distressed investing in australia 2013 market update · 2017-04-07 · market update the secondary...
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Distressed Investing in Australia2013 Market Update
Market update
The secondary debt market, consisting of distressed, impaired and non-core loan sales, has continued to experience a good level of activity in the past year. Whilst activity might have been down on 2010 and 2011, as shown by the fall in visits to Australia by market participants, it does appear to have exceeded expectations. During certain parts of the year liquidity in the market was impacted by the European debt crisis.
In regard to transactions in the last 12 months, one of the largest was Nine Entertainment, where there was sufficient agreement to allow for a debt for equity swap to occur. A scheme of arrangement was used to implement the loan to own strategy, which given the potential contractual issues was a far more seamless process, compared to a formal insolvency process to restructure the group. Other recent restructurings that were implemented through schemes include Alinta, Redcape and Centro.
In terms of debt trading, BrisConnections was one of the largest groups whose debt has started to trade recently following a period of contractual debt “lock-up”. It is the owner of AirportLinkM7 in Brisbane. The road opened in July with traffic well below forecast. It has $3+ billion of debt originally across 10 banks. Lenders were considering a debt standstill in February 2013, however opted for a formal insolvency process.
Other matters where debt has continued to trade in the last 12 months include Soul, Oracle, Fitness First, RiverCity, Top Ryde and Gunns. However, it does appear that there are less new syndicated names appearing as distressed.
The largest portfolio transaction in late 2012, was the BOSI commercial loan portfolio with what is believed to be approximately AUD$250 million in face value. Prior to this deal, BOSI also sold its distressed property loan portfolios in Australia and New Zealand, estimated at AUD$3.5 billion combined face value, in two separate transactions to consortiums including Blackstone and Morgan Stanley, and to Goldman Sachs and Brookfield Asset Management.
Based on the above, debt trading does now appear to be generally accepted by banks operating in Australia.
With respect to profiting in the Australian secondary debt market, the results to date appear to have been quite mixed with some participants having extremely good results and others not so. Similarly the prices that banks have sold the original debt have greatly varied on single transactions, particularly given changes in market liquidity, transaction outcomes and currency over recent years.
Going forwardTo assess the level of distressed investing going forward and where it will occur, it is necessary to consider, firstly the level of lending and provisions in the Australian banking market and then the lending mix of the local banks.
For the level of loans and provisions, the all Banks Loan Analysis (Figure 1) shows that whilst provisions as a proportion of lending has recently decreased, the level of lending provisions remains relatively high. This is further illustrated in Figure 2.
For Foreign subsidiary banks, Figure 3 highlights the level of provisions against total loans in Australia. The level of provisions to June 2012 has remained high.
With regard to the split of business lending, the Reserve Bank of Australia (‘the RBA’) published the following table in September 2012.
Major Banks’ Business Lending Exposures as at end March 2012
Sector Share of total per cent
Property 25
Utilities, telecommunications and other 22
Wholesale and retail trade 13
Agriculture, forestry and fishing 10
Manufacturing 8
Transport and storage 7
Business services 5
Construction 4
Accommodation, cafes and restaurants 4
Mining 2
Source: RBA
Most interesting from the summary is the large exposure to commercial property and the relatively small exposure to mining, the latter sector tending to borrow from the offshore bond markets. For commercial property distress continues. According to the RBA’s September 2012 Financial Stability Review, commercial property market lending (including developers of residential property) accounted for approximately 30% of business loans, but nearly half of businesses loan impairments.
The distress in banks’ commercial property exposure does appear to be a result of the longer term impacts of earlier growth as shown in Figure 4.
In summary, for distressed debt investing going forward in Australia, given the relatively high level of impaired debt, the current distressed entities whose debt continues to churn and the acceptance of debt trading by the major banks, it appears that the current level of activity will continue, with a reasonable proportion of distressed being business property loans. However, the largest impediment for future growth in the secondary distressed debt may be the apparent reluctance to expand from syndicated debt and property loan books into the trading of debt in bi-lateral exposures.
