What Does Asia’s Debt Build-Up Mean for Liability Management?

Increased levels of debt restructuring point to a broader pattern across Asia and underscore the need for active liability management.

While speculation about debt build-up will naturally be focused around China, our experience has pointed more towards an increase in regional debt restructuring in addition to the specific challenges facing China. Increased debt levels apply equally to the private sector and public enterprises across Asia, the roles of which can sometimes be blurred.

It is well understood that the current debt build-up is a result of, among other factors, the ultra low interest environment which has prevailed since the financial crisis. In our direct experience, the demand for liability management and debt restructuring solutions has significantly increased in recent months. The bond restructurings we are seeing are often a result of these high corporate debt levels combined with a softer economic outlook. Some corporate cash-flows are clearly coming under pressure across the region. We have also seen capital markets restructurings across Asia due to the commodities downturn.  Issuers need to carefully consider upcoming redemption and maturity dates to ensure that funds are ready or alternative borrowing options are available.

In addition to the distressed restructurings that tend to make headlines, we are also seeing issuers use a number of different liability management techniques to achieve their goals. Some issuers are taking the opportunity to buy back their debt at less than their principal amount. In certain industries and markets, bond prices are generally trading down due to general negative sentiment. Stronger credits have been able to take advantage of these lower levels through public tender offers at below par. Other issuers are using tender or exchange offers in combination with bondholder consent processes to amend the terms of existing bonds (such as improvements in financial covenants or extension of maturities) or to forcibly redeem bonds in accordance with the terms of the instrument.

The current environment should focus issuers around the region of the need to proactively manage their outstanding bond maturities. The sooner they are considering restructuring options and structures, the better, as the bondholder consent process can be complicated and time-consuming and market disruptions can quickly eliminate alternative fundraising sources. Effective liability management, and early planning for restructuring, are critical for companies seeking to best deal with their debt positions. We expect that the current trend of increased liability management will continue as the combination of record levels of debt and difficult trading conditions across Asia will require issuers to carefully consider their repayment and restructure options.

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Capital Markets, Partner, Linklaters