgan Stanley MUFG Securities UBS

Trading Company In-House Team of the Year FINALISTs • Itochu Corporation • Mitsui • Sumitomo Corporation • Toyota Tsusho Corporation

Diners Club Award Japan In-House Lawyer of the Year

ASIAN LEGAL BUSINESS may 2012

• Oh-Ebashi LPC & Partners

Employment Law Firm of the Year FINALISTs • Anderson Mori & Tomotsune • Freshfields Bruckhaus Deringer • Herbert Smith • Mori Hamada & Matsumoto

Insolvency Law Firm of the Year FINALISTs • Baker & McKenzie GJBJ • Bingham MuCutchen • Mori Hamada & Matsumoto • Nishimura & Asahi • Oh-Ebashi LPC & Partners

FINALISTs • Deutsche Bank Group - Tomohiko Kimura • JP Morgan - Tomohiko Oshikawa • Morgan Stanley MUFG Securities - William Bruinooge • Toyota Tsusho Corporation - Hueilee Shu • UBS - Aaron D. Eddington

Japan In-House Team of the Year Finalists to be announced

FIRM AWARDS International Deal Firm of the Year FINALISTs • Baker & McKenzie GJBJ • Davis Polk & Wardwell • Linklaters Tokyo • Morrison & Foerster • Simpson Thacher & Bartlett • Skadden Arps Slate Meagher & Flom • Sullivan & Cromwell

Japanese Deal Firm of the Year FINALISTs • Anderson Mori & Tomotsune • Mori Hamada & Matsumoto • Nagashima Ohno & Tsunamatsu • Nishimura & Asahi

For more information about the finalists of the Diners Club ALB Japan Law Awards 2012, please visit

www.albawards.com

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American chamber of commerce in japan award International Arbitration Law Firm of the Year FINALISTs • Herbert Smith • Morrison & Foerster • White & Case

IP Law Firm of the Year FINALISTs • Abe Ikubo & Katayama • Anderson Mori & Tomotsune • Milbank, Tweed, Hadley & McCloy • Momo-o, Matsuo & Namba • Mori Hamada & Matsumoto • Morrison & Foerster • Ropes & Gray • TMI

canadian chamber of commerce in japan award Litigation Specialist Law Firm of the Year FINALISTs • Iwata Godo • Matsuo & Kosugi • Mori Hamada & Matsumoto • Morrison & Foerster

Event Partner Diners Club International Diners Club International is owned by Discover Financial Services (NYSE: DFS), a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Established in 1950, Diners Club International became the first multi-purpose charge card in the world, launching a financial revolution in how consumers and companies pay for products and services. Today, Diners Club is a globally recognized brand serving the payment needs of select and affluent consumers, offering access to more than 450 airports lounges worldwide, and providing corporations and small business owners with a complete array of expense management solutions. With acceptance in more than 185 countries and territories, millions of merchant locations and access to over 845,000 cash access locations and ATMs, Diners Club is uniquely qualified to serve its card members all over the world. Website: www.dinersclub.com

japan Law Awards

• Nishimura & Asahi • Oh-Ebashi LPC & Partners • Orrick, Herrington & Sutcliffe

Best China Practice of the Year FINALISTs • Anderson Mori & Tomotsune • Linklaters Tokyo • Mori Hamada & Matsumoto • Nishimura & Asahi • Oh-Ebashi LPC & Partners

Offshore Law Firm of the Year FINALISTs • Appleby • Conyers Dill & Pearman • Maples and Calder • Ogier • Walkers

Managing Partner of the Year FINALISTs • Baker & McKenzie - Yoshiaki Muto • Davis Polk & Wardwell - Theodore A. Paradise • Herbert Smith - Peter Godwin • Latham & Watkins Gaikokuho Joint Enterprise Joseph Bevash • Morrison & Foerster - Ken Siegel • Norton Rose - Michael Joyce

