Singapore Lawyers Warn of 1998-Like Pain as Debt Defaults Spread

Tuesday, Feb 23 2016 12:00 PM

Rajah & Tann Singapore LLP, Southeast 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 cents on the dollar from insolvencies in East and South Asia, compared with more than 80 cents in the U.S., according to World Bank studies. Rival law firm Hogan Lovells US LLP said in an interview that regional banks will likely boost the sale of bad loans in the 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 and the city faces escalating risk on multiple fronts. Rating companies 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’s home sales had their worst start to the year since 2009 after prices slumped.

112 Defaults

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 Southeast Asia, Indonesia’s PT Berau Coal Energy and PT Trikomsel Oke and Thailand’s Sahaviriya Steel Industries Pcl have missed bond and loan repayments.

Berau Coal showcased the depth of distress in the region’s bond market when it bought back $150 million of bonds at 30.3 cents on the dollar in December. That’s the lowest since Chinese company Asia Aluminum Holdings Ltd. repurchased its notes at 22.5 cents before it collapsed in March 2009. The price of distressed buybacks in Asia since 2008 averaged 48 cents on the dollar, according to data compiled by Bloomberg.

Offshore investors have challenged PT Bakrie Telecom’s restructuring in U.S. courts, saying their principal would be trimmed to between 7 and 19 cents on the dollar under the Indonesian firm’s local proposal. Back in 2009, bondholders recovered less than 7 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.

More Work

Rajah & Tann has seen as much as a 30 percent rise in restructuring and insolvency work over the past two years, Sim said. His firm was involved in cases related to marine fuel supplier OW Bunker, contractor Punj Lloyd Ltd., China Fishery Group Ltd. and Bakrie Telecom. It also worked on the insolvencies of Siva Shipping and Mercator Lines Singapore Ltd.

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, with the spread over government securities jumping to 904 basis points earlier this month from as low as 596 basis points in May, according to a Bank of America Merrill Lynch index. Ructions in Asia’s credit markets have wiped out more than $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.

Another Purge

The 376 listed companies in Southeast Asia have accumulated $100 billion of debt tied to the steel, metals, mining and energy sectors based on their latest filings, up from $47 billion in 2009, Bloomberg-compiled data show.

DBS Group Holdings Ltd., Southeast 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 possible delinquencies may come from the oil and gas sector with S$1 billion of loans tied to exploration companies.

Hogan Lovells expects “banks in the region to be scrutinizing their loan book and looking at ways to rationalize,” Langhorne said. “The bundling of nonperforming loans for disposal is likely to be a trend in the coming months.”