asia-pacific distressed debt outlook 2009 - mergermarket

ASIA-PACIFICDISTRESSED DEBTOUTLOOK 2009

DECEMBER 2008

MER 826 Debtwire DD Asia A4 AW6.qxd 8/12/08 10:55

CONTENTS

Foreword 1

Research Methodology 2

Pre-Qualifiers 2

Survey Analysis 3

About Rothschild 20

Clifford Chance Profile 22

Debtwire Contacts 25


FOREWORD

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Welcome to the Asian Distressed Debt Outlook 2009, which Debtwire is delighted topresent in conjunction with Clifford Chance and Rothschild. This is the second AsianDistressed Debt Outlook since Debtwire launched its service in the region late in 2006.Judging by the accurate predictions made in last year’s report, the 2009 survey shouldserve as useful guide to distressed debt professionals.

This year’s survey shows respondents expect distressed debt investingopportunities will emerge mostly from China and Indonesia followed byAustralia and South Korea. Most of these opportunities are expected to ariseout of refinancings (or rather, the inability of companies to obtain refinancing),a sentiment that reflects the recent state of global capital markets.

And Asian real estate is overwhelmingly seen as the sector that willprovide distressed investors with the most abundant product in 2009, ayear survey’s respondents expect to see bountiful investing opportunitiesin all sectors. By then, the effects from the sudden drop in global demandin the second half of this year will have dealt a debilitating blow to themany Asian companies that, for the last two years, have been squeezedby sharply rising labour and commodity costs and an appreciating homecurrency. In the weeks following the completion of this survey, distresseddebt professionals were clearly expecting a substantial increase in thenumber of covenant breaches and payment defaults, particularly fromChinese manufacturers, as well as from product makers in South Korea,Taiwan and Japan.

That China and Indonesia are seen as providing the most distressed debtopportunities is no doubt because these are the countries that have beenthe destination for so much hot (mostly hedge fund) money over the lastfew years. Ditto for the real estate sector, especially in China, Australia,Japan and India. Indeed, real estate developers account for nine out ofthe 13 Chinese companies identified by Debtwire Asia as “stressed”, and approximately half of the USD 16bn in debt those companies had.Similarly, of the 25 Japanese companies Debtwire Asia has identified asdefaulted (on a total of USD 15bn of liabilities,) 14 are real estate-relatedconcerns, with a total of USD 7bn in debt; of the USD 32.5bn of stressedand defaulted debt in Australia, USD 14.5bn is real-estate related.

To some chagrin, China and Indonesia are also viewed by this year’srespondents as the most difficult of jurisdictions to seek legal recourse (as they were last year). That will make next year an interesting test ofthe many privately-placed loans that were structured to mitigate as muchas possible the region’s legal and regulatory risks, market participants say. What, for example, will creditors be able to do with shares that havebeen pledged to them in offshore escrow accounts by Indonesian orChinese companies? Will they seize or sell them? And to what effect,given that ultimate control of any Indonesian or Chinese company willhave to be obtained by directly controlling domestic operating companies?

Legal and regulatory issues widely remain viewed as the most pressingfactors discouraging capital from moving into Asia, the survey showed. A case in point is the Reserve Bank of India’s rejection in early November of Ranbaxy Laboratories’ application for the change-of-control triggered early redemption of its USD 440m outstanding CBs. This was an alarmingdevelopment as this signalled that investors might have no legal recourse if Indian companies failed to redeem notes early, as specified under theirrespective bond indentures. The RBI followed up by issuing guidelinesallowing for the buyback and early redemption of foreign currencyconvertible bonds, but the details were still not clear at the time of writing.

The survey’s respondents also see regulatory and legal impediments as asignificant factor in providing funding to companies in distress in the region.The absence of laws allowing for debtor-in-possession financing in Asia and Australasia have long been detrimental to the efforts of creditors torehabilitating distressed companies in the region. This year has already seen a number of companies being forced into administration because theirstatus as defaulted debtors did not enable them to obtain working capital.

These issues might also explain why only 12% of this survey’srespondents expected Japan to provide significant distressedopportunities. This, even though Debtwire Asia data shows Japan to be Asia’s largest distressed debt market: The country has five companieswith at total amount of USD 47bn of debt we classified as stressed, more than double the USD 21bn in debt owed by the 10 Australiancompanies and about three times greater than the USD 16bn of debtowed by the 13 Chinese companies. Japan also dominates the region in terms of the number and value of debt defaults: Debtwire Asia hasidentified 25 Japanese companies having a total of USD 15bn of debtthat has defaulted. This compares with 12 companies in Australia havingapproximately USD 15.2bn of defaulted debt and 6 companies in Chinawith USD 2bn of defaulted debt.

How this downturn plays out will likely be different from the 1998 Asian crisis. But surely, unlike that one, there is a level of maturity to the market that wasn’t here last time around. Almost a third of therespondents to this survey have been in Asia for more than ten years and another 30% for between six and ten years. Those that participatedin the workouts that emanated from the 1998 crisis will have learnedsome hard lessons and have gained invaluable know-how. Hopefully, thiswill mean that the workouts that come out of the current downturn willbe a smoother ride. Somehow, we doubt it.

Luc MongeonEditor, Debtwire Asia


RESEARCH METHODOLOGY

In October 2008, Debtwire canvassed the opinions of 100 hedge fund managers and proprietary trading bankers on their views of the Asia-Pacific distressed debt market in 2009.All responses are presented anonymously and in aggregate.

PRE-QUALIFIERS

How many years have you been working in Asia?

1-5

6-10

11-15

16-20

20+

3%

40%

30%

17%

10%

How many years have you been working in the hedgefund industry?