Supporting Organisations

Offical Card

R E S E RV E YO U R TA B LES A N D SE ATS

THE MOST HIGH-PROFILE LEGAL EVENT OF THE YEAR The eighth annual Diners Club ALB Japan Law Awards 2012 will be held in Tokyo on Thursday 7 June 2012 at 6:30pm. This well established and reputable event recognises the excellence and outstanding achievements of Japan’s leading law firms and in-house legal teams as well as the top deals and dealmakers of the past year. Join this prestigious event as Japan’s best legal practitioners assemble to celebrate with all the finalists and winners. Table and seat reservations are now open and welcomed. Includes: cocktail reception, gourmet dinner, awards ceremony, fine wines

BOOK NOW! DON’T MISS DINERS CLUB ALB JAPAN LAW AWARDS 2012 Ritz-Carlton,Tokyo Yes! I want to attend Diners Club ALB Japan Law Awards 2012 dinner and presentation ceremony at 6:30pm on 7 June. Please reserve table(s) US$3,800 per table (for 10 seats) Please reserve US$420 per seat

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Appetite For More REUTERS/Bobby Yip

The last two years have witnessed a swift and dramatic rise in the dim sum bond market, with hungry investors capitalising on an appreciating yuan. As corporations increasingly enter the market to finance their China operations, the appetite for dim sums is going global. What does the future hold for this warming market? Kanishk Verghese investigates

espite a mild case of indigestion late last year, the appetite for “dim sum” bonds – yuan-denominated debt instruments that are issued in Hong Kong – has come back stronger than ever. In Hong Kong, the bonds raised 151 billion yuan ($23.95 billion) in 2011, more than a fourfold increase from just 36 billion yuan in 2010. The surge is expected to continue. Gross issuance of yuan bonds could reach up to 310 billion yuan for 2012, says HSBC. But why are dim sum bonds exciting? Foreign-exchange investors had been betting on an appreciating yuan for the past year. But now companies too are seizing upon the yuandenominated bonds to finance their ventures in China. Moreover, as interest in dim sum bonds goes global, a shift in focus towards

creditworthiness and stronger covenant packages is bound to follow. The surge in issuances is also indicative of a broader trend: China’s drive to internationalise its currency. Enter the corporations One of the more noteworthy trends in the dim sum bond market is the growing presence of non-financial companies in a market that is dominated by financial institutions keen on reaping foreign exchange profits from an appreciating yuan. Fast food giant McDonalds kickstarted the movement in 2010, and may look towards a second dim sum bond offering this year to finance its aggressive expansion plans on the mainland. Volkswagen, Tesco, Unilever, Yum! Brands, Caterpillar and Ford are among the foreign corporations that have followed suit, tapping the bonds as a way to fund their own growth in China. American automaker Ford, which has a number of joint ventures in China, issued bonds worth one billion yuan in March 2012 for the first time. Just days earlier, U.S. heavy equipment manufacturer Caterpillar had issued its third round of

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dim sum bonds. “These are companies that can finance in any market. If others of this calibre continue to access the dim sum market, that will help it grow,” says Eugene Gregor, a Tokyo-based capital markets partner at Davis Polk & Wardwell. South Korean institutions are also exhibiting a keen interest. In July 2012, CJ CheilJedang, a prominent food manufacturer, became the first South Korean company to issue dim sum bonds, raising 1.1 billion yuan. Lotte Shopping, a leading department store business, is the other non-financial corporation that has issued dim sum bonds so far. Other South Korean issuers have been banks: Shinhan Bank, which raised 625 million yuan in bonds in March; Export-Import Bank of Korea (392 million yuan in August 2011); and Korea Development Bank. The five businesses issued a combined sum of 6.02 billion yuan, according to a report by the Korea Centre for International Finance. The Middle East has also joined the scene. In March, Dubai-based bank Emirates NBD became the first-ever Middle Eastern company to issue dim sum bonds, raising 750 million yuan. More markets are expected to get involved. Strong bilateral trade ties between China and Latin American nations have led market observers to believe that Brazilian and Mexican companies may be next in line for dim sum bond issuances. Mexican telecoms leader América Móvil already issued one billion yuan in bonds in February this year, the first Latin American company to do so. Multinationals are attracted to dim sum bonds because they can use the capital raised from issuances without Chinese regulatory approval. Furthermore, the proceeds can also come in handy when settling cross border transactions. Growing Chinese appetite The hype has not been restricted to foreign undertakings. A swelling number of Chinese issuers are entering the market — not only the large privately owned names, but also the higher graded state-owned enterprises (SOEs). In February 2012, Chinese state-owned steel manufacturer Baosteel Group issued 2.9 billion yuan in dim sum bonds to fund its wholly owned subsidiary, Baosteel Resources International. This was the company’s second offering since issuing 3.6 billion yuan in bonds in November 2011. “The next one to two years will see a lot of SOEs coming out to issue bonds,” states Connie Heng, a partner at Clifford Chance in Hong Kong. In October 2011, the People’s Bank of China and the Ministry of Commerce issued new rules on foreign investment into China using yuan funds, which allow a new route for them to flow back into the country. This gradual relaxation of the Chinese regulatory scheme has led to bond deals with direct Chinese guarantees attached to them. “That was not the case six months ago,” says Gregor. “This is a very important development as it broadens the product portfolio the Chinese corporates can use to finance themselves.” Going global All signs indicate that the dim sum bond market is clearly up and running. “The big issue for everyone now is how quickly it will grow, and how interested issuers from outside Asia will be in the product,” says Gregor. Clearly, they are interested. The uptick of European, U.S. and even Middle Eastern issuers entering the dim sum bond market points towards that. In fact, the bond could now be re-evaluated to reflect

