Asia Pacific Distressed Debt 2010

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The financial crisis has reshaped the debt landscape in Asia-Pacific, and despite soaring equity markets,increasing property prices and booming hard commodities, scepticism still exists as to whether economic recovery is here to stay. Against this backdrop, Debtwire, in association with Clifford Chance andRothschild, canvassed the opinion of 100 people involved in distressed debt on their views of the Asia-Pacific distressed debt market in 2010.



CONTENTSForeword Research methodology Survey findings Guns N' Roses and the Chinese bankruptcy law Looking ahead to 2010 Contacts 1 1 2 16 20 23


Asian equity markets have soared, hard commodities boomed and Hong Kong property prices zoomed, and yet, as this survey shows, there is plenty of scepticism that the global economic recovery now underway is sustainable.But the respondents to the survey are more sanguine about Asias prospects: almost everyone surveyed - 95% to be precise - think that Asian economies will outperform the US and Europe in the coming year. That doesnt mean that Asia wont provide distressed investors with the opportunities they are looking for. The majority of the respondents to this survey expect the number of defaults in Asia to either remain the same or increase in 2010. But at the same time, these participants indicated that finding actionable investment opportunities is a problem. Indeed, 59% of those surveyed stated that less than 25% of the situations they have explored represented an actionable and attractive investment opportunity. There are a number reasons for this, but no doubt, the fact that there are so little debt trades in Asia is the main factor which prevents investors from taking advantage of so many situations. Regulatory issues are also at work too: 57% of the respondents stated that regulatory restrictions against lending directly to onshore companies, particularly in China, means that enforcing rights over security is extremely difficult. Because of these regulations, offshore investors have, over the past few years, been forced to lend to the offshore holding companies of Chinese domestic companies, the ultimate beneficiaries of such loans. However, as the FerroChina and Asia Aluminum cases underscored this year, offshore lenders in such situations often find that they are structurally subordinated to onshore (Chinese) banks that are quick to freeze the borrowers assets at the first sign of unruly foreign creditor behaviour. Indeed, this years survey indicates that a large majority of investors now see China as the most difficult market in which to operate, whereas in the previous two years surveys, China could only tie with, or take second place, to Indonesia for this dubious award. China also stands out in this years survey as being the country that is likely to be the source of more defaults than any other country in Asia. But it also ranks second (behind Australia and ahead of Japan) as having the most attractive distressed debt opportunities in Asia. No doubt, investors see the massive amounts of liquidity in the Chinese banking system and the governments determination to reflate the countrys economy as providing more investment opportunities in the year ahead. Regulatory restrictions and dysfunctional legal systems are cited as the biggest factors behind the difficulties in enforcing security rights in Asia, but investors clearly blame bad loan structures for the problems they have in recovering value: A whopping 94% of survey participants stated that security pledges over shares and other collateral in India, Indonesia and China had not proved as effective as had been expected when the loan deals were entered into. Meanwhile, 81% said the structured loan products, such as private placed loans arranged during the 2006-2008 boom years, did not provide adequate protection to creditors. In this context, its difficult to see where the most risky emerging market debtors will find new funding, particularly if the rally in Asian high yield bond and equity markets doesnt hold up in 2010. And without those markets, creditors could find them stuck in the same trap of having to amend, extend, and pretend for much longer than they had anticipated. Luc Mongeon Editor, Debtwire Asia

RESEARCH METHODOLOGYIn October 2009, Debtwire canvassed the opinion of 100 people involved in distressed debt on their views of the Asia-Pacific distressed debt market in 2010. All responses are presented anonymously and in aggregate.