1-3

4-6

5-9

10-12

13+

5%

29%

47%

12%

7%


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SURVEY ANALYSIS

The majority of respondents expect distressedopportunities in Real Estate, Financial Servicesand Industrials & Chemicals sectors toincrease in 2009Do you expect opportunities for distressed investors in thefollowing sectors to increase, decrease or stay the same in 2009?

• Some 92% of respondents believe that distressed opportunities in theReal Estate sector will increase in 2009, with Financial Services comingnext at 76%. This sentiment is perhaps expected, however possibly mostnotable is the perception amongst distressed investors that thetraditionally more secure sector of Industrials & Chemicals comes a veryclose third, with 75% expecting it to yield an increased number ofdistressed opportunities over the coming year.

• On the other hand, respondents believe the Telecom and Utilities sectorsare expected to witness the smallest rise in distressed debt situations in2009, with less than 60% of respondents apiece believing so.

• Hedge fund managers and prop desk traders differed in opinion whenlooking at the exposure of the Financial Services sector to distressedsituations. Predictably, prop desk respondents were fairly reticent aboutthe amount of distressed activity that would occur in the sector over thenext year, with just 70% stating that it would increase. The correspondingfigure for hedge fund managers was 82%.

• One respondent commented that “there are opportunities in every sector.It is not a matter of sector picking but market picking - I would not wantto pigeonhole a particular sector but would say it should be a bottom upapproach when it comes to distressed debt.” Another goes on to say that“it depends more on the solid fundamentals behind these companies andwhether their performance is sensitive to what is going on at the moment.The real estate sector here may carry opportunities but it really is on acase-by-case basis.”

5

92 8

76 24

75 25

70 30

69 31

68 32

70 2

2

28

2

68 30

65 35

64 36

64 36

63 37

57 38

55 45 5

0 10 20 30 40 50 60 70 80 90 100

Percentage of respondents

Real Estate Increase

Stay the same

Decrease

Utilities

Telecom

Transportation

Paper & Packaging

Technology

Auto Manufacturers/Suppliers

Oil, Gas & Mining

Manufacturing

Consumer Products

Construction

Retail

Industrials &Chemicals

Financial Services

“Whilst 2009 will provide opportunities acrossall sectors, the bulk of the current distressedsituations we are seeing are in the real estate,manufacturing and retail sectors. We expect thattrend to continue with a pick up in distress inthe transportation sector as global tradecontinues to deteriorate.”

Scott Bache, Clifford Chance


SURVEY ANALYSIS

“The refinancing issue in Asia will largely dependon whether or not the Asian commercial banks areprepared to step into the market and provideliquidity in the first half of 2009 to refinance thosebusinesses that are in relatively good shape buthave been affected by market sentiment. Thepre-IPO loan sector will certainly be busy as it isunlikely that the IPO exits will happen on schedule.The onshore/offshore structures prevalent in manypre-IPO financings are going to make negotiating asensible restructuring very difficult if the sponsorsare not prepared to act responsibly.”


“This financial crisis is creating distressedsituations across the spectrum of products. The challenge will be in identifying the businessmodels and management that will outlive theexpected downturn on Main Street.”

Robert Schmitz, Rothschild

Refinancings, private placements and LBOs to account for 86% of distressedsituations next year

What type of situation will be the most likely source of distressed products in 2009?

• Respondents consider that refinancings (61%), private placements(15%) and LBOs (10%) will make up the lion's share of distressedsituations in 2009, sharing 86% of the poll. On the other hand,share-backed financings and equity-linked notes are the least likely to result in distressed debt situations, with just 7% of respondentsbelieving this will be the case.

• A number of respondents highlight that the type of situations likely to lead to distressed opportunities are country and sector-specific.One notes that “the availability for credit for LBOs is dismal in Japan”while another caveats that “it really depends on the sector. Looking at the REIT market, however, I would have to say refinancing.”

• Yet another respondent believes that “there is potential in pre-IPOfinancing being the more likely source of distressed products whileshare backed financing might not be since many of these deals willbe worked out privately. However, this is really dependent on themanagement and their willingness to sit down and hold discussionwith banks. Sometimes negotiations will be very drawn out leading to fire sales.”

Refinancings

Private placements

LBOs

Pre-IPO financings

Share-backed financings

Other

Equity-linked notes

15%61%

10%

6%

4%

1%3%


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China, Indonesia and Australia earmarked to lead distressed debt situations in 2009

Rate each country based on its expected distressed debtopportunities in 2009

• China, Indonesia and Australia are top of the list of countries expected to witness significant levels of distressed debt opportunities emerge in the coming year, with 66% of respondents considering that China will see significant distressed debt situations in 2009. This may go some way to supporting the aforementioned prominence of Industrials as adistress-prone sector. Similarly, 49% think that Indonesia will see similaropportunities, while 37% believe that distressed debt situations inAustralia in 2009 will be significant.

• On the flip side, respondents believe that Taiwan, Hong Kong, NewZealand and Singapore will witness the least amount of distressed debtover the coming year, with only approximately 10% of respondents in each case believing that a significant number of opportunities will emerge.

• One respondent writes that “Hong Kong (in terms of issuance), Australiaand Singapore will all see large levels of distressed debt as they all have a large amount of corporate activity/debt relatively speaking. Korea has alarge portion of their debt in foreign currencies - the Won's debt liability isgetting bigger and is thus potentially a source of distress.” Anotherrespondent notes that “there will be less distressed debt opportunities inSouth-East Asia due to the fact that Singaporean banks are relatively well-capitalised while Malaysian and Thai capital markets are more closed.”