Looking forward, whilst some of the large public and leveraged deals have been concluded, activity is expected in the following areas: • Mining services• Retail• Energy• Property• Agribusiness.
March 2013
Legal updateThere were no new significant reform or legislative developments affecting the secondary market this last year.
Of more interest however, were two decisions of Australian courts which confirm the effectiveness and flexibility of creditors’ schemes of arrangements to effect loan to own strategies for senior lenders.
In the decision of Centro Properties Ltd [2011] NSWSC 1465, Barrett J approved the scheme notwithstanding objection that the scheme – • was contrary to public policy because it was inconsistent with
winding up priorities and paid money to “out of the money” stakeholders including contingent creditors; and
• amounted to a breach of trust and an unlawful return of capital to shareholders.
His Honor found that the funds being paid were in effect secured creditor funds (rather than company funds) and they were entitled to apply those funds to effect an overall compromise with stakeholders if they wished to do so.
In the decision of Nine Entertainment Group Limited [2012] FAC 1464, Jacobson J convened meetings of creditors to consider a creditors’ scheme of arrangement notwithstanding objection from minority secured lenders on the grounds that:• they did not consent to being converted to equity; and• that the board control rights given to certain senior lenders
were class creating.
His Honor found that it was permissible under Australian law to convert senior debt to equity notwithstanding the objections of a senior lender to receiving equity. His Honor also declined to convene separate classes of creditors.
These decisions are very supportive of the secondary market and represent helpful precedents which confirm that the Australian restructuring market can produce similar outcomes to those achievable in the Commonwealth and other common law jurisdictions.
Figure 4. Banks’ Commercial Property Exposures – Consolidated Australian operations
0
50
100
150
200
0
5
10
15
20
2012
All banks
250
European banks*
201220082008 2004
25
Major banks
US banks
Asian banks
Non-majorAustralian banks
2004
* Includes UK and continental European banks
$billi
ons $billions
Source: APRA; RBA
0Jun 2012
Mar 2012
Dec 2011
Sep 2011
Jun 2011
Mar 2011
Dec 2010
Sep 2010
Jun 2010
Mar 2010
Dec 2009
Sep 2009
Jun 2009
Mar 2009
Dec 2008
Sep 2008
Jun 2008
Mar 2008
Dec 2007
Sep 2007
Gross Loans and Advances
$milli
ons
$thousands
Lending Provisions
200
400
600
800
1,000
1,200
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Figure 3. Foreign Subsidiary Banks’ Loan Analysis
Source: Australian Prudential Regulation Authority (APRA)’s Quarterly Bank Performance Publication (June 2012)
Gross Loans and Advances Lending Provisions
Jun 2012 M
ar 2012 D
ec 2011S
ep 2011Jun 2011M
ar 2011D
ec 2010S
ep 2010Jun 2010M
ar 2010D
ec 2009S
ep 2009Jun 2009M
ar 2009D
ec 2008S
ep 2008Jun 2008M
ar 2008D
ec 2007S
ep 2007
5.0
0
10.0
15.0
20.0
25.0
30.0
0
500.0
1,000.0
1,500.0
2,000.0
2,500.0$m
illion
s $millions
Figure 1. All Banks Loan Analysis
Source: Australian Prudential Regulation Authority (APRA)’s Quarterly Bank Performance Publication (June 2012)
Figure 2. Banks’ Impaired Assets – Consolidated global operations
15
30
2007
Impaired assets outstanding45
-10
0
10
Movements in impaired assets
2008 2010 2011
Net change
20122009 New impaired Write-offs No longer impaired
$billi
ons
Source: APRA; RBA
pwc.com.au/carashurst.com
Contact informationJames Marshall Partner, Sydney Restructuring & Insolvency +61 2 9258 6508 [email protected]
David Merryweather Partner, Sydney Corporate Advisory & Restructuring +61 2 8266 3238 [email protected]
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