China to lead Asian distressed debt opportunity in 2010

Skepticism remains over whether an increasing number of distressed debt deals will be attractive to investors, according to a recent survey.

China tops the list of Asian countries expected to offer significant distressed debt opportunities in 2010, followed by Australia and Indonesia, according to a survey on Asian distressed debt released by Debtwire in association with Clifford Chance and Rothschild. 

However, the survey, which asked 100 investors in distressed debt, including private equity firms, hedge funds, and proprietary trading desks, for their views on Asia Pacific distressed debt markets, also showed investors were skeptical of the extent of the investable opportunity in China.

While 58 percent of respondents indicated they expected the number of ‘significant’ distressed opportunities to increase in 2010 in China, compared to 36 percent and 35 percent for Australia and Indonesia respectively, one commented anonymously: “There will be countries like China where there are lots of distressed situations, but it does not necessarily mean there are opportunities for investors.”

Some 75 percent of respondents also named China as one of the Asian countries where it is most difficult for creditors to exercise or enforce rights over security. This was followed by Indonesia, with 27 percent, and India, with 6 percent.

“Whilst there are undoubtedly numerous distressed situations in China, we are yet to see many investors buy into distressed debt with a view to forcing a restructuring on the debtor and shareholders,” stated Scott Bache, Hong Kong-based partner at Clifford Chance. “To the extent that opportunities exist, it is more likely to be found in funding shareholders in buying back debt at a steep discount, given the creditor side execution risks in China.”

Whilst there are undoubtedly numerous distressed situations in China, we are yet to see many investors buy into distressed debt with a view to forcing a restructuring on the debtor and shareholders.

Scott Bache

Overall, Australia was seen to be the market offering the most attractive distressed debt opportunities in the Asia Pacific region, with 46 percent of respondents choosing it as one of their top picks regionally. Several referred to the country’s legal system as the reason for this. China followed Australia, with 33 percent, and then Japan and Indonesia, with 20 percent each.

In terms of sources of opportunity, real estate was predicted by 84 percent of respondents to see increased distressed opportunity in 2010, topping the list of sector plays. Some 68 percent of respondents expected refinancings to be the most likely source of distressed products, and 65 percent said the majority of opportunities in distressed debt investing would come from trading secondary debt. Some 23 percent of respondents said private equity would provide the majority of opportunities in distressed debt investing.

Overall, the investable opportunity set for distressed investors in Asia was shown to be limited: a majority of those surveyed (59 percent) said less than 25 percent of the situations they had looked at in 2009 represented an ‘actionable and attractive’ investment opportunity.

“Given the distinct advantage that shareholders have over foreign creditors in many distressed situations, this is hardly a surprising result,” said Clifford Chance’s Bache. “Generally, if it’s not a financial sponsor owned borrower or a distressed situation in Australia there are few, if any, attractive opportunities to get involved in distressed situations at the moment in Asia.”