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 |  Subject: Chinese Defaults Worry Foreign Banks--They Should Blacklist the Bastards  Thu Sep 10, 2009 8:26 pm | |
| HONG KONG -- Foreign banks that entered oil-derivative contracts with some Chinese airlines and shippers could find they have little recourse if the companies make good on threats to default on obligations.
This week, China's State-Owned Assets Supervision and Administration Commission offered encouragement to some Chinese companies to challenge losses stemming from derivatives used to protect against sudden spikes in the price of fuel.
Some of China's biggest airlines and shippers lost hundreds of millions of dollars last year on derivative trades when the price of oil plunged. They are now seeking to claw back those losses.
Last month, China Eastern Airlines Corp., Air China Ltd. and China Ocean Shipping (Group) Co. sent letters to a handful of foreign banks, including Deutsche Bank AG, Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Citigroup Inc. and Morgan Stanley. The letters warned that the companies reserved the right to default on those obligations.
Bankers said they haven't heard of any defaults thus far. A spokeswoman for the International Swaps and Derivatives Association, a global trade association for over-the-counter derivatives, declined to comment.
Still, support from the Chinese government has heightened concerns among Western investment banks about the risks of doing business in China. Bankers and lawyers said firms' ability to collect on outstanding obligations, especially in the event of a dispute, always has been tenuous, but the recent letters have pushed these concerns to the fore.
Western banks already are planning to impose higher costs on Chinese companies that want to enter into such hedging arrangements, including requiring larger amounts of collateral to back any future contracts, bankers said.
Typically, such hedging arrangements are struck in Hong Kong, Singapore or other jurisdictions with a well-established framework for resolving contract disputes.
Foreign court rulings are difficult to enforce on the mainland, lawyers said. In addition, derivatives counterparties generally include mandatory binding arbitration, said Thomas Britt, a Hong Kong-based lawyer at Debevoise & Plimpton LLC. The parties agree to select their own arbitrators, usually experts in the field, and abide by the resulting decision.
Lawyers said China has agreed to enforce arbitration awards on the mainland, under terms of a multilateral convention drafted in the late 1950s. Still, Beijing can opt to set aside an arbitration outcome.
"The government can still conclude that it is contrary to public policy to enforce complex and unfair contracts when Chinese companies have made a legitimate claim that they were misled," Mr. Britt said.
People close to the banks that received letters said that if China balks at accepting arbitration terms, the firms still could seek a court ruling in Hong Kong, Singapore, the U.K. or whichever jurisdiction governs a particular contract. In that case, they may be able to seize overseas assets of the Chinese companies -- a Chinese aircraft that touches down in London, for example.
But it is an unlikely course of action, these people said. No global bank wants to be responsible for heightening international political tensions with China.
It remains unclear whether the Chinese companies will actually default. They still rely on their ability to enter into these deals to smooth out jet-fuel costs.
http://online.wsj.com/article/SB125252560206996817.html |
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