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Distressed Investing in Australia 2013 Market Update

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Page 1: Distressed Investing in Australia 2013 Market Update · 2017-04-07 · Market update The secondary debt market, consisting of distressed, impaired and non-core loan sales, has continued

Distressed Investing in Australia2013 Market Update

Page 2: Distressed Investing in Australia 2013 Market Update · 2017-04-07 · Market update The secondary debt market, consisting of distressed, impaired and non-core loan sales, has continued

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

Page 3: Distressed Investing in Australia 2013 Market Update · 2017-04-07 · Market update The secondary debt market, consisting of distressed, impaired and non-core loan sales, has continued

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

Page 4: Distressed Investing in Australia 2013 Market Update · 2017-04-07 · Market update The secondary debt market, consisting of distressed, impaired and non-core loan sales, has continued

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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