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Singapore defaults seen as bellwether for 2017 Asia distress

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Singapore's commodities-related defaults could turn out to be the canary in the mine.

[HONG KONG] Singapore's commodities-related defaults could turn out to be the canary in the mine.

Despite a modest rebound in resource prices, restructuring specialists including KPMG and Hogan Lovells Lee & Lee see more Asia-Pacific commodities and shipping companies being pushed into delinquency. 

Law firm DLA Piper said there could be choppy waters ahead on rising interest rates and President-elect Donald Trump's overhaul of trade with China. Regional non-bank borrowers face US$76.4 billion of dollar bonds maturing in 2017, 24 per cent more than this year, Bloomberg-compiled data show.

While oil prices have jumped 17 per cent since Mr Trump was elected, they are about half what they were in 2014. Resource prices as a whole are down 64 per cent from their peak before the 2008 global financial crisis, the Bloomberg Commodity Index shows.

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Singapore, whose economy relies on shipping and oil service firms, was exposed first because the companies were smaller and less able to tap government support. 

"Singapore is a bellwether for the larger Asean and Asian region," said Andy Ferris, Singapore-based partner at Hogan Lovells Lee & Lee.

"Some of the fundamental problems those industries face won't go away. Many of the companies in the commodities sector have high levels of debt and depressed revenues."

Five companies in the city, including oil services firms Swiber Holdings Ltd and Swissco Holdings Ltd, defaulted on nearly S$1 billion of bonds in 2016. KPMG said defaults could widen to include Singapore's developers after home prices dropped by the most in more than seven years in the three months ended Sept 30. China's overheated housing market cooled in November as authorities rolled out renewed buying curbs.

Payments Due

Real estate firms in the Asia-Pacific region face US$8.7 billion of dollar bonds due 2017, while energy-related companies including coal miners and oil services firms must repay US$12 billion, Bloomberg-compiled data show. 

Commodities trader Noble Group Ltd's dollar bonds maturing 2020 traded at 84.2 cents on the dollar on Monday, while oil producer MIE Holdings Corp's dollar notes due 2018 traded at 83.3 US cents, Bloomberg-compiled data shows.

Graham Martin, head of restructuring at KPMG in Singapore, said he expects more defaults among oil services and shipping firms throughout Asia including countries like Malaysia and Thailand, with rising stress in Indonesia where coal miners face low prices.

"We think Indonesia will be one of the top markets for restructuring work in 2017," said Mr Martin, who is planning to add headcount in Jakarta.

Mark Fairbairn, Hong Kong-based head of restructuring and special situations for Asia at DLA Piper, counters that Singapore's issues could turn out to be a "cluster of problematic companies" that do not appear to be of the best quality, he said. He added that the defaults in Singapore may still be a bellwether for more to come in the oil services sector.

He also expects more work across the region as rates rise and Mr Trump disrupts trade.

"Across Asia, we could see more corporates getting into difficulty with their bank or bond debt," said Mr Fairbairn.

China's top policy makers said after a Beijing meeting in mid-December that controlling financial risk to avoid asset bubbles will be a priority for 2017. Hogan Lovells' Mr Ferris said "inherent government support" may be gradually withdrawn. At least 28 onshore bonds have defaulted this year, compared with seven in 2015.

"I definitely think we will see further distress out of China," said Mr Ferris.

"We have seen a move to allow trading of credit-default swaps and that suggests that the government could allow certain companies just to fail. It's a fair bet to say we'll see a sustained level of distress in the bond market throughout Asia next year."

BLOOMBERG

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