Insights – Key takeaways from Debtwire Asia Pacific Forum 2024
We summarise the key takeaways from the Debtwire Asia Pacific Forum 2024 held in Hong Kong at the Four Seasons Hotel on 10 October 2024.
Panel 1: View from the top: The role of the banks in restructuring
Current state of play
First wave, restructuring of PRC real estate developers largely on the back end with some companies, not currently distressed, but may become distressed. Second wave, Hong Kong real estate sector facing liquidity issues and may need help to get through. Pockets of distress in other Asia Pacific markets, but not on size and scale as PRC real estate sector
Asia high yield market, previously dominated by PRC real estate issuers, not coming back to levels seen 5 to 10 years ago
Private credit funds looking to fill the funding gap. Larger deals in play for private credit (recent cases include Logan US$1 billion refinancing and Bohai Leasing US$1 billion loan)
Creditor dynamics in restructuring
Banks and bond holders
Different agendas and interests
Banks generally prefer a restructuring plan with less nominal haircut and additional credit enhancement. Bonds generally want liquidity and have flexibility to take equity linked instruments in a restructuring plan
Banks often smaller in the capital stack than bonds in PRC real estate restructurings and do not hold a blocking stake in any proposed scheme. Generally become a “follower” and have limited scope to negotiate for better terms and outcomes
Banks typically fund the entire borrower with multiple exposures and touch points (e.g. syndicated loan, bilateral loan and cash management functions). Additional time needed for banks to work through complexities of different negotiations
Onshore and offshore banks
Potential for dis-alignment of interests
Onshore banks rolling over existing debt often seek to get new security, which reduces asset base and value for offshore banks
Onshore banks limited in ability to take haircuts due to regulatory requirements, even if a haircut makes commercial sense from a cash flow perspective
Onshore banks internal approval sometimes made easier if dragged along under the terms of the scheme, where bonds have the statutory majorities in hand and all creditors are getting the same deal terms
Negotiations with onshore banks can be a challenge as onshore banks have different motivations and follow different playbook (sometimes driven by regulatory or policy direction, especially if there is a regional or provincial lens)
Increasing importance of private credit
Banks looking to alternative credit for liquidity and exit as the regulatory cost of holding distressed assets is punitive
Challenge for banks exiting in the secondary market is bid/ask gap. Banks face dilemma of selling loans/assets at a discount to par and accrued/market value of assets to manage the book and regulatory cost
Panel 2: Private credit on the rise
Current landscape in Asia
In the past, private credit mainly referred to distressed and special situation deals. Now, performing credit is the growth engine due to the vacuum in bank lending to mid-market companies for growth capital (underpinned by strong growth in economies in the region), asset heavy situations and weakness in public markets
Still early days in Asia. Private credit relatively small compared to bank financing (bank financing estimated at 80%)
Sponsors want similar flexibility and standard documents to what they see in Europe and US
Banks and funds complimentary in Asia
Banks provide working capital facilities, capex lines, revolvers (i.e. senior tranches) and funds can provide long term drawn facilities (i.e. junior tranches)
Bank market is competitive, liquid and provides cheapest form of financing. Private credit fills the gap when banks can’t fund due to size, sector, timing or regulatory restrictions and use their flexibility and speed of capital as a competitive advantage
Banks partnering with private credit funds to introduce clients
Asian vs international funds
International funds have fundraising advantage. Strong brand name has advantages when discussing with borrowers
Asian funds have local experience advantage. Asia is a collection of different markets with different risk/return characteristics and legal regimes. Having boots on the ground (local investment teams, deal sourcing, structuring and risk management capabilities) is a key competitive advantage. Parachuting US and Europe experience into Asia may not always work
Asian funds can partner with banks to compete with big international funds on large cap deals
Flexible capital
Funds perspective is not to loosen covenants or credit underwriting standards. Flexibility around creating structures that suits borrowers needs taking into consideration the type of collateral available, financial position and cash flow generating capabilities (e.g. cash vs PIK interest, longer tenors, warrants)
What does the future hold for private credit?
Developments in structural features taking lead from US and Europe
Increased diversification. Moving outside of developed Asia markets and India
Continued increase in volumes, growth in sponsor and non-sponsor financing
Panel 3: The outlook for distressed opportunities
Opportunities in PRC real estate restructurings
Bond trading post restructuring (equity linked instruments)
Asset level financing or asset acquisitions in offshore jurisdictions
White knight equity investors (not seen so far due to uncertainty in underwriting equity values)
Structuring and valuation
Use of conversion features. Often involve higher price for conversion, but maximise optionality by converting later and keeping debt claim longer
Use of PIK features for debt remaining on balance sheet to give more time for debt servicing
About Debtwire
The Debtwire Forum Asia Pacific is the premier conference in Asia Pacific bringing together over 800 leading credit professionals from across the region for a day of interactive panel discussions and sharing insights into the latest trends and opportunities available for those pursuing credit strategies in the region.