65 17 8 44

49 23 15 211

38 22 22 216

36 16 31 413

25 25 29 417

16 27 36 516

21 18 41 515

17 24 37 517

0 10 20 30 40 50 60 70 80 90 100


China

Indonesia

Australia

South Korea

India

Thailand

Vietnam

Philippines

Japan

Malaysia

Taiwan

Hong Kong

New Zealand

Singapore

Significant

Very high

High

Low

None

12 21 43 519

14 17 43 719

9 21 47 518

12 20 32 234

3 14 54 326

8 13 36 1528

“The coupling of China, Indonesia and Australia as providing the most opportunities is certainlyinteresting. The predictability of the Australianlegal system (save of course the Sons of Gwaliaaberration) allows investors to enter into distressedsituations with some degree of comfort that theywill not be blind sided. China and Indonesia, onthe other hand, will be driven as much by therelationships investors have with the keystakeholders and the politics of any given situationthan a respect for creditors’ legal rights. Going intotheir downturn Korea looks like Detroit in the1970's but without the good music.”


“The country rankings will shift as governmentspromulgate recapitalization measures andconsider regulations such as those allowing for debtor-in-possession financing and for better functioning AMCs.”



SURVEY ANALYSIS

Respondents are split over whetherbusinesses will encounter further difficultygoing forward

Which of the following types of businesses are encountering the most difficulty and/or will encounter the most difficulty in the next year?

• Public businesses will encounter the most difficulty next yearaccording to 67% of respondents respectively. At the same time,around half of respondents believe that entrepreneurial, hedge fundand private equity businesses are currently going through the worst of the crisis.

• One respondent clarifies his response by saying that “due to currentmarket conditions, many hedge funds have been forced to sell orliquidate. Furthermore, there will be a redemption wave in Q4 withfund houses redeeming shares and returning money to investors.”Another respondent notes that “banks and non-banks have significantexposure if they have much liability in debts. Entrepreneurs will findthat they have no easy access to capital while private equity-investedcompanies may also find themselves facing difficulty.”

33

1051 49

50

1048 52

0 10 20 30 40 50 60 70 80 90 100


Entrepreneurs

Hedge Funds

Private Equity

Public

Currently

In the next year

67

50

“Regardless of the sector, access to liquidity will bethe key to avoiding distress in 2009. Whilst manyfunds have been hurt by redemptions in the secondhalf of 2008, those funds that go into 2009 withunallocated capital will find that they will havesignificant opportunities to deploy capital intodistressed situations. The main obstacle to a marketrebound is that distressed investors still fear re-entering the market too soon and that their buyingwill be tantamount to catching a falling knife.”


“2009 will be an extremely challenging year forfundraising. Public companies, followed byentrepreneurs, should fare better than the funds in attracting loans. With power shifting back to lending institutions’ credit committees, funds will be rigorously scrutinized for internal controls and investment practices. Towards year end, the lending climate should improve as institutionsstabilize and economies reflate.”



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Slowdown in the US economy is mostlikely to trigger financial distress in 2009

Which event or events are most likely to trigger financialdistress over the next year?

• Some 64% of respondents believe that the most likely trigger offinancial distress over the next year is the slowdown in the USeconomy. A further 41% also judge that tighter credit markets couldact as a trigger, while 26% cite a potential slowdown in Chineseeconomic growth resulting in further distress.

• One prop desk trader notes that “it'll be a mixture of things, but thenext 12-18 months will be painful. Volatile currency fluctuations mayput countries at risk, as well as any slowdown in the wider Asianeconomy.” Another respondent warns against attempting to attributea specific, known trigger of financial distress, instead saying “therewill not be one single event that will trigger financial distress. Thesituation will keep unfolding.”

“This will be a prolonged process of unwindingthe 25-year bull market. We have to be mindfulthat the bear market that started over a year ago could last about one-quarter to one-third the duration of the proceeding bull market.”


0 10 20 30 70605040

Slowdown in US economy

Tighter credit market

Slowdown in China’s economic growth

Downturn in domesticconsumer spending

Overheated stockmarket/stock market crash

Property marketcorrections

Increased interestrates

Volatile commodityprices

64%

41%

26%

15%

11%

10%

7%

5%


94% of respondents believe that hedge-fundrestructurings will increase in 2009

Do you expect restructuring of hedge funds to increase, decrease or remain the same in 2009?

• The vast majority - 94% - believe that hedge-fund restructurings willincrease in 2009 with just 5% considering that the number ofrestructurings will remain the same and only 1% thinking that they will decrease.

• One respondent who believes that hedge funds will increasinglyrestructure says that “we’re already beginning to see restructuringsacross the board. If nothing else, the leverage factor is a prominentissue. Investors are very wary of short term losses and consolidationhas spurred internal restructures.” Others disagree, however, with onerespondent noting that “those that are highly-leveraged may need tochange strategy but some are doing quite well still. Hedge funds arealways shifting their strategy anyway.”

“Those funds that have appropriate lock-upprovisions (which reflect the fact that capitalneeds to be patient to generate alpha returns in Asia) are likely to do very well in 2009.”


Increase

Remain the same

Decrease

94%

1%5%


SURVEY ANALYSIS

58% of respondents believe privateplacements and loans will make up the bulk of funding methods in 2009

Which will be the proffered method to raise new funding in 2009?

• Private placements and loans will be the two most popular methods ofraising funds in 2009, according to a combined 58% of respondents.Debt and equity capital markets are also sources to tap according to 20% and 13% of respondents respectively. On the other hand, bondissuance and IPOs are not considered sources of capital, with a total of just 7% of responses.

• Interestingly, prop desk traders are much more likely to select loans as a method of funding than their hedge fund counterparts, with 42%doing so compared to 25% in that order.

