Distressed debt a new asset class in Asia<\/p>\n
By Andrea Ricci<\/p>\n
HONG KONG (Reuters): Asia's decline in fortunes has created a
\nnew class of securities previously associated with troubled Latin
\neconomies but not robust Asia -- distressed debt.<\/p>\n
With currencies of many countries sharply weaker, numerous
\ncompanies have found themselves unable to service their external
\ndebt, forcing them to restructure or default.<\/p>\n
Many more are current on their obligations but are the victims
\nof poor sentiment, which has caused Asian debt paper prices to
\nplummet.<\/p>\n
The debt of all of these companies can be considered
\ndistressed. And there are investors who will take it.<\/p>\n
So investment banks are taking a closer look.<\/p>\n
"I wouldn't say that it is a change in focus for us," said
\nIvan Lee, vice president and head of fixed-income research at
\nSalomon Smith Barney.<\/p>\n
"I would say that the distressed debt market is attractive
\nenough for us to have a serious look at the market and put some
\nresources there," he said.<\/p>\n
Raja V, vice president at BA Asia, said distressed debt is not
\neasy to define but can be split into three broad categories.<\/p>\n
"The first category are those companies that are going through
\na prolonged period of illiquidity. In this category, all you are
\nlooking for is the catalyst that turns them from being illiquid
\ninto liquid and viable investments," said Raja.<\/p>\n
The second type are companies that have been growing beyond
\nsustainable growth rates and are overextended financially.<\/p>\n
"These are the ones that an investor is really looking at from
\nthe point of view of M&A (mergers and acquisitions) activity or
\nassets sales, normal corporate restructuring," he said.<\/p>\n
The third are companies that are "pure and simple junk. What
\nyou are looking for there is terminal asset values", he said.<\/p>\n
Salomon's Lee said many bonds and loans in Indonesia are
\ndistressed in terms of their yield spreads.<\/p>\n
"Have they defaulted? No. They are still current. But because
\nof the perceived risk of the parent, the trading level can be
\ndistressed," he said.<\/p>\n
Potential returns with distressed debt are high, but so are
\nthe risks. Investors take on distressed debt in the hope that the
\nbig money that can be made on a few deals will make up for losses
\non the rest.<\/p>\n
Most investors are U.S.-based funds that have experience with
\ndistressed Latin American debt or got into the market in the late
\n1980s when the U.S. real estate market tumbled.<\/p>\n
Asian investors are just starting to get into the game.<\/p>\n
Both types of players have something to learn.<\/p>\n
"There are Asian players that are not used to buying
\ndistressed debt, but they know the Asian market," said Douglas
\nTanner, senior partner in Asia for Milbank, Tweed, Hadley and
\nMcCloy, a law firm advising debt holders and investors.<\/p>\n
"Then you have a lot of people in the U.S. which are very
\nsophisticated buyers of distressed debt, but they don't know
\nanything about Asia. So over the last three months it has been a
\nprocess of education on both sides, one learning about distressed
\ndebt, the other learning about Asia," he said.<\/p>\n
Investment banks are gearing up for the nascent market,
\nputting more resources into credit research.<\/p>\n
"You have to have good traders or good salespeople that can
\nsource paper, or you need to have a lot of people that are very
\nclose to the companies, who would know what their funding profile
\nis, what their funding gaps are and therefore would know what
\nmoney they need and when they need it," said a fixed-income
\nmanager at a U.S. bank.<\/p>\n
"It is very detail-oriented sort of stuff, it's not sexy, it's
\nnot glamorous. People think it is, but there is actually a lot of
\ndrudgery that goes into making money in it," he said.<\/p>\n
The same problems that plague Asian debt markets generally --
\na lack of transparency, poor corporate disclosure and unclear
\nbankruptcy laws -- become magnified when the debt in question is
\ndistressed. Clarity varies significantly by country.<\/p>\n
"If you look at Hong Kong and Singapore, the legal recourse
\navailable to the creditors is very comfortable and the disclosure
\nlevel in terms of the integrity of the financial statements is
\nquite reliable," said Lee.<\/p>\n
"When you get into countries like Thailand and Indonesia,
\nwhere the bankruptcy laws are still being developed, the
\nuncertainties there obviously are higher. And Malaysia and Korea
\nare in between," he said.<\/p>\n
How much clout debtholders have in forcing a company to
\nrestructure also varies by country, and by company.<\/p>\n
"If you have a company that needs to do an international
\nfinancing to continue to expand its business or to meet its
\nobligations then the holders of its existing debt have a lot of
\nleverage," said Tanner.<\/p>\n
But, he said, "I have not seen evidence that holders of
\ndistressed debt have been able to exercise substantial leverage
\nout here in Asia."<\/p>\n
The outlook for improved bankruptcy laws is good, however.<\/p>\n
"By and large, the legal systems are converging on the U.S.
\nstyle, which is one of the reasons that many of the vultures
\nswooping around are Americans," said the fixed-income manager.<\/p>\n
Other factors also can cloud the picture, analysts said.<\/p>\n
"Sometimes, there is a discrepancy of information, so that
\ninvestors think the debt is hedged and then find out it's not,"
\nsaid C.K. Kong, vice president, Pacific credit research, at
\nCredit Suisse First Boston.<\/p>\n
Salomon's Lee said the supply of Asian distressed debt
\nultimately could be in the tens of billions of dollars. But trade
\nis as yet modest and liquidity very thin.<\/p>\n
"The market is very new and not well developed. A lot of
\ninvestors are doing their homework at this stage and are very
\nselective," Lee said.<\/p>\n
Existing creditors, meanwhile, are still deciding whether they
\nwant to sell their portfolios.<\/p>\n
Some investors have complained that Asian distressed debt is
\ntoo richly priced, a problem Lee attributes to existing
\ncreditors' unwillingness to sell the debt at a deep discount.<\/p>\n
"We are seeing quite a lot of interested buyers, but they are
\nnot aggressively buying, which is an indication that they think
\nthe price is on the expensive side," he said.<\/p>",
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