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Update: Singapore lawyers warn of 1998-like pain as debt defaults spread
[SINGAPORE] Rajah & Tann Singapore LLP, South-east Asia’s largest law firm, reckons the region’s rising bond defaults will inflict as much pain on creditors as the financial crises of 2008 and 1998.
As distress spreads from shipping to mining and retail to construction industries, the law firm said in an interview that recovery rates will be similar to those seen in the global credit meltdown and Asian financial crisis. Secured creditors recover only less than 33 US cents on the dollar from insolvencies in East and South Asia, compared with more than 80 US cents in the US, according to World Bank studies. Rival law firm Hogan Lovells US LLP said in an interview that regional banks will likely boost sales of bad loans in coming months.
“The trough in the mining cycle seems to be continuing and some say it will be a while more before any significant recovery is expected,” said Sim Kwan Kiat, Rajah & Tann’s head of restructuring and insolvency based in Singapore. “From experience, the lower end of the spectrum for recovery rates this time round in 2016 is unlikely to be much different from those in 2008 or 1997-98.”
Bad loans in Singapore rose to a six-year high in 2015. Rating firms last month placed energy and mining companies globally on review for downgrades, the Baltic index of shipping rates last week reached the lowest since its 1985 inception and Singapore home sales had the worst start to a year since 2009.
Energy firms dominated 112 global bond defaults last year, according to Standard & Poor’s, as the slowest Chinese growth in two decades helped drive prices for commodities from oil to iron ore and coal to multi-year lows. In South-east Asia, Indonesia’s PT Berau Coal Energy and PT Trikomsel Oke and Thailand’s Sahaviriya Steel Industries Pcl have missed bond and loan repayments. Sembcorp Marine Ltd, the world’s second-largest oil-rig builder, had its first quarterly loss in at least 12 years as clients cancelled orders.
Berau Coal flagged the depth of distress in regional credit markets when it bought back US$150 million of bonds at 30.3 US cents in December. That’s the lowest since China’s Asia Aluminum Holdings Ltd repurchased notes at 22.5 US cents before it collapsed in March 2009. The price of distressed buybacks in Asia since 2008 averaged 48 US cents on the dollar, Bloomberg data show.
Offshore investors have challenged PT Bakrie Telecom’s restructuring in US courts, saying their principal would be trimmed to between seven and 19 US cents on the dollar under the Indonesian firm’s local proposal. In 2009, bondholders recovered under seven US cents on the dollar from the failure of Singapore-listed Celestial Nutrifoods Ltd and Asia Aluminum Holdings, according to estimates by Greenwich, Connecticut-based Gramercy Funds Management LLC.
Rajah & Tann has seen as much as a 30 per cent rise in restructuring and insolvency work over the past two years, Mr Sim said. His firm was involved in cases related to marine fuel supplier OW Bunker A/S, New Delhi-based contractor Punj Lloyd Ltd, China Fishery Group Ltd and Bakrie Telecom.
Sim sees similar trends to the shipping industry emerging throughout the region, following the slump in oil and gas prices, and predicts that construction will continue to see tough times. After a steady stream of restructuring mandates focused on commodities, coal and oil producers, Hogan Lovells is starting to see signs of stress in the retail industry, said Shaun Langhorne, a restructuring partner based in Singapore.
The creditworthiness of Asia’s junk-rated borrowers has weakened as investors sought the highest risk premium in four years to own their debt. The spread over government securities jumped to 904 basis points earlier this month from as low as 596 basis points in May and was last at 863 basis points, according to a Bank of America Merrill Lynch index.
Ructions in Asia’s credit markets have wiped out more than US$11 billion of junk-bond value from the peak in April last year, while Moody’s Investors Service said in January the negative rating trend for Asia’s non-bank corporates can only worsen in 2016.
DBS Group Holdings Ltd, South-east Asia’s biggest bank, liquidated some bad loans in December, chief executive officer Piyush Gupta said on Monday. Rival lender United Overseas Bank Ltd last week said delinquencies may come from the oil and gas sector with S$1 billion of loans tied to exploration companies.
“It’s not just the oil and gas, it’s the larger commodity super-cycle that’s obviously coming off,” Mr Gupta said. With regards to bad loans in the offshore marine sector, “we were able to monetize 60 percent of the collateral in the fourth quarter; we took no big write-off, the residual amount of the loans went into nonperforming assets", he said.
The 376 listed companies in South-east Asia have accumulated US$100 billion of debt tied to the steel, metals, mining and energy sectors based on their latest filings, Bloomberg-compiled data show. While that fell from US$108 billion a year earlier, it’s surged from US$47 billion in 2009.
Hogan Lovells expects “banks in the region to be scrutinising their loan book and looking at ways to rationalise”, Mr Langhorne said. “The bundling of nonperforming loans for disposal is likely to be a trend in the coming months.”