• One common remark that also surfaced was that hedge funds would alsoraise capital from sovereign wealth funds and/or governments/state-ownedbanks. One respondent did balance this by saying: “However, such amethod will still be very difficult for those funds without good trackrecords”. Another states that: “currently, the most popular method tofund-raise in Asia is through special situations funds. It is not a situationwhich is likely to prevail however. These funds focus on the fundamentalvalue and less on the lack of liquidity, and therefore funds are being heldon a longer term basis than they should be.”

“Depending upon the duration and depth of thisfinancial crisis, multilateral and government agencyloans might be necessary along side club deals and small private placements as some first steps to restoring liquidity to corporates and projects inthe region. Numerous institutions, even within Asia,need to be recapitalized before lending can berestored to reasonable levels.”


Private placements

Loans

Debt capital markets

Equity capital markets

Bond Issuance

IPO

20%

29%13%

7%2%

29%

The overwhelming majority also believe thatfunding will be harder to come by next year

Will it be harder easier or equally challenging to raise new funding in 2009?

Harder

Equally challenging

95%

5%

• It is of little surprise, given the current market conditions that theAsian hedge fund community is facing, that the vast bulk ofrespondents believe that raising funding will be more difficult in2009, with just 5% considering that funding will be equallychallenging to raise.

• Despite the gloomy outlook, one respondent writes that “at themoment investor confidence has been shaken. A return of trust isreally needed right now. The whole world is looking at Asia at themoment which has been less impacted by the financial crisis. Therecovery prospects are therefore higher and if the funds focus on that,they will still be able to pull in investors.” Another respondent echoesthis sentiment, saying “there are still deep value opportunities outthere. Investors themselves are more risk-averse and cautious yetthere is still a need to put their money to work!”


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Funding in Asia is hampered by regulatory & legal impediments

Do regulatory and legal impediments to providing funding to companies in distress in Asia and Australasia exist?

• 81% of respondents believe that in addition to the credit crisis, funding is being constrained by a number of regulatory and legal impedimentsthat exist within the region.

Yes

No19%

81%

Chief among the legal and regulatoryimpediments are inadequate bankruptcyregulations and legal framework restrictions

What are the regulatory and legal impediments to providingfunding to companies in distress in Asia and Australasia?

• Of those respondents who believe that legal and regulatory impedimentswithin Asia exist to constrain funding, some 20% believe that inadequatebankruptcy regulations are to blame, while a further 19% consider thatlegal framework restrictions hinder the flow of funds.

• That 26% select not sure is a reflection of the fact that this varies fromcountry to country. One respondent notes that “there are certainly legalimpediments across the region. For example, JPMorgan recently notedthat the recovery rate for default claims in China is among the lowest inthe world. The nature of doing business in Asia is that in every country,there are different legal systems. In Indonesia, you might think that youcan get your money back but the courts then come up with somethingnew. Nothing is set in stone and that is definitely a legal constraint.”This view is, however, not prevalent in other Asian markets. For example,one respondent says: “Legal restrictions are not a significant issue inSingapore, Hong Kong, Australia, Korea and Japan - all have developedproper legal frameworks that minimise legal impediments.”

• Yet another respondent notes that: “The main hindrance that regulatorybodies are inflicting on the markets is that they are banning investmentbodies from shorting the market.”

“One open question is how well will the new ChineseBankruptcy Act work in this downturn. Whetherrecovery rates in China can be increased to thelevels that are in line with more developed regionsdepends on whether the Act is enforced in a waythat is broadly consistent with what foreign investorsexpect from their experience in more developedcountries. The outcome of Ferrochina is likely toprovide some guide as to what foreign investors canexpect as we move through the cycle.”


0 5 10 15 302520

Not sure

Inadequate bankruptcyregulations

Legal frameworkissues/restrictions

Inability to short/capital flow restrictions

Lack of liquidity

Other

Restrictive bankconvenants

Currencyrestrictions

26%

20%

19%

14%

13%

9%

3%

3%



SURVEY ANALYSIS

The majority of funds will continue de-leveraging over the course of 2009

Do you anticipate using more, less or the same amount of leverage in your portfolio in 2009?

• The majority of funds will continue de-leveraging over 2009, with 54%of respondents stating that their fund will utilise less debt next year thanin 2008. 4% decided to buck this trend however, and will take on furtherdebt in the new year.

• Not surprisingly, there exists a sliding scale between the amount ofleverage utilised this year and the amount anticipated in 2009. Of thoserespondents who took on no debt last year, 89% anticipated using noleverage in 2009 while of those who utilised between 0 to 1 timesleverage, 50% note that they would do the same going forward. Thisproportion fell to just 13% of respondents who leveraged their fundsbetween 1 to 2 times in 2008 and no hedge funds who leveraged bymore than 2 times anticipated maintaining or increasing that level ofleverage in 2009.

• One respondent notes that he would utilise more leverage “but only if we can get it. I would use it to invest in the companies to take our debt back.” Another points out that “most hedge funds are using noleverage now, and are holding 30%-40% cash.”

“Leverage obviously has its place in fundinvestment strategies, but those funds looking toinvest into distressed situations are unlikely to useleverage due to the uncertainty of outcome andtiming of an exit across many Asian jurisdictions.”


“The wisdom of leverage will wane as stagflation ordeflation dominate our operating environments.”


Less leverage

Same amount of leverage

More leverage

42%

54%

4%

Hedge funds are chiefly utilising two times or less leverage over 2008

How much leverage are you using in managing your fundin 2008?

• 88% of hedge fund respondents have utilised two times or lessleverage throughout the course of 2008, with over half (54%) stating that their fund has not used leverage at all this year.Meanwhile, a combined 6% note that their funds have beenleveraged by more than three times.

