Jonathan Rogers
IFR Asia Columnist
LAST WEEK I had lunch with one of Asia’s foremost restructuring advisers, someone I have known professionally for the best part of a decade. We had the inevitable discussion about what to expect in 2014, not just from the restructuring practitioner’s field of play but from the whole global caboodle.
The former topic yielded a laugh-out-loud nugget, delivered in the usual sardonic drawl: at many banks now you’re not allowed to use the “R” word when it comes to troubled loans. No, restructurings are now to be referred to as refinancings or rollovers.
Refer to them as restructurings and all kinds of internal bank strictures kick in which could cause credit lines to be pulled and even the chop for the person who signed off on the original loan.
How absurd. If it looks like a restructuring, sounds like a restructuring … well, you know the rest. Perhaps they should come up with a new term for a “refinancing” that involves a haircut on principal – something that in Asia has come to mean having as much as 80% of your money written off and getting the rest termed out from the original three-year exposure to anything as long as 15 years. Let’s call it a “roll-under” and leave it at that.
He is working on a deal that involves a company hit by the downturn in commodity prices, where plunging Ebitda has made servicing its syndicated and bilateral loans impossible. That’s partially the result of a liquidity squeeze in the company’s domicile that has stopped local banks from extending more funds. But it’s also the result of an emerging culture of extreme risk aversion across the Asian banking landscape.
At many banks now you’re not allowed to use the “R” word when it comes to troubled loans
MANY BANKS NOW have a list of unloved “wouldn’t touch it with a barge pole” sectors, with commodities at the top and shipping somewhere close. There’s perhaps an irony in this: many restructurings emerge during the bottom of a cyclical downturn only to be finally signed off after the cycle has already turned.
That might prove to be the case in the Asian shipping industry, where one of the biggest restructurings still underway, for Indonesia’s Berlian Laju Tanker (involving more than US$2bn of debt) is being thrashed out against the backdrop of a surge in Baltic Dry shipping rates. And some commentators are making the case that commodities are due for a revival of fortune after a steep slump, in the face of reviving US and European economic growth.
It’s probably an irony many Asian companies can live with, as long as they can avoid full liquidation. They get to reduce debt, often in a dramatic, wipe-out fashion, without sacrificing an uncomfortable amount of equity in the process, and are often able to return to the financial markets for capex needs a few years later with their reputation fully restored.
THAT BRINGS ME back to the other topic of our lunchtime discussion: the whole caboodle. This particular restructuring veteran isn’t a Janet Yellen fan, and reckons the market will not buy into the idea of a Yellen put. Well, we’ve had the Greenspan and the Bernanke put carrying us through the best part of 30 years. Isn’t a third a little too much to ask?
He told me of chats he’d had with old market hands who think that the “big one” is waiting in the wings. That’s where Fed tapering proves an operation that cannot be handled without prompting the mass withdrawal of capital from emerging markets, the US Treasury bond market crashes, and America’s debt burden takes centre stage in Greek tragedy fashion.
A World Bank report published last week warned of a “disorderly adjustment scenario” for countries with high current account deficits, such as India and Indonesia in this region, as well as South Africa, Turkey, Brazil, Hungary and Poland. The fear is that Fed tapering will prompt the sudden withdrawal of capital flows from these countries, in turn forcing a punitive rise in onshore interest rates as these countries attempt to defend their currencies. Onshore debt service would become a nightmare for cash-poor companies and mass default the result.
No doubt that is the rosiest scenario for Asia’s debt restructuring community, and it would represent the re-emergence of an industry that has struggled in recent times.
Since the years immediately following the Asian financial crisis, there have been little more than a dozen headline-grabbing restructurings in the region, and the total fee wallet has been dwarfed by the payout on the loan and bond underwriting side of the equation. Most Asian companies have hoarded cash rather than borrow to expand, but over the past few years that cash pile has been dwindling across numerous countries in the region.
In the face of a disorderly adjustment, the resources might just not be there for any but the lowest geared companies to service debt. That prospect might just be why this particular restructuring guru had more of a spring in his step than usual.