SOMETHING IS STIRRING in the murky waters of Asian debt restructuring. China’s slowing economy is awakening a distressed giant, while Asia’s resources and shipping sector remains on the rocks.
Completing a restructuring deal in this region is an often frustrating process, involving as it does the meeting of minds across different parts of the capital structure and across different continents. You would never describe it as a fast-moving segment of the capital markets.
And although you might imagine that the collapse of the commodities supercycle and the carnage it has inflicted on the resources sector in the region has created a bonanza in the workout game, this has so far not been the case.
That now seems likely to change.
Numerous bonds issued by Asian resources companies trade at a deep discount to par, but despite the distressed state of the debt, many of these companies have managed to keep servicing it, sometimes diverting working capital to coupon payments.
One debt workout veteran last week described the industry as “a tough place to be in”, noting that there are few active big-ticket workouts in the region, with the loan restructuring from Indonesian coal services provider BUMA the last notable deal to actually close, back in late 2014.
Defaults are creeping up in China, with issuers in the offshore dollar bond markets having recently missed coupon payments
BUT IT SEEMS that the restructuring shoe is dropping in China, in what may well prove to be the most visible evidence that last summer’s collapse in the country’s equity markets was more than just a panic-induced price markdown.
Ratings agency Fitch may have been the first voice to express the shift in China’s corporate landscape when in September it reviewed its notching policy on the country’s state-owned enterprises, noting that “the state is likely to gradually exit from commercial SOEs operating in fully liberalised and competitive sectors, and [that] some of these SOEs will be allowed to fail or to be eliminated in the event of distress, as long as systemic risk remains manageable.”
In other words, if you thought the Chinese government would stump up the necessary cash when an SOE or SOE-linked company runs into distress, think again. Those comfort letters on which numerous investors have relied to make their credit call on China’s swathe of SOE debt may turn out to be a chimera, as face-saving injections of cash disappear amid the reforms of China’s bloated state-owned sector.
Which brings me back to restructuring. Defaults are creeping up in China, with Winsway, Hidili and Shanshui Cement, all issuers in the offshore dollar bond markets, having recently missed coupon payments. Of these, it looks like Shanshui is about to take the formal restructuring route, having last week filed to have the company wound up and in the process accelerating payments due on its 2020 US dollar bonds.
It will be interesting to see how the Shanshui restructuring pans out, given that it will represent the first large-scale workout from China to test what happens to onshore and offshore bondholders in a liquidation. Vulture funds are rumoured to have been sniffing around the due 2020s which were down as much as 20 cents last week, but I for one would not want to get involved in that game.
OF COURSE, THE Asian restructuring industry will want to see an orderly workout and this one will set the standard for the no doubt many that are waiting in the wings among China’s 50,000-odd SOEs. Indeed, in the face of a full-scale liquidation of Shanshui, should a brutal haircut be applied to bondholders, it will reverberate across the entire offshore China bond complex, both secondary and primary.
In the meantime, the restructuring veteran opined that in Asia we may well be in the era of “workouts of workouts” in which deals thrashed out a few years ago on terms that seemed conservative at the time are now proving too big a challenge for the borrowers to honour.
One of these is the restructuring of Indonesian shipping company Arpeni Pratama. The company is now undergoing another round of restructuring, after the cyclical upturn in the global shipping market which underpinned the terms of the original workout simply failed to materialise.
You might have thought that one element which could possibly have circumvented yet another restructuring at Arpeni would be the inclusion of a chunky debt-for-equity swap in terms of the original restructuring.
But Indonesian banks, which were and remain big holders of Arpeni debt, have internal statutes which prevent them from booking equity for more than two years, thus putting all the onus onto debt.
Perhaps if the China restructuring story goes gangbusters that might well be an essential element in the workout modus operandi, particularly given that China can and does tweak its regulations on the turn of a dime. I know that China equity is not the most savoury proposition these days, but it may be a necessary face saver in this growing morass.
