Distressed Asian debt hard to find

The great credit crunch of 2009 has passed and unfortunately for distressed debt traders, there is little in the way of bad debt to be traded in Asia.

Many pundits had predicted that the credit crunch would bring with it a wave of defaults due to difficulties in getting refinancing, but in reality local currency liquidity did much to stave off the damage. Nevertheless Asia’s distressed debt community has found something to cheer about when they met in Singapore for Debtwire’s Asia Pacific Distressed Debt outlook 2011 panel discussion.

Australia has proved to be the one bright spot for trading in distressed debt, mainly due to the failure of major property companies and trusts such as the now-failed Babcock & Brown and Centro. The flood of liquidity into Asian capital markets has meant that there are few refinancings to be done over the remainder of 2010 and 2011, although 2012 could be challenging as a lot of refinancings are due then. Robert Schmitz, Head of Restructuring and Debt Advisory at Rothschild noted that across the region banks still have the liquidity. “We do see funds coming in and looking but we have not seen the deeply distressed transactions go through.”

Scott Bache, Partner and Head of Asian Restructuring & Insolvency Group at Clifford Chance said that there are deals of a 2007 and 2008 vintage that haven’t been completed because of issues with the deal structure, as well as simply getting the debtors to the table to have a sensible discussion. “A lot of those debts are going into litigation and no real liquidity with people weary to buy into a litigation work out,” said Bache.

“And in Asia many companies with debt are family-owned and so a lot of these distressed debt deals has been completed privately, which leaves Australia as one of the largest markets in the region.

In Hong Kong and Singapore we have a lot of people who want to take capital and put it to work in Australia,” he added.

Few opportunities

In contrast to the United States and Europe, the market for distressed debt in East Asia ex-Japan has provided relatively few new opportunities recently, noted Sandor Schick, managing director of Schick & Associates law firm in Singapore. “There has been another default this year by a so-called “S-Chip” inthis case. China Milk Products, a Chinese company that is listed on the Singapore Stock Exchange.

“This is the latest of a series of such defaults in the last few years. In addition, one Indonesian company whose secured notes are listed on the SGX, Arpeni Pratama Ocean Line PT, has also just defaulted on its obligation. But, on the whole, there have been relatively few defaults in Southeast and East Asia in 2010, and the amount of debt typically involved in such cases has also been quite small compared to the massive amount of debt at issue in certain recent, large-scale bankruptcies outside of the region, such as those of Lehman and General Motors. There has thus been limited scope for trading in distressed debt in East Asia.

Some distressed debt trading desks have consequently been examining investment opportunities further afield such as in high yield.”

According to Schick, there is also one rather interesting and high-profile distressed situation currently unfolding in Vietnam, that of Vietnam Shipbuilding Industry Group (Vinashin).

“Vinashin raises anew an issue which often arises in cases involving state-owned enterprises: will financial support from the government be forthcoming if the resources of the debtor prove insufficient to meet its obligations? Even in the absence of any legally-binding guaranty, foreign creditors often profess to perceive an implicit sovereign guaranty of the debt of substantial state-owned enterprises. The government of Vietnam so far has taken all of the appropriate steps in response to Vinashin’s difficulties: it has removed much of the senior management of the company and has also appointed respected external financial advisors to assist in a debt restructuring. Whether the government also determines it to be necessary or appropriate to provide direct financial support remains to be seen.”

Australia still best for debt

So where are the opportunities likely to be in Asia? According to Cameron Duncan, a Partner at boutique restructuring firm KordaMenthaNeo, which has worked on such deals as Advance SCT and Asia Water Technology in Singapore, the distressed debt investment focus in Asia is expected to continue to be in China and Indonesia. However, more opportunities are expected to arise in Thailand and India.

The added perception of risk with opportunities in India is likely to mean that non-India based investors will be more cautious until one or more large workouts in India are successfully completed. Still, it is the land down under that remains the largest in the region for traded distressed debt. Henry Davis York partner Nicholas Dunstone noted Australia is the largest market for distressed debt in Asia following a slew of corporate failures in 2009.

“There has been an unparalleled influx of secondary debt liquidity into our market totaling around AU$5 billion since Babcock started trading in 2009. Now Centro and a dozen other names are well covered. The driver for that is that Australia is at the forefront of debt structuring,” said Dunstone. “In Australia the major banks are sellers of distressed debt and debt that may not be distressed but nevertheless is a big exposure. The major Australian banks would have denied they were involved but actually they are at the forefront of conducting auctions of their debt,” he added.

The problem for buyers of distressed debt, such as the 40 funds that are active in the Australian market, is that now the big deals are all done, there is not much left at the table. Robin Challis, head of special situations at The Royal Bank of Scotland noted that $1billion “has been traded in Centro in the last ten days.” But the focus is coming back to private placements. “There was recently a $100 million placement in a private situation and that is typical of what you will see over the next six months. If you asked me six months ago I would have said not. But now the opportunities in the secondary market are a lot less,” said Challis.

Burnt by private placements

But according to Clifford Chance’s Bache, there are people still not prepared to go into anything private. “A lot of the people in Asia have seen private deals go wrong and there will be skepticism about the private placement market going forward. China is still very difficult given getting control over ownership and you are not able to do a proper restructuring. In India a lot of the sponsors are very good litigators.

What is most surprising is how good Indonesia has been at getting deals done. It’s not at western standards but it’s moving in the right direction,” said Bache. So who is doing the deals? According to Bache, a lot of distressed debt funds are bypassing the investment bankers and putting their own deals together with companies.
“There is still distressed debt here but it’s just not being traded and a lot of the original investors are just hanging on trying to work things out.”

If Hong Kong Business readers would like a copy of the report please email Naveet McMahon on Naveet.McMahon@mergermarket.com