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Friday, 14 November 2008
Asia refinancing to provide risks and opportunities
Appleby of ADM Capital said investors should stay patient for opportunities to ripen in a market he says is the best in his lifetime for investing in distressed debt - better even than during the 1997 Asian financial crisis.
Asia refinancing to provide risks and opportunities
By Tony Munroe and Umesh Desai, Reuters 13 November 2008
HONG KONG: With nearly $500 billion in debt maturing over the next year and banks forced to be miserly, Asian companies will need to be creative in their search for refinancing, with plenty of defaults expected.
Most blue chips will have little trouble renewing their borrowings, but smaller companies and those in capital-heavy industries like shipping and steel could be forced to find alternative sources of finance.
Non-bank investors with cash on hand, like private equity firms, hedge funds, sovereign wealth funds and even deep-pocketed tycoons, are positioning themselves to find bargains where banks may fear to tread.
“The biggest elephant in the drawing room is the refinance trade,” said Robert Appleby, chief investment officer at ADM Capital, which manages about $2.5 billion in distressed assets and may raise up to $1 billion more to plow into a wave of anticipated opportunities over the coming year.
“You will get widespread delinquencies and you will see some companies going bankrupt and some companies going technically bankrupt - the land of the living dead.”
Growing numbers of companies in Asia - as varied as the Australian investment firm Allco Finance Group, the Hong Kong watch retailer Peace Mark and the Singapore-listed steel maker FerroChina - have been unable to meet their debt obligations.
More are expected to seek debt restructurings or go into default as the financial crisis squeezes banks and their borrowers and the global slowdown slashes corporate cash flow, crippling their ability to make loan payments. Volatile stock prices are also making it harder for borrowers to pledge their shares as collateral.
Lenders looking to shrink their balance sheets and reduce risk will have little patience for laggard clients.
“We have already seen bankers taking a tougher line in H2 this year, particularly on highly leveraged borrowers,” said Terry Chan, Asia-Pacific credit officer at Standard & Poor’s in Melbourne, referring to the second half of 2008.
The flow of investment into capital-hungry companies has already slowed to a trickle, in sharp contrast to recent years, in which sovereign wealth funds and Hong Kong tycoons flocked to Chinese initial public offerings and hedge funds and banks were happy to finance property developers in India and China.
Borrowers hoping to be rescued by a market recovery have miscalculated as the financial turmoil has deepened and lenders have braced themselves for a potentially long and deep global recession.
“Some of these issuers have not managed their maturities as well as they should have - particularly those who were rolling over their dues in the hope the capital markets would reopen soon,” said Chan of Standard & Poor’s.
Would-be investors in debt-strapped companies have mostly kept to the sidelines amid a steady stream of negative economic and corporate news, and will be reluctant to take the plunge until a measure of stability emerges.
Given the risk aversion that has hit global markets, whatever financing that will be available will not be cheap. The cost of insuring against debt defaults, which investors use to measure and price credit risk, has ballooned in Asia.
“Anybody with large-scale capital wants Warren Buffett terms,” said Steven Barg, managing director and head of global capital markets for Asia at UBS, referring to the large returns extracted by Berkshire Hathaway for stakes in Goldman Sachs and General Electric.
Those with capital to invest are demanding not just aggressive valuations but stringent terms.
Audrey Lee, a senior real estate lawyer at Paul, Hastings, Janofsky & Walker in Hong Kong, said credit for property projects in China is frozen. Last year, developers across the country raked in big funding packages ahead of IPOs that never happened.
“Some projects are finding the terms quite crazy, exorbitant, if banks are even willing to talk to you,” said Lee, noting that banks will demand comprehensive collateral packages and guarantees from a borrower’s parent company.
Bankers and investors are lining up to put together financing deals when better market visibility emerges.
Globally, UBS recently merged its equity and debt capital desks, a move that better enables bankers there to find solutions for companies whose refinancing options have dwindled.
“The well-known names across Asia won’t have a problem. The guys who are going to have a problem are the next tier down,” said Steve Bennett, head of global leveraged finance for Asia-Pacific at UBS, who figures $480 billion in Asian company debt, excluding Japan, will come due over the next year.
