Companies across Asia expect tighter liquidity levels and rising funding costs as European banks continue to reduce their exposures in the region, according to a recent joint survey by Clifford Chance, KPMG and Debtwire.
The survey asked 100 professionals involved in distressed investing their views on Asia-Pacific distressed debt and special opportunities over the coming year.
One of the key findings was that just over half (55 percent) of respondents said they expect the amount of distressed debt in Asia-Pacific to rise in 2012, while 52 percent said that as European banks scale down their Asian operations, US and Asian banks will be able to provide liquidity but at a higher cost.
While there are a number of factors affecting an increase in Asia-Pacific distressed debt, 46 percent of respondents agree the most likely cause is the continued problems in the eurozone. Other factors coming into play are threats of slowing Asian economies due to policy changes (39 percent), an implosion of China's economic bubble (38 percent) and the US entering another recessionary period (36 percent).
Edward Middleton, Partner, Head of ASPAC Restructuring, KPMG, said: "It would seem from our own analysis of recent financial results of Chinese listed corporates that there is increasing pressure on cash flow and working capital caused by a tightening in liquidity in the market. Corporates lacking adequate visibility and control over cash flow will be more susceptible to a downturn in the economy. We've witnessed recently an increasing number of opportunities for investment in corporates who are overtrading, thus presenting attractive propositions to distressed investors."
The survey also notes that China ranks first on the list of countries investors are targeting in Asia for distressed opportunities. Meanwhile, for the second year in a row, survey respondents see Japan and Australia as the second and third most targeted countries for distressed debt/special situations investments.
Scott Bache, Partner, Asia Pacific Head of Restructuring and Insolvency, Clifford Chance, said: "The eurozone crisis has certainly reduced liquidity in the credit market, creating more opportunities for distressed debt and special situations investments. Whilst there are opportunities and a high level of interest in China, execution risk is particularly high given the inherent difficulties in the usual offshore to onshore funding structures used in China."
Indonesia, in previous years a favorite target for distressed debt/special situations investors is now ranked behind India, South Korea, the Philippines and Malaysia.
Edward Middleton, Partner, Head of ASPAC Restructuring, KPMG, said:"In the equivalent ranking last year, Indonesia ranked fifth, ahead of South Korea, and the Philippines did not register at all. This year, by contrast, the Philippines enters the chart straight in at number six while Indonesia comes in eighth, behind both the Philippines and Malaysia. This may be a quirk of the statistical analysis as, on activity seen in recent months those targeting Indonesia ahead of the Philippines this year are likely to acquire more air miles than those with the reverse view."
While 39 percent of respondents say significant liquidity shortages could occur as European banks withdraw from Asia, many also point out that hedge funds and prop desks will likely step in to replace banks as lenders. However, 22 percent say hedge funds and prop desks will decrease Asian investments in favor of Europe.
Scott also commented: "The rise of 'shadow banking' is a systemic shift in global capital markets. Certainly, funds are an obvious solution for frustrated corporate borrowers. Collectively, funds represent an attractively large pool of capital: they are sufficiently diverse in their specialist knowledge and strategic objectives to accommodate a wide range of business borrowers and financing propositions."
With borrowers likely to find it tougher to obtain commercial bank loans, 60 percent of survey respondents say they expect volumes for the primary mezzanine loan market to increase, while 35 percent say it will remain unchanged and only 5 percent expect a decrease.
Tighter liquidity conditions are also expected to generate defaults: 55 percent of the survey's respondents expect the amount of distressed debt in the Asia-Pacific region this year to increase from 2011 levels while 26 percent expect it to remain the same and 19 percent believe it will decrease.
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About Clifford Chance
Clifford Chance is one of the world's leading law firms, helping clients achieve their goals by combining the highest global standards with local expertise. The firm has unrivalled scale and depth of legal resources across the five key markets of the Africa, Americas, Asia Pacific, Europe and the Middle East, and focuses on the core areas of commercial activity: capital markets; corporate and M&A; finance and banking; real estate; tax; pensions and employment; litigation and dispute resolution. The firm has 34 offices in 24 countries with some 3,200 legal advisers. The firm also operates a co-operation agreement with Al-Jadaan & Partners Law Firm in Saudi Arabia.
Clifford Chance operates across Asia Pacific, with offices in Bangkok, Beijing, Hong Kong, Perth, Shanghai, Singapore, Sydney and Tokyo. With over 400 lawyers in Asia Pacific alone, it is one of the largest international firms in the region, enjoying a market leading reputation across practices.