• “We have not used leverage since the beginning of 2008 and I knowmost fund houses would be very reluctant to utilize leverage rightnow. Who would dare to leverage their funds in the current financialclimate?” notes one respondent, while another who does not utilisedleverage states that “we are long-only.”

0 times (ie. no leverage)

Less than 1 time

Between 1 and 2 times



Over 4 times23%

54%

6%3% 3%

11%


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China and Indonesia stand out as thecountries where it is most difficult to enforce security/legal rights

Which country do you think is most difficult for creditors to exercise (or enforce) their rights over security?

China

Indonesia

Thailand

India

South Korea

Vietnam

Philippines

45%

34%

7%

6%

4%3% 1%

Which country poses the most significant challenges for creditors looking to enforce their rights in the courts?

• Over 75% of respondents believe that China and Indonesia are thetwo most difficult countries in which to exercise and enforce securityrights, with 45-47% citing China and 34-36% citing Indonesia.

• One respondent notes that “I would say it is very difficult to enforcerights over security in the less developed cities in China. In cities likeBeijing and Shanghai there are generally no problems but the smallercities present difficulties.” Another respondent writes that “it is theless developed countries such as Vietnam and Cambodia, where thereis a risk of bankruptcy law foreclosures stepping in that creditors needto be vigilant about.”

• Hedge fund managers and prop desk traders’ opinions differed on atleast two countries, namely China and Thailand. An average of 55%of hedge fund respondents note that China is the most difficultcountry in which to enforce their rights, compared to just 41% ofprop desk traders. On the other hand, 14% of prop desk tradersbelieve that the most difficult country to enforce rights is Thailand,against just 3% of hedge fund managers.

“The only surprise in the responses is that Indiadoes not appear to be causing much concern. Itmay well be a reflection of the fact that we areat the beginning of the cycle and I certainly willbe interested to hear investors’ views on India in12 months’ time. We are certainly seeing anumber of challenging situations in India andwhilst the law in India is more certain than inmany other Asian countries, the scope to forumshop in order to manipulate the system and tiecreditors up in lengthy litigation is likely to testmany investors’ resolve in the coming years.”


China

Indonesia

Thailand

India

South Korea

Vietnam

Philippines

47%

36%

7%

4%4% 1% 1%


SURVEY ANALYSIS

However, the vast majority of respondents arenot wary of lending to businesses domiciled in those countries

Given the difficulties of enforcing security over assets in China, Indonesia, India and taiwan, are you wary of lending to the following?

10 86

10 13

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9


Not wary

12

Companies whose principle operating

subsidiaries are located in those

countries

Companies domiciled

in those countries

• This question reveals a surprisingly small level of respondents who are wary of lending to either companies whose principal operatingsubsidiaries are located in China, Indonesia, India and Taiwan (13%), orto companies domiciled in these countries (12%). An overwhelmingmajority can not say either way and would take a case by case approachwithin these countries. Highlighting this, one respondent says: “I wouldnot be wary to lend because any investments in these countries would behighly-specific where sufficient and detailed due diligence has been doneon the sponsors. Every cesspool has its golden orbs floating around - andwe always find companies we trust.”

“Certainly what is already happening in the marketshould be making investors more wary than theyappear to be. Whilst there will undoubtedly beopportunities to put money to work in new loans,investors should learn from some of the practicaldeficiencies in many onshore/offshore structuresthat have been apparent from some time to ensurethat they have more leverage onshore in the eventthat a debtor becomes distressed.”


Legal advisors first priority to contact when an investment has defaulted say respondents

Rank in order of priority the parties you would contact when one of your investments has defaulted?

• A combined 86% of respondents state that if one of their investmentswere to default, the first or second party they would call would betheir legal advisor. On the other hand, a combined 64% ofrespondents believe that calling their investors/other creditors wouldbe either a first or second priority, while 54% note that they wouldcall their financial advisors either first or second.

1058 28 14

1026 39 35

0 10 20 30 40 50 60 70 80 90 100


Legal advisor

First priority

Second priority

Third priority

28 27 45

Investors/Other creditors

Financial advisor


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Sub-prime issues are mostly affecting debt-raising and credit spreads say respondents

If so, what impact have sub-prime issues had on the Asian credit markets?

• Of those respondents who consider that the credit crisis will have anegative impact on Asian credit markets, 54% believe that sub-primeissues have primarily affected the ability to raise debt, while a further25% also consider that the current crisis has led to worsening creditspreads. Lesser proportions judge that the sub-prime crisis has meantthat there has been a fall in risk appetite (16%) and a decrease inconfidence (12%).

• One respondent notes “the impact has been pretty obvious. Manyindustries which traditionally have been rock-solid have had troublere-financing debt. Companies are also paying 3 to 4 times as muchas they did previously to obtain funding. This will probably continuefor the next 18 months. Asia also has a less developed credit market,and so the proportion of dislocation will be greater.”

“A decrease in confidence, a fall in riskappetites, and a back-to-the-basics mindset will limit the amount of credit available for most of 2009.”


0 10 20 30 605040

Difficulty inraising debt

Worsening creditspreads

Fall in riskappetite

Not sure

Decrease inconfidence

Other

54%

25%

16%

16%

12%

3%


77% of respondents believe that the sub-prime crisis has had a negative impact onAsian credit markets

Have sub-prime issues had an impact on the Asian credit market?

• A large but not overwhelming 77% of respondents believe that sub-prime issues have had a negative impact on Asian credit markets.Nonetheless, 16% consider that the credit crisis has had no impact on credit markets, while another 2% judge that the crisis has been beneficial.

• One respondent states that “banks will need to start prioritizing theirrelationships as clients find it harder to meet monetary demands. If the company has had a good track record, it will find itself ahead of the queue. I think there will be a lot of soul searching and parting from equity.”

