Goldman Sachs Blazes New Trail With Debt Restructuring of Over US$5 Billion for Provincial Investment Trust in China
The 2000 completion of US$5.59 billion in debt restructuring of Guangdong Enterprises is the first for a Chinese state-owned enterprise. Goldman Sachs is the first foreign investment bank to be hired by one of China’s provincial governments.
Created in the early 1980s, Guangdong Enterprises Holding Limited (GDE) served as the investment arm of China’s Guangdong province. As an investment trust based in Hong Kong, GDE allowed the province to tap into previously off-limits foreign investment, ultimately leading to GDE’s ownership in hundreds of new companies. By late 1998, however, GDE faced an immediate need to restructure more than US$5.59 billion in debt for international lenders and bondholders.
GDE was part of a proliferation of investment trusts launched in China to provide provincial governments with access to international funding sources in support of local investment efforts. Over time, GDE morphed into a massive conglomerate with a broad array of investments in real estate, manufacturing and trading, and faced a number of internal challenges as well. By the late 1990s, GDE and other investment trusts were on the verge of collapse.
Goldman Sachs was the first foreign investment bank to be hired by one of China’s provincial governments, based largely on the unique capabilities demonstrated during the 1997 privatization of China Telecom. The privatization required a deep understanding of China's culture and business practices and the GDE restructuring was no less monumental a task.
In a departure from past practices, where the government would step in and assume the liabilities of failing investment trusts, China was committed to treating these entities as independent financial enterprises and negotiating with creditors accordingly. Goldman Sachs demonstrated its confidence in the undertaking by committing to invest US$20 million in the restructured entity.
The restructuring entailed downsizing GDE from 300 companies to core businesses in public works, utilities, real estate and hotels. By the end of 2000, the restructuring was completed and widely seen as a landmark moment in China’s transition away from the outdated model of investment trusts to a more modern financial system.