Debt Capital Markets

its growing global status. “Everyone talks about the so-called dim sum bond market, but I think we’ve reached the stage now where that term is not all that appropriate anymore, because these issues clearly have nothing to do with Hong Kong as such,” says Andrew Malcolm, partner and head of capital markets at Linklaters in Hong Kong. “These bonds are now no longer Hong Kong market instruments. They are Eurobonds; true international bonds that just happen to be issued in renminbi.” Indeed, China’s moves since the start of this year to make London an offshore yuan trading centre, underscores Malcolm’s statement. Three Chinese policy banks – the Agricultural Development Bank of China, Export-Import Bank of China and the China Development Bank – are set to pioneer dim sum bond issuances on the London Stock Exchange, targeting a European investor base. It is believed that multinational companies, including European-headquartered ones, are likely to follow with similar deals. “The European corporates who are coming into the market are, almost without exception, doing it with the expectation that they will transfer the proceeds onshore into China to finance their onshore businesses. That is

Debt Capital Markets

ASIAN LEGAL BUSINESS MAY 2012

the way the market is going to continue to develop,” says Malcolm. Better creditworthiness But as the dim sum bond market continues to evolve, so do the investors. They are paying less attention to the strength of the yuan, and focusing more on the creditworthiness of the products and covenant protection. Malcolm thinks this is a good thing: “We were in danger of getting into a situation where people somehow thought that the dim sum bonds were a special market, and that usual credit criteria and debt covenant packages did not really matter. “In the past, a significant proportion of dim sum bonds had included only the most basic of bond covenants. Industry experts are optimistic of the longterm development of the market, as issuers realise that enhancing covenant protection can increase the competitiveness of their bond offerings. The market is aligning itself with more standard bond documentation, as investors start to treat dim sum bonds like any other bond. Greater creditworthiness may further whet appetite from abroad, as China’s gradual and methodical relaxation of its foreign exchange controls increases the availability of the yuan in global trade, and helps promote the issuance and trading of dim sum bonds. In July 2009, China initiated a pilot scheme for five of its cities to settle their trade in yuan with Hong Kong, Macau and ASEAN countries, before making the programme nationwide in June 2010. A month later, several constraints on the offshore conversion, transfer and offer of yuan-denominated bonds in Hong Kong were lifted, causing yuan deposits to pour into its banks. The latter has been an integral part of internationalising the yuan, acting as a hub for investors to store the currency, thereby supporting liquid yuan offshore markets. The new relaxed regulations on foreign investment using yuan funds are anticipated to further stimulate the bond market. While China is internationalising the yuan mainly by trade settlement, the currently bondsfocused capital markets are developing alongside and bringing the currency back into China, creating a two-way flow of yuan. Malcolm believes that China’s promotion of this cross border movement is the country’s deep policy objective, which means a further easing of capital controls may help the yuan fully internationalise. What next? So how might the dim sum bond market develop? For a start, the weaker market performance of dim sum bonds towards the

