Asia’s debt restructuring scene has been one of the most colourful sectors of the financial markets in the past 20 years.
In IFR Asia’s early days, one South-East Asian issuer was known to open creditor meetings by placing a loaded pistol on the table. On another occasion, a bus deposited a bunch of stick-wielding thugs outside a company building where discussions were taking place, and some foreign creditors were forced to climb a barbed-wire fence to get away. One investor remembers being threatened with a shark tank when attempting to enforce a claim in Thailand.
Robert Schmitz, head of debt advisory and restructuring for South-East Asia at Deloitte, formerly at Rothschild, Macquarie, Dresdner Kleinwort Wasserstein and Warburg Dillon Read, has seen a change in attitudes during his two decades in Asia’s restructuring business.
Gone are the days when international banks were able to take a punt on distressed debt for their proprietary book – Dodd-Frank rules put paid to that behaviour. But Asia’s growing wealth has given rise to independent funds to fill the gap.
“The next generation came home from abroad, looking at companies and understanding governance better, but overall the market dynamic of more liquidity and having vehicles to do it, encouraging holders to sell their portfolios, became easier,” said Schmitz.
“They have local knowledge and more capital.”
Asian debt restructurings have produced some good results, but the record is patchy. Rare successes, such as the restructurings of Suzlon Energy (at least the first round) in India and Arpeni Pratama and Garuda in Indonesia, which should have been good guides to future transactions, were not followed up. And since Indonesian law is not based on precedent, the laws would have to be recodified to achieve consistent outcomes.
Indonesian courts have occasionally ruled that bonds issued through offshore vehicles – the normal method for Indonesian companies to sell dollar bonds – have no claim on assets in a recovery, as in the case of Asia Pulp and Paper, or that offshore bondholders are not entitled to vote on restructurings at all. As a result, investors remain wary of certain jurisdictions in Asia and reluctant to allocate capital there.
China has had a mixed track record, with many investors citing the restructuring of Asia Aluminum as one of the worst outcomes for foreign creditors. In the agreement, finalised in 2009, bondholders received 19 cents on the dollar and holders of the Chinese aluminium producer’s payment-in-kind notes received half a cent.
Chinese issuers were often reluctant to address their financial troubles, but recent restructurings have shown signs of more equitable treatment of foreign creditors.
“In years past, the answers for a restructuring in China and sometimes Taiwan were usually their uncle, their province or their state bank will bail them out,” said Schmitz.
The increasing internationalisation of some Asian companies has also raised the incentive for an amicable restructuring, as their overseas assets may be exposed to creditors if they are unable to agree terms. These threats could be acted upon for maritime and aviation assets.
On the other hand, Thai companies, which were among the most affected by the Asian crisis, have cut their reliance on foreign currency debt and domestic banks have replaced offshore lenders.
“It took them five years to sort out their issues from the Asian crisis, but they learned their lesson about borrowing from foreign parties,” said Schmitz. “Local banks are growing in size and they can take care of domestic needs to a large extent. They did a good job of developing the local market, and now their banks are playing in Indochina and are very competitive.”
Looking to the future, capital requirements will keep Asian banks under pressure to recycle their portfolios, and greater liquidity gives them more options when it comes to selling to a third party that may be more focused on finding a resolution.
The changes in the bankruptcy laws in India, for example, are promising a boon for restructuring, although most of the work will be concentrated within the banking system. The central bank is forcing lenders to deal with their bad debt, and forthcoming resolutions should further encourage creditors or claimants to work through their portfolios.
Singapore has also revised its laws and now embraces DIP (debtor in possession) financing. Market watchers also believe certain parts of the Indonesian government recognise that the country’s bankruptcy law needs revision after 10 years.