SURVEY FINDINGSWho was surveyed? Opportunities in the Real Estate sector are expected to increase the most in 2010Do you expect opportunities for distressed investors in the following sectors to increase, decrease or stay the same in 2010?Private equity investor Hedge fund Proprietary trading desk at bank or investment bank6%

Please describe yourself:

11% 5%


Real Estate Oil, gas and mining Manufacturing Financial Services Technology Auto manufactures/ Suppliers Retail Industrials and chemicals

84 62 58 52 47 40 39 37 38 27 16 16 10 8 0 49 84 10 20 30 40 50 60 70 Percentage of respondents 80 75 73 41 53 51 49 51 47 45 37 24 36


6 2

Increase Remain the same Decrease

18 11 8 9 12 12 15 20 9 11

Legal advisor Financial advisor Bank/investment bank credit risk management/credit workout dept



Construction Transportation Paper and packaging Telecom Consumer products Utilities

8 90 100

Echoing sentiments expressed in last years Distressed Debt Outlook, once again an overwhelming number of respondents - 84% of those surveyed believe that opportunities for distressed investors would increase in the Real Estate sector. Interestingly, this is the largest percentage group to expect opportunities in any given sector to increase. Compared to 2008, the largest drop in expected opportunities is in the Consumer space. Last year 68% of respondents expected opportunities in this space to increase. This year a mere 10% expect opportunities to increase while the rest of the respondents are almost evenly split between expecting opportunities to either remain the same (49%) or decrease (41%). However, one respondent cautioned, saying even when the economy is recovering, [the] consumer industry might still be in distress due to lagging effects. In 2008, respondents expected distressed debt opportunities to increase or remain unchanged in most sectors as a result of the financial crisis. In this year's survey, a subset of investors are predicting that opportunities will in fact decrease, a sign that markets are recovering.


68% of respondents expect refinancings to be the most likely source of distressed products in the coming yearWhat type of situation will be the most likely source of distressed products in 2010?3% 2% 1% 6%

Most respondents predict that China will offer significant distressed debt opportunitiesRate each country based on its expected distressed debt opportunities in 2010China Indonesia Australia India Japan South Korea Thailand58 35 36 21 17 16 15 6 11 5 3 80 4 12 71 57 11 22 19 15 10 20 30 40 50 60 70 Percentage of respondents 80 90 8 3 100 19 4 8 5 58 8 66 63 36 43 31 8 38 38 18 18 13 14 10 10 14 3 1 3 2 3 16 27 11 16 2 8 5 2 7 5

Refinancings LBOs Pre-IPO financings Private placements Equity-linked notes Other Share-backed financings

Significant distressed debt opportunities Distressed debt opportunities Some distressed debt opportunities Few distressed debt opportunties No distressed debt opportunities




Hong Kong Malaysia Taiwan

Vietnam 2 11 Philippines 22 70

Similar to last years findings, an overwhelming majority of respondents said refinancings will offer the lion's share of distressed situations in 2010. The number of respondents expecting distressed situations to arise out of refinancings increased from 61% last year to 68% this year. 11% of the respondents expect LBOs to be the most likely source of distressed products in 2010. One respondent said he felt LBO situations in Australia would be particularly affected. The number of respondents who expect private placements to be the most likely sources of distressed products has more than halved to 6% in this year's survey, down from 15% in last years edition.

Singapore 13 69 New Zealand 2 800

Whilst there are undoubtedly numerous distressed situations in China, we are yet to see many investors buy into distressed debt with a view to forcing a restructuring on the debtor and shareholders. To the extent that opportunities exist, it is more likely to be found in funding shareholders in buying debt back at a steep discount, given the creditor side execution risks in China.Scott Bache, Partner, Clifford Chance

China, Indonesia and Australia are again at the top of the list of countries expected to witness significant levels of distressed debt opportunities of debt to emerge in the coming year. However, in last years report the clear majority believed that these countries would offer significant distressed debt opportunities, while in this years report more respondents state that they see only some distressed debt opportunities. One respondent stated that export-oriented countries would offer the majority of distressed debt opportunities and added that this is where firms are looking for debt financing in a short time frame to meet their needs. In relation to China, which overall is seen as the country that will offer most distressed debt opportunities, one respondent said that there will be countries like China where there are lots of distressed situations, but it does not necessarily mean there are opportunities for investors. Japan is interesting in that it is a mixed bag: while 17% of respondents believe the country will offer significant distressed debt opportunities, 14% believe it will in fact offer no distressed debt opportunities at all.


SURVEY FINDINGSA slim majority predict that the amount of defaulted debt in Asia will increase in 2010 China is also predicted to see the largest increase in defaults say 49% of the respondents

Do you expect the amount of defaulted d


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