Opportunities amid distress: Restructuring in Southeast Asia

The carnage in commodity markets is leading to heavy distress in primary industries in key countries such as Indonesia within the 10-member Association of Southeast Asian Nations (ASEAN) such as Indonesia, according to Alexander McMyn, a partner at the Singapore-based legal joint venture Hogan Lovells Lee & Lee (HLLL).

McMyn was speaking to GTNews ahead of the firm’s ASEAN Horizon Summit held in the city state recently. Beyond affecting just producers in the coal mining or oil and gas sectors, the impact is trickling through into retail, food and beverage, real estate and other industries. “It’s not Armageddon, but there is significant distress,” he reports

The cause is more than just low energy prices, HLLL partner Shaun Langhorne adds. When debt was cheap, people leveraged their other businesses and put together unsustainable business models. Now that markets have become more competitive and debt is coming due for repayment, there is some stress. Beyond commodities, he too is seeing distress extending to related pockets such as retail.

The firm also is seeing the beginnings of insolvencies and filings in court, Langhorne reports. “Banks have been trying to manage it, hoping things will get better. We’re now reaching the point where something has to happen, whether it’s other trade creditors starting insolvency, or whether bank creditors do provisioning.”

Recent earnings reports from banks in Singapore reflect these challenges. Eugene Tarzimanov, vice president and senior credit officer at Moody’s in Singapore says that local banks “have seen a broad-based deterioration in asset quality through 2015, a trend we expect to continue because of slowing economic and trade growth in Asia, and increasing stress for oil and gas borrowers.”

The slowdown is having a broader impact in Asia as well, with trade slowing around the region. Dow Jones reports that what began more than a year ago as a slowdown in commodities exports has spread to other traded goods, as falling global growth hurts consumer and corporate spending. It notes that the International Monetary Fund (IMF) last month downgraded its outlook for world economic growth by 0.2 percentage point to 3.4%.

The long tail of the slowdown

That slowdown is likely to extend well beyond 2016, Langhorne suggests, because there is a long tail for some of these situations. “In the industries we’re looking at – Indonesian mining, oil and gas – these are not the sorts of assets you can sell to private equity and move on. There’s going to be a very long tail, multiple rounds of restructuring.”

Part of the reason for that long tail is that restructuring these debts can be difficult. While Singapore is increasingly a hub for restructuring activity and is “a central place to get things done,” he reports that companies are stuck in the legal structures in other countries when a lawsuit is instigated there. The challenge is that insolvency laws are still at an early stage and courts simply don’t have sufficient expertise in some other countries in ASEAN.

Courts may not understand how to deal with distressed situations, so it can be difficult for them to deal with complex financial structures. Additionally, since laws are also different from Western legal structures, a company can’t just take over a business from their debtor as they would, for example, do in the UK and will need to go through a long process of consensual restructuring.

The net result is distress in shipping, in addition to mining and oil/gas – particularly in Malaysia and Indonesia. “That plays into the service companies – that’s the tail for the next two, three or four years,” says Langhorne.

Opportunity amid distress

While the challenge is tremendous for the distressed companies, as well as the banks or other firms that have lent to them and to the firms’ suppliers, McMyn believes there can be massive opportunities for people who see value in an asset.

He expects that those investors who see value, or who want to get a foothold in ASEAN, might well take advantage of the situation and buy some of the distressed companies. Langhorne echoes this view, adding that one trend he expects to see starting in the second half of 2016 is an increase in distressed merger and acquisition (M&A) activity – particularly in oil and gas – along with portfolio sales by banks. “We’ve seen that in Australia five or six years ago. It will become more common here in Southeast Asia.”

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