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.