• Another says that “it’s definitely been a slow-in-coming impact - and theeffect in Asia has been more severe than anyone expected. Asian bankswere less exposed to the sub-prime situation, yet investor confidence hasbeen completely shattered.”

“Sub-prime was the mere tip of the iceberg.Fourteen months later, the unwinding derivativesand fund redemptions are seriously undercuttingAsia’s financial markets while leading us towardsthe wider landscape of consumer and industrial loan defaults.”


Negative impact

No impact

Not sure

Positive impact

77%

16%

5% 2%


SURVEY ANALYSIS

Respondents cite regulatory governance and currency restrictions as main obstacles to regional foreign investment

At present which are the main obstacles to foreign investment in the region?

• 48% of respondents believe that the main obstacle to foreign investmentin the region is regulatory governance, while another 36% believe thatcurrency restrictions are the largest obstacle to regional foreigninvestment. Bankruptcy laws and practices also hinder investmentaccording to 28% of respondents.

• One respondent notes that takeover codes are the biggest obstacle,saying: “In Korea, HSBC cancelled their planned acquisition of a bank dueto takeover restrictions.” Another respondent mentions that “taxation isheavy when moving money into Japan and there are restrictions on whatentities can enter into on the market.” However, yet another respondentdisagrees, saying that the biggest obstacles are “none of the above - Ibelieve the main issue is trust at the moment. When everything else isremoved the only thing that matters is trust.”

0 10 20 30 5040

Regulatorygovernance

Currencyrestrictions

Bankruptcy lawand practices

Other

Takeover codes

Taxes

Competition from domestic funds

48%

36%

28%

10%

6%

6%

4%


Half of respondents believe China will relaxforeign investment regulations in 2009

Which country is most likely to relax regulations onforeign investment?

• 50% of respondents consider that China will most likely relaxregulations on foreign investment in 2009. A further 18% believe thatIndian foreign investment regulations will also become more flexible,while 8% apiece believe that Indonesian/Japanese regulations willloosen in the coming year.

• “It is not likely that India and Malaysia will relax their regulations too much because they don’t want hedge funds and investment banks to go in and buy all the assets on the cheap” one respondentnotes, while another says “China especially will deregulate, mostlydue to its WTO commitments.” However, one respondent disagreed,writing “I don’t predict any countries relaxing regulations, but even if they do, I don’t foresee anyone jumping in quickly.”

• Again, opinions from the prop desk and hedge fund universes differed sharply, especially with regards to China. 67% of prop desk respondents believed that China will relax foreign investmentregulations in 2009, compared to just 35% of hedge fund managers.

China

India

Indonesia

Japan

South Korea

Vietnam

Phiippines

Taiwan

18%

8%

8%

50%

5%

5%3%


SU

RV

EY

FIN

DIN

GS

15

“We are certainly seeing signs of distress in India and whilst the work out environment is likely to be more creditor friendly in Indiacompared to China and Indonesia, the market is relatively untested for foreign creditors. There are also regulatory challenges, particular withonshore/offshore structures, and there is a risk that the Courts may favour local stakeholders in some distressed scenarios.”


“Indian corporate restructurings will be one of Asia's more noteworthy features for 2009.Convertible bonds will be in the headlines while defaults arising from overseas expansionsfunded by foreign debt will create a heightenedappreciation for cross border restructuring regimes. On balance, these restructurings should be constructive for the country’s futurecapital flows.”


67% of respondents believe the likelihood of Indian debt issuance defaults rising overnext two years is greater than half

What is the likelihood that the plethora of out-of-the-moneyIndian debt issuances will ultimately result in a rise in defaults over the next two years?

• The majority of respondents (67%) believe that the likelihood ofdistressed Indian debt issuances eventually resulting in a default over thenext two years is greater than 50%, with some 43% judging that risk tostand at greater than 75%.

• One such respondent believes that a rise in defaults has already begun,saying “in fact, Indian convertible bonds have started to trade as if theyare in distress. Property has been a popular issuer and this is not the bestasset class. Another point to note is that many holders of Indian debt arenot dissimilar to those from 10 years ago insofar as investors pour inmoney without ever having been to the place.”

• Others disagree, with one respondent noting that “many of the IndianCB/debt structures do not mature until 2012/2015. It will be hard for anyof those companies to re-finance presently, but comparatively I thinkIndian corporations can outperform other Asia-Pacific counterparts in thedefault rate perspective. Therefore, I expect trading at very distressedlevels but perhaps not an increased level of bankruptcies.”

Less than 25%

Between 25% and 50%

Between 50% and 75%

Greater than 75%

24%

43%

20%

13%


SURVEY ANALYSIS

More than half of respondents believe thatVietnamese default rates are very likely toincrease over the next two years

How likely is it that Vietnamese corporate default rates will increase over the next two years given high inflationary pressures?

• A combined 54% of respondents judge that high inflationarypressures in Vietnam will mean that it is at least very likely thatcorporate default rates will increase over the next two years. A further 33% think that defaults will likely rise over the same period.

• Interestingly, a much larger proportion of prop desk respondents(94%) believe that Vietnamese default rates are at least likely toincrease over the next two years, compared to just 79% of hedgefund respondents.

• One respondent puts it succinctly, writing “Vietnam is a mess. Thereare few big corporations and foreigners are not allowed to own realestate or invest in private equity. The government is shaky andfurthermore, the Vietnamese market has fallen off the radar in the past six months.” Such sentiment is shared by another respondent who notes “the main problem with Vietnam is that no one reallyknows what is going on. There are no statistics coming out withregards to Vietnamese foreign exchange reserves. The economy is also highly leveraged and more to the point, there is a lack ofknowledgeable players in the market.”

