Second wave of Asian debt workouts on the way
Second wave of Asian debt workouts on the way
HONG KONG (Dow Jones): Out of the frying pan, into the fire. That may be Asia in 2001, after economies around the region flopped out of the financial crisis of 1997 only to get burned by the economic slowdowns in the U.S. and Japan.
The result could be a second wave of massive debt restructuring across the region, starting with the upcoming colossal restructuring of Indonesia's Asia Pulp & Paper's US$12 billion.
"There is clearly more (debt restructuring) going on now than we might have expected this time last year when everyone was feeling optimistic," said Andrew Carmichael, partner at international law firm Linklaters & Alliance, in a recent interview with Dow Jones Newswires.
This would be the proverbial silver lining to the dark clouds hovering over the region and it could bring more successful workouts like those conducted by Guangdong Enterprises (Holdings) Ltd., Total Access Communication and Thai Oil.
Although, the short-term impact of this could be harsh, it will also lay the groundwork for more sustainable growth going forward.
Carmichael, who was involved in GDE's restructuring, said that there won't be another GDE. But he noted that "the risk of a U.S. hard landing or soft landing has created an uncertain atmosphere and a number of companies that appeared to survive the crisis relatively well" by patching things up in a makeshift fashion will now have to face the economic downturn.
Making things more difficult for those Asian companies are creditors who are getting increasingly impatient and are now "perhaps a little more aggressive" in dealing with their debtors, the lawyer said.
Carmichael reckons that the two most active countries in terms of debt restructuring are South Korea and Hong Kong. In Thailand and Indonesia, debt workouts will likely drag on due to the absence of a strong legal framework and political will.
Carmichael warned that a large part of the restructuring in Hong Kong is still to come, mostly from red chips, which are mainland Chinese companies listed on Hong Kong's stock market.
Those red chips will likely have a difficult time servicing their debt this year and will have to do some restructuring, Carmichael said.
Bankers in Hong Kong say that a number of red chips, who have a large part of their debt maturing this year and next year, have been unable to raise new funds to refinance their upcoming maturing debt.
Hong Kong real estate developer Paliburg Holdings Ltd., for instance, warned last month that it may default on US$450 million of debt after one of its units failed to pay principal, premium and interest on an exchangeable bond that matured on Feb. 6.
Paliburg added that it is currently negotiating with bondholders to avoid a cross-default from its unit's missed payment worth US$161.5 million.
"There are quite a lot of Hong Kong companies that will have to work pretty hard to avoid problems later this year and next year," he said.
Carmichael declined to name any specific company but he noted that throughout Asia it will depend on the industry and the industry's cycle.
Telecom companies with old technology, for instance, will be hard hit as investor appetite for telco financing is drying up and the companies will need even more financing to upgrade their technology.
Thailand is one country where the prospects for creditors have worsened recently with the election of populist Prime Minister Thaksin Shinawatra.
"The political climate has changed hugely (and) many observers suspect that the new government will prefer to support Thai companies, particularly the small and medium sized enterprises, against creditors wishing to liquidate those companies," the lawyer said.
With a nationalist prime minister, Thai courts will have a hard time ruling for any liquidation that would involve massive layoffs. Observers in Thailand and Indonesia are becoming increasingly cynical when it comes to the local courts.
"In Asia generally, the courts, without being political, are extremely reluctant to be the ones to kill a company," Carmichael noted.
In fact, there hasn't been any full blown liquidation in Asia, apart from Hong Kong's Peregrine Group which collapsed in 1998. About 60 companies in the group were liquidated in 11 jurisdictions and HK$3.4 billion in debt were paid to more than 1,000 creditors. Some law suits against Peregrine are still in progress in Hong Kong's Court of Final Appeal.
The most painful debt workouts will likely come out of Thailand and Indonesia, where the poor economic outlook won't bring much support to failing companies. Korea will also go through difficult times as the government starts tackling the problems of the chaebols.
Wherever they take place, the debt workouts will be lengthy processes, not only because of the lack of strong legal frameworks surrounding bankruptcies, but also because of the number of players involved.
GDE, for instance, came to an agreement last December with more than 120 creditors on debts totaling US$5.59 billion on which it had defaulted two years earlier.
Even government efforts to change the law don't always make negotiations easier. Thailand's Central Bankruptcy Court last month rejected attempts by Prachai Leophairatana, the founder of Thai Petrochemical Industry, to stop TPI's restructuring. Prachai was ousted as chief executive of TPI and replaced by a debt workout specialist by TPI's creditors.
TPI also exemplifies the problems creditors face when dealing with a large number of Asian companies which are owned and run by prominent families.
Indonesia's Widjaja family will likely stay in the news for some time as Asia's largest corporate borrower Asia Pulp & Paper (PAP) starts renegotiating its debt worth up to US$12 billion. The Widjaja family owns APP's parent company, the Sinar Mas Group.
As an increasing number of creditors start filing law suits against APP, some unpleasant surprises may unveil as the group's complicated debt structure will likely make the process longer and more complicated than any case seen in Asia.