Hong Kong – (December 10, 2009) – The worldwide financial market’s performance over the last twelve months has made some financial institutions and investors wary. However, leading global offshore law firm Walkers sees opportunities for offshore finance and private equity structures in Asia. While there have certainly been shifts in focus by the market, the right offshore strategies can help achieve onshore solutions for investors and institutions, says Walkers.
Over the past five years, there has been significant growth in foreign direct investment in Asia, and particularly in the Peoples’ Republic of China. In that time, thousands of companies have been incorporated in the British Virgin Islands (BVI) and the Cayman Islands to facilitate such investments. However, due to differences in legal frameworks and financial markets around the world, achieving success for shareholders, investors and creditors can sometimes prove challenging. The dependability of the legal systems in the BVI and the Cayman Islands is often a key factor in the decision to use incorporated companies in one or both of those jurisdictions in Asian corporate structures.
“Arguably, the enforcement of domestic security in Europe and North America is more dependable than domestic security in developing markets,” said John Rogers, head of the Finance and Corporate team for Walkers’ Singapore office. “However, where there is some uncertainty about the enforceability of domestic security, which is sometimes the case in developing Asian markets, offshore security and structuring are integral.”
The recent economic downturn has systemically changed financial centres around the world and materially impacted Asian finance. These changes will likely result in changes to financial agreements moving forward.
“Only a few years ago, borrowers had enormous power. Wielding this power to hamstring banks, borrowers were left to essentially structure deals by their own terms. We now have a Brave New World, where power is back in the hands of the lenders who have renewed leverage to increase their collateral and security positions,” said Andy Randall, head of the Finance and Corporate team for Walkers’ Hong Kong office. “As creditors and shareholders continue to fight for their rights in financial agreements, this trend could be a game-changer in Asia and around the world.”
In the developing Asian markets, Walkers has seen increased utilization of offshore security packaging, restructuring and the use of offshore insolvency-related remedies as a means to achieving onshore solutions.
“The financial crisis has forced a shift in the offshore markets to focus on rights, remedies and enforcement options for creditors and shareholders, financial and corporate restructuring, and the resolution of shareholder and investor disputes,” said Randall “In addition, many hedge funds have been looking at restructuring to survive lower returns, liquidity concerns and other market challenges. This shift has created opportunities for implementing solutions that combine onshore and offshore elements.”
Achieving the right outcome involves working together with the onshore lawyers in the relevant market from the outset. The offshore enforcement strategy for an Indonesian asset, for example, may be different than the strategy for a Chinese asset or an Indian asset.
“Offshore-onshore interaction has become a necessity to favorably resolve restructuring and insolvency issues, particularly in the Asian markets. When it comes to pre-emptive enforcement of offshore security, the Cayman Islands and the British Virgin Islands are seen as creditor friendly jurisdictions,” said Antonia Hardy, head of Walkers' Global Finance & Corporate Group. “Offshore services often provide part of the solution. However, the strategic analysis prior to the enforcement is absolutely crucial.”
This is a view shared by Fraser Hern, the head of the Walkers’ Hong Kong Restructuring and Insolvency team. “Strategic analysis prior to an enforcement or restructuring is critical, and should involve both onshore and offshore counsel. There is a wide range of differing options available as a matter of BVI or Cayman Islands law which can assist stakeholders involved in distressed scenarios onshore. Determining which is appropriate in any given scenario requires a thorough analysis of key issues at an early stage, including the location of the underlying assets, identity of key creditors, attitudes of local courts, future liquidity issues, and identifying the client's ultimate objectives. Strategies differ widely depending on the specific details of the matter in hand."