• Others oppose this view, with one respondent stating “it is hard to say. The Vietnamese government has been closely monitoring what has been happening in the US, and have been on ‘monitormode’ ever since the sub-prime crisis unfolded. As a result, I wouldnot draw the conclusion that there will be an increase in thecorporate default rates.”

Extremely likely

Very likely

Not likely

Not likely at all

30%

33%

2%11%

24%

Hong Kong and China are most likely togenerate the majority of increases insecondary credit trading say respondents

What country is most expected to generate increases in secondary credit trading?

• When asked to rate twelve Asian countries on their ability to generateincreases in secondary credit trading on a scale of one to ten, the averagerespondent ranked Hong Kong at 8.49 and China at 8.33 placing thesetwo countries at the top of the poll. Average Singaporean (8.21) and Indian(8.06) ratings also placed the two countries in a strong position to generatethe bulk of secondary credit trading looking forward.

• One respondent who is bullish on increased levels of Asian secondarycredit trading says “all countries will experience an increase in thisregard. There is appetite there, especially in emerging markets. It must beremembered that investors still need to put their money somewhere - andwith the exchange rate loss or risk, many investors will still choose to puttheir money in Asia.” However, others are definitely bearish with anotherrespondent noting that: “Absolutely none of these countries will generateincreases in secondary credit trading.”

8.21

8.06

7.73

6.81

6.33

5.56

5.42

4.67

4.33

8.33

8.49

4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00

Average rating(on a scale of 1 to 10 where 10 = maximum increase and 1 = no increase in secondary credit trading)

Hong Kong

China

India

Singapore

Indonesia

South Korea

Philippines

Taiwan

Thailand

Vietnam

Malaysia


SU

RV

EY

FIN

DIN

GS

17

Respondents are split on whether hedge fund involvement in the regional lending space will impact on workouts

Will the high level of hedge fund involvement as lenders in theregion – either through bilateral loans or syndicated, privatelyplaced loans – make workouts easier or more difficult?

• Respondents were evenly split on whether hedge fund involvement aslenders in the region would impact on workouts. A combined 42% ofrespondents believe that such participation would make workouts easierwhile 38% think otherwise.

• Again, hedge fund/prop desk opinions on the matter differ. Just over half(51%) of hedge fund respondents believe that workouts will be easier - a sentiment shared by only 38% of prop desk traders.

• A number of respondents who consider that workouts will be moredifficult state that the reasoning behind this is that “hedge funds aregenerally more pragmatic and unemotional. They want to move on fromsituations. On the other hand, banks are slower and more bureaucratic.”“Bank lenders usually work as a group and are easier to negotiate withwhile hedge funds are indifferent and more demanding” anotherrespondent states.

• Another feels that workouts will be easier: “If there are morestakeholders working towards a workout, the process will be moretedious. When there is a club deal (as is typical with hedge funds), it will be easier to reach a consensus.”

• Finally, other respondents are sceptical that workouts will be affected at all, one saying: “When money is being withdrawn/redeemed from the fund, it is not a matter of easier or more difficult but simply thatworkouts are necessary”

Much easier

Easier

No effect

More difficult

Much more difficult33%

9%5%

33%

20%

“Our experience is that the involvement of fundsis generally a positive for a work out. Funds arelikely to move quicker on a distressed situationthan a bank which more often than not results in creditors being able to dictate the process.Big bank groups in Asia have traditionally beenslow to move and co-ordinate. In manysituations, losses have been more than theyought to be as shareholders have been given thetime to dictate the process and, in some cases,to be allowed to put their hands in the cookiejar. Funds generally are also able to look at abroader range of restructuring solutions such asdebt-for-equity swaps which banks, in manycases, are unable to participate in, oftenbecause of regulatory issues.”


“Hedge fund involvement brings sophisticationand flexibility to the process. Asian based /owned hedge funds are likely to be moreresponsive to dispute resolutions / restructuringsgiven their experience with regional businesscultures and legal systems.”



SURVEY ANALYSIS

92% believe that a hedge fund run is likely given the current market volatility

If the current volatility in the market continues, could this lead to a run on hedge funds?

• A combined 92% of respondents judge that a hedge fund run is likelygiven the current market volatility. Perhaps more pertinently, 63%believe that a run on hedge funds is a certainty.

• Not surprisingly, hedge fund managers are slightly less pessimisticthan prop desk respondents, with 65% replying that a run on theindustry was a certainty compared to 75% among prop desks. In fact,such a low divergence in opinion between hedge funds and propdesks is striking and is, in itself, a telling signal of the likelihood ofsuch an event occurring.

• One respondent argues that there “already has been a run on thehedge funds, with the industry seeing a record number of investmentredemptions. However, redeeming loans comes with penalties andinvestors also have to consider the fact that they need to move theloans somewhere else if they redeem.”

“At the time of writing, it is a certainty thata run on funds has happened, often irrationally.The more important issue is when will the hugeamounts of capital currently sitting in cash beredeployed into funds in 2009.”


Definitely

Likely

Not sure

Not likely

27%

2%8%

63%

The volume of private debt facilitieswill decrease next year, 55% ofrespondents believe

Will the volume of pre-IPO, high yield, privately placed debt facilities increase, remain the same or decrease over the next year?

• Over half of respondents believe that the volume of pre-IPO high yieldprivately-placed debt facilities will decrease in 2009. At the sametime however, a sizable 29% consider that such facilities will actuallyincrease over the year.

• “I think the debt facilities will drop off for companies looking to list.Small caps are risky these days and it will be tougher for them tosecure financing unless they are strong businesses which do notrequire blue sky growth” one respondent says, while another asks“who knows if there will be any buyers? Buyers can cherry pick whatthey want to invest in but will still be limited given the lack ofliquidity in the markets.”

