Companies in South-East Asia face now the prospect of being forced into financial distress as the economic storm over certain economies shows no sign of improving. Mark Cooper from law firm Hogan Lovells Lee & Lee laid out an overview of the situation.
The recent announcement by Moody’s that it is downgrading its rating for Singapore's major banks from «stable» to «negative» is, while confidence remains high in those banks' stability, a further sign of the weakening economic outlook across the region, says Cooper, a partner at Hogan Lovells Lee & Lee.
Regional banks, and the ability to access global capital markets, have historically made debt cheap and attainable which has allowed many companies to expand rapidly based on expectation of continued high commodity prices or other potentially unsustainable business models.
Exposure of Regional Banks
With a reported $100 billion of debt lent to natural resources groups alone, regional banks in particular face the prospect of a growing portfolio of bad debt as these companies become increasingly unable to repay their loans.
Banks that have lent to these companies may consider de-risking by reducing their exposure and expect to dispose their non-performing loan portfolios to other lenders and strategic investors over the next 12 to 18 months.
More Mergers And Acquisitions
These conditions and trends will provide potential purchasers with varied opportunities for investment in credit across South-East Asia. And this may open possibilities for entry into markets which would not otherwise be open to a given investor, whether by establishing a direct lending relationship with distressed borrowers or through entry into structures which provide a return for taking on pure economic exposure, says Cooper.
While conventional wisdom has it that financial distress is a «bad thing», for an investor it can reduce valuations and make a company or asset an attractive acquisition target. For this reason, we anticipate that increasing instances of financial distress will translate into more merger and acquisition (M&A) activity across the region over the next 12 to 18 months.
Realistic Valuations
Private equity groups may also make opportunistic buys attracted by the decrease in the traditional mismatch between seller’s expectations and buyers’ valuations that has limited private equity investment in South-East Asia in the past.
«We expect that the potential rewards of gaining a foothold, or expanding into, one of the world’s most dynamic economic regions will prove an irresistible draw for investors with the requisite appetite and skill set,» says Cooper.
Mark Cooper is an M&A and private equity lawyer with extensive experience across a number of jurisdictions comprising the fast-developing ASEAN region. He is head of the firm's Indonesia desk and works regularly on transactions in Indonesia, the Philippines, Singapore and Vietnam. His transactional experience encompasses all of the key sectors for the region.
