US: companies offered way out of China debt

The scheme utilises an international set-off of China's defaulted sovereign obligations against outstanding commercial debts owed to China, enabling U.S. and foreign companies which owe money to China or Chinese SOEs to extinguish such debt at a 70% discount from the principal amount owed.

The ABF represents U.S. citizens holding defaulted sovereign bonds of the government of China. Under international law, these obligations are the responsibility of the government of the People's Republic of China, which refuses to honour repayment.

The ABF has placed approximately USD260 milliard of these obligations into escrow to develop the debt relief scheme in order to recover repayment of creditors' claims while simultaneously offering debt relief to parties with outstanding obligations owed to the Chinese government or any of its SOEs. The international setoff procedure involves the discounted purchase and exchange of the defaulted sovereign obligations for cancellation of commercial debt.

Eligible participants for the debt relief program include any private or governmental party owing money to the government of the People's Republic of China, including any of its state-owned enterprises.

It's a good wheeze: in effect, it's form of voluntary garnishee proceedings. China's sovereign debt is due, US companies owe money - either late or not - to Chinese State Owned Enterprises. So by collecting the money from the US companies, the amount owed to US citizens can be reclaimed. The creditors are willing to settle for part of their money and the companies that owe money to China get a discount.

Of course, there is just one snag: there is no judgment in respect of the bonds. And therefore there is no formal garnishee order. Thus there is no specific authority to say that the Chinese SOEs cannot proceed against the companies which owe them money after the scheme has been applied. The garnishee order would offer that protection, although it would not offer the discount.

The scheme looks good on paper but actually it appears to be on dubious legal ground.

Anyone who wants to try it out can contact

Oppenheimer & Co., Inc., Louis D'Angelis, Senior V.P. - Investments, Telephone: (201) 845-2308

Winthrop Advisors, L.L.C., Greg Hahn, President, Telephone: (317) 443-4208

American Bondholders Foundation, LLC, Jonna Z. Bianco, President, Telephone: (931) 359-8781