“Everyone talks about the so-called dim sum bond market, but I think we’ve reached the stage now where that term isn’t all that appropriate anymore because these issues clearly have nothing to do with Hong Kong as such.” Andrew Malcolm, Linklaters

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Debt Capital Markets

REUTERS/Petar Kujundzic

end of 2011 suggests that the investor base is growing more selective, and prefers more creditworthiness. “The focus has become more on higher credit bonds. Towards the end of last year, people started becoming more careful over what they invested in,” says Clifford Chance’s Heng. Nonetheless, global interest in dim sum bonds is set to intensify. This is clear from the push into the market by European, Middle Eastern, U.S. and Latin American corporations. Moreover, the launch of London as a second offshore yuan trading hub may widen the pool of investors. These trends in time will make dim sum bonds less of a Hong Kong phenomenon, and more of a global norm. “Issuers are now routinely adding the

renminbi drawdown option to their Medium-Term Notes when they do their annual update,” says Malcolm. “There will be sales of the bonds in Hong Kong, but equally there is a growing investor base outside Hong Kong in Europe and elsewhere that is now able to buy these bonds in renminbi.” For his part, Gregor believes that the growth of dim sums and the number of corporations issuing yuan debt is aligned with a broader trend of China’s deliberate and systematic regulatory liberalisation. As part of this maturation, dim sum investors will likely see bondholder protections and covenant packages closely mimic those found in Asian U.S. dollar-denominated high-yield bonds. Now that Chinese companies have a broader debt portfolio to efficiently finance their ventures, Gregor stresses the need for law firms to reassess their operations: “From a law firm’s point of view, those who have been able to do well in the equity markets in China now need to figure out how they can put the right resources to work across a range of cross-border debt products.”

Debt Capital Markets

ASIAN LEGAL BUSINESS MAY 2012

Japan’s Prime Minister Noda attends a meeting with China’s National People’s Congress Chairman Wu at the Great Hall of the People in Beijing. REUTERS/POOL New

China as creditor-in-chief? By Kanishk Verghese

he flourishing dim sum bond market and the increasing settlement of trade in yuan is indicative of China’s highly publicised ambitions to become what some have termed “creditor-in-chief”. It is no secret that China is ramping up efforts to internationalise its currency. During talks in December last year, Japan’s Prime Minister Yoshihiko Noda and China’s Premier Wen Jiabao disseminated the idea of a free trade agreement between their nations. Signs of progress emerged three months later in March 2012, when Japan was given the green light to buy 65 billion yuan ($10.3 billion) of Chinese government debt. The People’s Bank of China, China’s central bank, said on its website in March that the two countries are strengthening

bilateral financial market cooperation, and promoting the use of the yuan and the yen in trade between the two nations. Japan is the first of the world’s seven leading economies – which include the U.S., Canada, Britain, France, Germany and Italy – to buy Chinese debt. In efforts to further boost the use of its currency worldwide, China has also signed yuan trade agreements with countries like Malaysia, Belarus and Argentina. More than 9 percent of China’s total trade was settled in yuan in 2011, compared to just 0.7 percent in 2010, according to Reuters. The Chinese central bank released a figure of over two trillion yuan for international trade settlements in its currency last year, while foreign direct investment settled in yuan reached 110 billion yuan.

Such elevated figures led to China’s announcement of the China International Payment System in April, a new trading platform that is expected to enhance crossborder yuan payments and improve the convertibility of the currency. Expected to take up to two years to be implemented, the system will make yuan clearance safer and more efficient for cross-border trade in yuan. Achieving full convertibility of the yuan will not happen overnight, asserts Clifford Chance capital markets partner Connie Heng, as internationalisation of the yuan will require an easing of regulations by the Chinese government. “The other part of the puzzle to internationalisation is encouraging foreign governments to increase their holding of PRC sovereign bonds and yuan as reserves in their portfolio,” she says.

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