• Other respondents are more positive: “I think that in the medium andlong term the volume will continue to increase. The next 12 to 18months will be shaky but I feel there will still be room to develop”one respondent says. Yet another believes that “it’s hard to say, sincethe bond markets rely heavily on interest rates.”

Increase

Remain the same

Decrease

55%

29%

16%


ABOUT ROTHSCHILD

Rothschild has a strong Asian focus with over 90 bankers of which 67 are in East Asia.In Asia, Rothschild concentrates on providing investment banking services, private bankingand venture capital.

Globally, Rothschild has one of the largest independent restructuring and capital marketspractice. There are over 80 bankers based in Europe, US and Asia. The Asian restructuringand debt advisory practice was established in 2006 with dedicated bankers based in HongKong, Mumbai and Singapore.

The exclusive financial adviser to the principal Indian lenders in the Dabhol power companyrestructuring, one of the world's most complex restructurings. Rothschild also advisedLehman Brothers (Asia) on its sale to Nomura. At present, it is the exclusive independentfinancial adviser to Garuda Indonesia, T Sulfindo Adiusaka.

Robert SchmitzHead of Restructuring, AsiaT: +65 6531 1437F: +65 6535 9109E: [email protected]

Robert has over twenty seven years’ experience with corporatefinance, and credit, derivative and capital markets transactionsin North America and Asia. Since 1990 Robert has specializedin capital restructuring. He frequently represents shareholdersand managements of companies with complex insolvency andfund raising issues.


A COMPLETE SERVICE ACROSS ASIA

Clifford Chance provides the full range of restructuring and insolvency services throughoutAsia. Our award-winning team has acted on many of the most important restructuring andinsolvency matters in the region this year.

With over 30 restructuring and insolvency lawyers based in Asia, supported by another 100lawyers in 18 offices worldwide, we provide a multi-lingual English, US and civil law service,as well as local law advice wherever regulations permit.

Experienced in restructuring fromevery angleWe have extensive experience of voluntary and involuntaryrestructurings – having acted for both creditors and debtors, weunderstand the tension points that often arise during a restructuringand are well placed to guide our clients to ensure that their interestsare best served.

As Asia has become more open to non-bank, non-relationship basedparticipants, our involvement in these complex cross-borderrestructurings has meant that we know and act for some of Asia'smost active distressed debt investors.

Clifford Chance has advised on all aspects of restructuring andinsolvency transactions; including: • reschedulings• loan-to-own transactions implemented through debt-for-equity swaps• distressed M&A• schemes of arrangement• administration• voluntary reorganisation• court-driven rehabilitation• receiverships• voluntary and compulsory liquidations• bankruptcy

For more information, please contact any of the individuals listed below.

About Clifford ChanceInternational law firm Clifford Chance combines the highest globalstandards with local expertise. Leading lawyers from differentbackgrounds and nationalities come together as one firm, offeringunrivalled depth of legal resources across the key markets of theAmericas, Asia, Europe and the Middle East.

The firm operates across Asia, with offices in Bangkok, Beijing, HongKong, Shanghai, Singapore and Tokyo. With over 350 lawyers in Asiaalone, it is one of the largest international firms in the region, enjoying a market leading reputation across a number of practices.


CLIFFORD CHANCE CONTACTS IN ASIA

Scott BachePartner, Hong Kong and Head of Asian Restructuring & InsolvencyGroupT: +852 2826 2413F: +852 2825 8800E: [email protected]

Scott specialises in finance and securities matters with a particularemphasis on corporate restructuring, distressed mergers andacquisitions and special situation investments. Scott regularlyadvises on insolvency issues, security enforcement, distressed debttrading and general banking litigation.

Donna Wacker

Consultant, Litigation, Hong Kong T: +852 2826 2413F: +852 2825 8800E: [email protected]

Donna specialises in insolvency, banking and commercial litigation, security enforcement and regulatory matters (bothcontentious and advisory).

Troy DoyleConsultant, SingaporeT: +65 6410 2248F: +65 6535 6855E: [email protected]

Troy specialises in financial and corporate restructuring, distressedmergers and acquisitions, distressed debt trading (both portfolio and single asset debt), and other special opportunity transactions.

Patrick O'ConnorPartner, Restructuring and Insolvency, Hong KongT: +852 2826 2413F: +852 2825 8800E: [email protected]

Patrick focuses on restructuring, acquisition finance and derivativesand has broad experience in finance, insolvency and restructuring in Asia. He has advised major banks and borrowers on manysignificant transactions in Asia.

Clifford Chance Clifford Chance


DEBTWIRE ASIA CONTACTS

25

CO

NT

AC

TS

© DebtwireSuite 2001Grand Millennium Plaza181 Queens Road, CentralHong Kong

T: +852 2158 9730E: [email protected]

Luc MongeonEditor, Debtwire AsiaT: +65 6224 3527E: [email protected]

Tom WadhamHead of Sales, Debtwire AsiaT: +65 6224 2924E: [email protected]

RemarkNaveet SinghPublisher, RemarkT: +852 2158 9750E: [email protected]


This publication contains general information and is not intended to be comprehensive nor to providefinancial, investment, legal, tax or other professional advice or services.

This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affect you or yourbusiness. Before taking any such decision you should consult a suitably qualified professional adviser.

Whilst reasonable effort has been made to ensure the accuracy of the information contained in thispublication, this cannot be guaranteed and neither Debtwire, Clifford Chance nor Rothschild nor any affiliatethereof or other related entity shall have any liability to any person or entity which relies on the informationcontained in this publication. Any such reliance is solely at the user’s risk.

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