Corporate defaults may peak in Q1 next year
Corporate defaults may peak in Q1 next year
Even after GDP turns around, number of defaults won’t drop for next 6-9 months: S&P
By LYNETTE KHOO
(SINGAPORE) Analysts are expecting corporate defaults to peak in the first quarter of 2010, notwithstanding the recent economic recovery across the globe.
More distressed debt could emerge, even in Asia Pacific, they say.
Year to date, the total number of global corporate issuers that defaulted has risen to 213, nearly four times the 55 defaults over the same period in 2008, according to US-based credit-rating agency Standard & Poor’s (S&P).
‘We would anticipate that defaults will continue to come through in the pipeline in the first three months of 2010,’ Devi Aurora, S&P senior director of global fixed income research, told BT.
S&P is expecting all 14 Asia-Pacific economies it covers to return to positive growth next year. But the default cycle tends to lag the economic cycle by six to nine months.
‘So, even after GDP turns around, we still don’t see a fall in the number of defaults for the next six to nine months,’ Ms Aurora said.
In the Asia-Pacific region, the amount of ‘expected deals’ - whereby companies have defaulted on loans and appointed a financial adviser to negotiate a solution - stood at US$10.85 billion, according to Debtwire, a real-time news and data provider of the Financial Times.
Stressed debt in the region - defined as debt at risk but the default can still be averted - is about US$131.64 billion year to date.
Among Singapore firms, the size of ‘expected deals’ has reached US$805 million while stressed debt has hit US$3.37 billion as at Sept 2.
Singapore firms with ‘expected deals’ include Jaya Holdings and TT International, both of which appointed nTan Corporate Advisory on possible restructuring arrangement.
Also on the list of ‘expected deals’ in the region are China-based firms listed on Singapore Exchange, such as FibreChem and Sunshine Holdings, which defaulted on loan facilities of US$35 million and US$120 million respectively, and Celestial NutriFoods, which defaulted on convertible bonds worth $234.6 million.
Robert Schmitz, managing director and head of restructuring for Asia in N M Rothschild & Sons, warns that the refinancing market is at risk and non-performing loans have not reached the worst yet.
‘If the wall of debt coming due over the next three quarters cannot be refinanced, then defaults will climb. I have seen studies projecting that the North American and European markets are about two-thirds of the way to the peak,’ he said.
In Singapore, there is reason for worry on the GDP front when the construction of integrated resorts and the hot residential segment cools, Mr Schmitz added.
But for investors going for distressed investing, Ms Aurora noted that the fourth quarter of 2008 was the most opportune time to pick up companies for a fraction of what they are worth.
‘The increase in valuations in recent months means that values are more rationalised now,’ she said. ‘Nevertheless, we have seen a raft of distressed exchanges so far this year.’
Distressed exchanges happen when debt holders accept securities in exchange for their debt claims.
But Ms Aurora cautioned that an exchange offer is not the final story as ‘research has shown that even after distressed exchange has been executed, unless there is a change in top-line growth, the company may come back into trouble’.
As much as a quarter of these distressed companies may face problems again down the road, she said.
Reflecting this, an S&P report dated Sept 4 noted that distressed exchange offers are now the top reason for default this year at 74 issuers - over five times the distressed exchange count in the whole of 2008 and nearly 19 times the count in 2007.
Covenant resets and equity cures through rights offerings are still the preferred solutions, Mr Schmitz said.
On a positive note, the financial markets over the last months seem to be indicating that the financial crisis is over and that is encouraging for the distressed debt markets, he added.
Source : Business Times - 07 September 2009
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