Companies in India and Indonesia will probably face greater financial strain in the next two years as weak commodity prices and currency depreciation dent earnings, according to Clifford Chance LLP.
Stressed assets in India’s banking system are at a decade-high as companies including Suzlon Energy Ltd. pursue debt workouts with creditors. Miner PT Bumi Resources and shipper PT Berlian Laju Tanker are among Indonesian corporates in the midst of reorganizing some $4 billion of debt as falling coal prices and vessel oversupply crimp profitability.
“Corporates in India and Indonesia are facing the most pressure in the distressed loans area, going by our involvements over the past six months,” Andrew Brereton, a Singapore-based partner in Clifford Chance’s banking practice said in a Feb. 20 interview. “The market is affected by the cyclical nature of the commodity industry and the political angle in terms of protectionism.”
Bad and restructured loans at Indian lenders jumped to a 10-year high of 10.2 percent as of Sept. 30, according to central bank data, as rating companies said tighter credit assessments from April could worsen the outlook. The S&P GSCI index of 24 commodities fell 2.2 percent in 2013, ending a four-year rally as coal slumped. Emerging-market currencies tumbled 3.5 percent in January in their worst start to a year since 2009 as the Federal Reserve began cutting its record stimulus.
“We’ve already had a taste of what might come in the context of Fed tapering, with the slide in emerging-market currencies last year,” said Brereton. “That in itself has caused distress in some corporates, particularly those with significant dollar-denominated debt. We haven’t had a real wave of defaults, but we could see that pressure building up over the next two years.”
Companies and governments in Asia outside Japan sold $126.7 billion of dollar bonds in 2013 compared with $121.5 billion the year prior, according to data compiled by Bloomberg. Sales this year total $29.6 billion versus $25.8 billion the same period of 2013.
Brereton, who is also the co-head of Clifford Chance’s restructuring and insolvency practice in Singapore, declined to disclose the law firm’s current cases. Clifford Chance has advised clients in the restructurings of Singapore-based Ferrochina Ltd., and Continental Chemicals Ltd. and Wockhardt Ltd. in India, he said in a Feb. 25 e-mail.
KKR & Co., the buyout firm founded by George R. Roberts and Henry R. Kravis, plans to invest in failing Indian companies and banks after raising $2 billion for a global fund which will provide financing to distressed firms, Kravis told reporters in Mumbai on Feb. 21. Troubled Indian companies may get structured loans or equity from funds including the KKR Special Situations Fund LP, he said.
DBS Group Holdings Ltd., Southeast Asia’s biggest lender, slowed loan growth to medium-sized companies in India in 2013 following a cash squeeze as the government sought to rein in its fiscal deficit, Chief Executive Officer Piyush Gupta said.
“The only area where we continue to see challenges is the India portfolio,” Gupta said at an earnings briefing on Feb. 14. “We took a broom and cleaned up anything we could find in the fourth quarter. So we were aggressive in our recognition of non-performing loans.”
In Indonesia, mining and shipping are “probably the two most interesting sectors from a restructuring perspective,” Brereton said. “Activity has been more prevalent in loans and bonds on the private side, but we’ve seen some activity in the public bonds space as well.”
Greenwich, Connecticut-based Gramercy Funds Management LLC, the $3.9 billion emerging-market investment manager founded by Robert Koenigsberger, were among investors involved in Berlian Laju’s debt restructuring, according to court filings.
Berlian Laju creditors, with a combined about $125.5 million in claims, filed an involuntary Chapter 11 petition against the Jakarta-based ship operator in December 2012. In March of that year, Berlian had put about a dozen subsidiaries into Chapter 15 proceedings in Manhattan to complement a bankruptcy reorganization in Indonesia. In April, a U.S. bankruptcy judge ruled the Southeast Asian nation was home to the foreign main proceeding.
Singapore-based companies including China Fishery Group Ltd. and First Ship Lease Trust are also negotiating with lenders to refinance their bank loans, according to statements issued by Standard & Poor’s and Moody’s Investors Service this month.