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Singapore law firm sees cracks in South-east Asia's credit markets

Singapore

CRACKS are showing in South-east Asia's credit markets as struggling companies in troubled industries seek to repair their balance sheets, according to Rajah & Tann Singapore LLP, which manages the largest network of corporate lawyers in the region.

The law firm, which has handled local units of Lehman Brothers Holdings and MF Global in their bankruptcy cases, said a slowing Chinese economy and more risk aversion among alternative capital providers will make it more challenging for some companies to meet maturing obligations. While credit markets have rallied this year amid more dovish steps by central banks, some weaker borrowers may still struggle to roll over debt.

"We are increasingly being asked to review security and loan documents and advise on enforcement options, with financiers being keen to make sure the ducks are in a row," said Danny Ong, a partner in charge of dispute resolution practice, citing recent instructions and mandates from clients. "This has led to us ramping up our internal resources in anticipation of more distress events."

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Singapore's credit market bore the brunt of regional distress with at least 15 corporate defaults since 2014 as shipping and oilfield services groups stumbled, Noble Group headed for liquidation and as Hyflux fights for survival. In Indonesia, PT Bumi Resources pursued a debt reorganisation after coal prices tanked, while builders, a broadcaster and seafood producer have also pushed out repayments on debt.

Leverage in the corporate sector has increased in almost every country, barring Indonesia which enjoys strong commodity prices, S&P Global Ratings said in a September 2018 analysis of nearly 2,400 listed companies with US$700 billion of debt load.

Rajah & Tann has acted for creditors, bond trustees and liquidators in recent insolvencies related to OW Bunker, Ezra Holdings and PT Berau Coal, among others. Mr Ong said investors should brace for more bad news.

Private equity firms, which replaced traditional banks as major capital providers after the global financial crisis, "are becoming increasingly risk averse", making fundraising or debt servicing more challenging, he added.

South-east Asian companies must repay US$17.9 billion of dollar-denominated bonds this year, with that amount rising to US$23.2 billion in 2023, according to Bloomberg-compiled data.

Slowing economic growth in China could have a ripple effect on cash flow, Mr Ong said. He is particularly concerned about the construction and shipping sectors and foresees a round of mergers and acquisitions across the region for survival.

"Builders are facing ever-thinning margins and this will lead to some industry consolidation," he said. "For some time, the shipping sector has stabilised but my sense is that a second wave of distress may be on the way." BLOOMBERG