Appleby of ADM Capital said investors should stay patient for opportunities to ripen in a market he says is the best in his lifetime for investing in distressed debt - better even than during the 1997 Asian financial crisis.
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Asia refinancing to provide risks and opportunities
By Tony Munroe and Umesh Desai, Reuters
13 November 2008
HONG KONG: With nearly $500 billion in debt maturing over the next year and banks forced to be miserly, Asian companies will need to be creative in their search for refinancing, with plenty of defaults expected.
Most blue chips will have little trouble renewing their borrowings, but smaller companies and those in capital-heavy industries like shipping and steel could be forced to find alternative sources of finance.
Non-bank investors with cash on hand, like private equity firms, hedge funds, sovereign wealth funds and even deep-pocketed tycoons, are positioning themselves to find bargains where banks may fear to tread.
“The biggest elephant in the drawing room is the refinance trade,” said Robert Appleby, chief investment officer at ADM Capital, which manages about $2.5 billion in distressed assets and may raise up to $1 billion more to plow into a wave of anticipated opportunities over the coming year.
“You will get widespread delinquencies and you will see some companies going bankrupt and some companies going technically bankrupt - the land of the living dead.”
Growing numbers of companies in Asia - as varied as the Australian investment firm Allco Finance Group, the Hong Kong watch retailer Peace Mark and the Singapore-listed steel maker FerroChina - have been unable to meet their debt obligations.
More are expected to seek debt restructurings or go into default as the financial crisis squeezes banks and their borrowers and the global slowdown slashes corporate cash flow, crippling their ability to make loan payments. Volatile stock prices are also making it harder for borrowers to pledge their shares as collateral.
Lenders looking to shrink their balance sheets and reduce risk will have little patience for laggard clients.
“We have already seen bankers taking a tougher line in H2 this year, particularly on highly leveraged borrowers,” said Terry Chan, Asia-Pacific credit officer at Standard & Poor’s in Melbourne, referring to the second half of 2008.
The flow of investment into capital-hungry companies has already slowed to a trickle, in sharp contrast to recent years, in which sovereign wealth funds and Hong Kong tycoons flocked to Chinese initial public offerings and hedge funds and banks were happy to finance property developers in India and China.
Borrowers hoping to be rescued by a market recovery have miscalculated as the financial turmoil has deepened and lenders have braced themselves for a potentially long and deep global recession.
“Some of these issuers have not managed their maturities as well as they should have - particularly those who were rolling over their dues in the hope the capital markets would reopen soon,” said Chan of Standard & Poor’s.
Would-be investors in debt-strapped companies have mostly kept to the sidelines amid a steady stream of negative economic and corporate news, and will be reluctant to take the plunge until a measure of stability emerges.
Given the risk aversion that has hit global markets, whatever financing that will be available will not be cheap. The cost of insuring against debt defaults, which investors use to measure and price credit risk, has ballooned in Asia.
“Anybody with large-scale capital wants Warren Buffett terms,” said Steven Barg, managing director and head of global capital markets for Asia at UBS, referring to the large returns extracted by Berkshire Hathaway for stakes in Goldman Sachs and General Electric.
Those with capital to invest are demanding not just aggressive valuations but stringent terms.
Audrey Lee, a senior real estate lawyer at Paul, Hastings, Janofsky & Walker in Hong Kong, said credit for property projects in China is frozen. Last year, developers across the country raked in big funding packages ahead of IPOs that never happened.
“Some projects are finding the terms quite crazy, exorbitant, if banks are even willing to talk to you,” said Lee, noting that banks will demand comprehensive collateral packages and guarantees from a borrower’s parent company.
Bankers and investors are lining up to put together financing deals when better market visibility emerges.
Globally, UBS recently merged its equity and debt capital desks, a move that better enables bankers there to find solutions for companies whose refinancing options have dwindled.
“The well-known names across Asia won’t have a problem. The guys who are going to have a problem are the next tier down,” said Steve Bennett, head of global leveraged finance for Asia-Pacific at UBS, who figures $480 billion in Asian company debt, excluding Japan, will come due over the next year.
Appleby of ADM Capital said investors should stay patient for opportunities to ripen in a market he says is the best in his lifetime for investing in distressed debt - better even than during the 1997 Asian financial crisis.
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