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Dealing in distress

4 January 2016 By Peter Thal Larsen

Investment bankers in Asia will switch from presiding over corporate marriages to arranging funerals in 2016. Cheap credit helped drive a merger boom in the region. As growth slows and debt becomes more expensive, dispensing restructuring advice looks like a growth business.

Bankruptcy experts have had a quiet time in Asia recently. Low interest rates and capital inflows limited distress. Of the 101 corporate defaults recorded by rating agency Standard & Poor’s by the end of November, just 21 were in emerging markets – a designation dominated by Asian countries. Companies that failed to repay creditors often did so for peculiar reasons. Chinese property developer Kaisa, for example, defaulted after its chairman suddenly stepped down at the end of 2014, but he returned to the helm a few months later.

Yet as U.S. interest rates rise and capital flows out, many Asian groups look vulnerable. Moody’s reckons average debt at 251 riskier companies it tracks in the region reached 4.9 times EBITDA in 2015, from 3.8 times in 2011. Barclays analysts expect the default rate for high-yield corporate borrowers in emerging markets to almost double to around 7 percent in the coming year. The stronger U.S. dollar puts extra pressure on groups whose debt is denominated in the American currency.

This means bankers, lawyers and investors who specialise in debt workouts will be busier in 2016. Some global investment banks are setting up dedicated Asian restructuring units. Bankers who spent years orchestrating mergers and acquisitions are now touting their services to corporations in need of debt relief.

The transition can be tricky, though. Investment banks face fewer restrictions in Asia than in the United States. Even so, acting for a company in bankruptcy can throw up conflicts of interest, or strain relationships with other clients.

Underdeveloped bankruptcy laws in many Asian countries mean restructurings can drag on. Local banks and politicians are unpredictable. Troubled companies can also be reluctant to pay for counsel: advisers on this year’s restructuring of PT Berau ended up suing the Indonesian coal miner for fees. And even if corporate distress proves lucrative for Asian bankers, it will never have the glamour of helping to arrange big deals.

This view is a Breakingviews prediction for 2016. Click here to see more predictions.


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