Rajah & Tann LLP, Southeast Asia’s largest law firm, said construction and commodity companies in Asia may follow shippers into financial distress this year amid global market turbulence.
“The construction and commodities industries should be watched,” said Singapore-based Sim Kwan Kiat, who heads the firm’s business finance and insolvency practice. “The former because of rising costs and the latter because of volatility.”
Sim, a 42-year-old partner at the Singapore-based firm, also expects “increasing awareness and vigilance” among banking regulators in Asia to prevent bad loans from worsening. Delinquent bank debt soared to a five-year high in China at the end of last year while stressed assets, including restructured facilities, reached a decade-high in India.
China’s $4.2 trillion onshore bond market had its first default earlier this month when Shanghai Chaori Solar Science & Technology Co. failed to make a full coupon payment on its notes. Copper prices tumbled to near their lowest since 2010 as Chinese factory production and exports data trailed estimates while the Ukraine-Russia political conflict and the Federal Reserve’s tapering of stimulus added to volatility.
“There’s growing uncertainty in global markets with some factors which are still very much in a state of fluidity,” said Sim. “There’s a chance things may take a turn for the worse, resulting in an increase in cases of corporate distress.”
The performance of China’s economy, the Crimean crisis and the reaction to cuts in the Fed’s bond-purchase program are factors adding to the unease, Sim said. The Hang Seng China Enterprises Index, a measure of Chinese shares in Hong Kong, has fallen some 20 percent since its Dec. 2 peak through March 14, while Russia scrapped five sovereign bond auctions this year.
Securities sold by Ulaanbaatar-based Mongolian Mining Corp. and Jakarta-based PT Bumi Resources were among 50 of the most-traded bonds globally yielding 1,000 basis points or more than their government benchmark on March 13, according to Bloomberg data, based on prices from Trace.
Mongolian Mining’s $600 million of 8.875 percent notes due 2017 and sold to investors at par in March 2012 were yielding 24.42 percent on March 14 compared with 17.67 percent at the start of the year, Bloomberg-compiled prices show. Bumi Resources’ $700 million of 10.75 percent 2017 debentures are yielding 31.31 percent versus 24.66 percent.
Sim has acted for lenders in cross-border cases including the workout at Danish shipping group Torm A/S in 2013, as well as the restructuring of Drydocks World of Dubai, the biggest shipyard operator in the Middle East. He was also involved in PT Berlian Laju Tanker, which reorganized more than $2 billion of debt, and restructures of Petromena ASA and PetroProd Ltd. of Norway involving $935 million of notes.
Rajah & Tann advised inspectors appointed by the Singapore government investigating the collapse of Barings Bank in 1995, according to its website. It also acted for a syndicate of lenders in the insolvency of Lewis & Peat, the largest rubber-trading house in the U.K., in 2000 and represented liquidators of MF Global Holdings Ltd. in local courts to recover more than $400 million in 2011.
Chaori Solar paid just 4 million yuan ($649,360) of an 89.8 million yuan coupon payment due March 7 following three years of losses. Recent corporate failures where debt hasn’t been repaid include Indonesian tanker operator Berlian Laju Tanker, oil producer Oleo & Gas Participacoes SA of Brazil and wind-turbine maker Suzlon Energy Ltd. of India.
Delinquent bank loans in China reached 592.1 billion yuan in the last quarter of 2013, the highest since the 2008 financial crisis, official data showed last month. India’s stressed assets, including bad and restructured loans, rose to 10.2 percent in September, the central bank said.
“There’s still a bit of stress in the solar industry in China, just like in the shipping sector where there are dramatic cycles,” said Kurt Metzger, a Singapore-based restructuring consultant at GEM Advisory who has been working with Chinese solar makers over the past year. “In this region, one could also see some distress in the mining industry in Indonesia.”