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Recovering assets on the road to recapitalization: China leads the way

  • Michael Redman

Turbulent market conditions have an unsurprising tendency to focus a corporation’s attention on value sitting off balance sheet and in the hands of others. Following the last year of volatility, this has proven to be particularly acute in China, where bad debts are thought to account for close to one-fifth of banks’ balance sheets.

Amongst the most interesting attempts to recapitalize afflicted Chinese institutions has been emboldening them to locate and recover valuable assets held by delinquent debtors abroad. Most prominently, this summer saw China’s CITIC Bank take the step of bringing a civil claim in local courts in Vancouver, Canada, seeking to recover millions of dollars’ worth of property held there by a guarantor on a delinquent credit facility. Seemingly, in a very familiar pattern, the loan went into default and the guarantor left China believing that removing himself from the jurisdiction would provide inoculation against the financial consequences.

While based on a contractual debt rather than a final decision of a court, this is clearly highly analogous to the work of Burford’s judgment enforcement practice where assets are located internationally and pursued through local courts. Unsatisfied judgments and awards are, after all, just another form of debt like any other.

What distinguishes the CITIC case is the bank’s willingness to finance the enforcement procedures and incur the inherent risks along the way. This includes the factual investigation required to identify the full spectrum of assets in the hands of the debtor to preserving those interests pending a full hearing to establish their rights over them.

It is often impossible at the outset to prejudge how debtors will respond to such actions, but if they are well-advised—and they typically are, given that they are often playing with someone else’s money—they can contest the action for years and drive up the cost of pursuit. Creditors therefore often simply keep these debts on their books or decide to write them off entirely.

This is where Burford’s enforcement financing can bridge the gap, leveraging both its expertise in locating assets worldwide and its capital in financing the legal proceedings to return the value to creditors. The availability of litigation finance is likely to embolden other institutions inspired by CITIC Bank’s example to seek similar recoveries and to recapitalize in a way that has the most immediate and positive impact on the corporate balance sheet.