MER 1097 Asia-Pacific 2010 AW4.

qxd 25/11/09 14:09 Page 1

ASIA-PACIFIC
DISTRESSED DEBT
OUTLOOK 2010
DECEMBER 2009
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CONTENTS
Foreword 1
Research methodology 1
Survey findings 2
Guns N' Roses and the Chinese bankruptcy law 16
Looking ahead to 2010 20
Contacts 23
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FOREWORD

FOREWORD AND RESEARCH METHODOLOGY

Asian equity markets have soared, hard commodities boomed and Hong Kong property prices
zoomed, and yet, as this survey shows, there is plenty of scepticism that the global economic
recovery now underway is sustainable.

But the respondents to the survey are more sanguine about Asia’s
prospects: almost everyone surveyed - 95% to be precise - think that
Asian economies will outperform the US and Europe in the coming year.
That doesn’t mean that Asia won’t provide distressed investors with the
opportunities they are looking for.
The majority of the respondents to this survey expect the number of
defaults in Asia to either remain the same or increase in 2010. But at the
same time, these participants indicated that finding actionable investment
opportunities is a problem. Indeed, 59% of those surveyed stated that less
than 25% of the situations they have explored represented an actionable
and attractive investment opportunity.
There are a number reasons for this, but no doubt, the fact that there are
so little debt trades in Asia is the main factor which prevents investors from
taking advantage of so many situations.
Regulatory issues are also at work too: 57% of the respondents stated
that regulatory restrictions against lending directly to onshore companies,
particularly in China, means that enforcing rights over security is
extremely difficult.
Because of these regulations, offshore investors have, over the past few
years, been ‘forced’ to lend to the offshore holding companies of Chinese
domestic companies, the ultimate beneficiaries of such loans. However, as
the FerroChina and Asia Aluminum cases underscored this year, offshore
lenders in such situations often find that they are structurally subordinated
to onshore (Chinese) banks that are quick to freeze the borrower’s assets
at the first sign of unruly foreign creditor behaviour.
Indeed, this year’s survey indicates that a large majority of investors
now see China as the most difficult market in which to operate, whereas
in the previous two years’ surveys, China could only tie with, or take
second place, to Indonesia for this dubious award.
China also stands out in this year’s survey as being the country that is
likely to be the source of more defaults than any other country in Asia.
But it also ranks second (behind Australia and ahead of Japan) as having
the most attractive distressed debt opportunities in Asia. No doubt,
investors see the massive amounts of liquidity in the Chinese banking
system and the government’s determination to reflate the country’s
economy as providing more investment opportunities in the year ahead.
Regulatory restrictions and dysfunctional legal systems are cited as the
biggest factors behind the difficulties in enforcing security rights in Asia,
but investors clearly blame bad loan structures for the problems they have
in recovering value: A whopping 94% of survey participants stated that
security pledges over shares and other collateral in India, Indonesia and
China had not proved as effective as had been expected when the loan
deals were entered into. Meanwhile, 81% said the structured loan products,
such as private placed loans arranged during the 2006-2008 boom years,
did not provide adequate protection to creditors.
In this context, it’s difficult to see where the most risky emerging market
debtors will find new funding, particularly if the rally in Asian high yield
bond and equity markets doesn’t hold up in 2010.
And without those markets, creditors could find them stuck in the same
trap of having to ‘amend, extend, and pretend’ for much longer than they
had anticipated.

Luc Mongeon
Editor, Debtwire Asia

RESEARCH METHODOLOGY
In October 2009, Debtwire canvassed the opinion of 100 people involved in distressed debt
on their views of the Asia-Pacific distressed debt market in 2010. All responses are presented
anonymously and in aggregate.

1
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SURVEY FINDINGS
Who was surveyed? Opportunities in the Real Estate sector are
expected to increase the most in 2010

Please describe yourself: Do you expect opportunities for distressed investors in the following
sectors to increase, decrease or stay the same in 2010?
11% 13% Private equity investor Real Estate Increase
84 10 6
Hedge fund
5% Oil, gas and mining
Proprietary trading desk 62 36 2 Remain the same
at bank or investment bank
6% Manufacturing 58 24 18 Decrease
Legal advisor
Financial Services 52 37 11
Financial advisor
Bank/investment bank credit Technology 47 45 8
risk management/credit
workout dept Auto manufactures/ 40 51 9
34% Suppliers
Retail 39 49 12

Industrials and chemicals 37 51 12

31%
Construction 38 47 15

Transportation 27 53 20

Paper and packaging 16 75 9

Telecom 16 73 11

Consumer products 10 49 41

Utilities 8 84 8

0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents

• Echoing sentiments expressed in last year’s Distressed Debt Outlook, once

again an overwhelming number of respondents - 84% of those surveyed -
believe that opportunities for distressed investors would increase in the Real
Estate sector. Interestingly, this is the largest percentage group to expect
opportunities in any given sector to increase.
• Compared to 2008, the largest drop in expected opportunities is in the
Consumer space. Last year 68% of respondents expected opportunities in
this space to increase. This year a mere 10% expect opportunities
to increase while the rest of the respondents are almost evenly split between
expecting opportunities to either remain the same (49%) or decrease (41%).
• However, one respondent cautioned, saying “even when the economy
is recovering, [the] consumer industry might still be in distress due to
lagging effects.”
• In 2008, respondents expected distressed debt opportunities to increase or
remain unchanged in most sectors as a result of the financial crisis. In this
year's survey, a subset of investors are predicting that opportunities will in
fact decrease, a sign that markets are recovering.
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SURVEY FINDINGS
68% of respondents expect refinancings Most respondents predict that China will
to be the most likely source of distressed offer significant distressed debt opportunities
products in the coming year
What type of situation will be the most likely source of Rate each country based on its expected distressed debt
distressed products in 2010? opportunities in 2010
3% 2% 1%
6% Refinancings China 58 16 16 2 8 Significant distressed
LBOs debt opportunities
Indonesia 35 31 27 5 2 Distressed debt
9%
Pre-IPO financings
opportunities
Private placements Australia 36 8 38 11 7
Some distressed debt
Equity-linked notes India 21 36 38 5 opportunities
Other
Japan 17 8 43 18 14 Few distressed debt
11% Share-backed financings opportunties
South Korea 16 5 58 18 3 No distressed debt
opportunities
Thailand 15 8 63 13 1

68% Hong Kong 6 11 66 14 3

Malaysia 5 3 80 10 2

Taiwan 4 12 71 10 3

Vietnam 2 11 57 11 19

Philippines 22 70 22 4
• Similar to last year’s findings, an overwhelming majority of respondents Singapore 13 69 19 8
said refinancings will offer the lion's share of distressed situations in 2010.
New Zealand 2 80 15 3
The number of respondents expecting distressed situations to arise out of
refinancings increased from 61% last year to 68% this year. 0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents
• 11% of the respondents expect LBOs to be the most likely source of
distressed products in 2010. One respondent said he felt LBO situations
in Australia would be particularly affected. • China, Indonesia and Australia are again at the top of the list of
• The number of respondents who expect private placements to be the most countries expected to witness significant levels of distressed debt
likely sources of distressed products has more than halved to 6% in this opportunities of debt to emerge in the coming year. However, in last
year's survey, down from 15% in last year’s edition. year’s report the clear majority believed that these countries would
offer significant distressed debt opportunities, while in this year’s
report more respondents state that they see only some distressed
“Whilst there are undoubtedly numerous distressed debt opportunities.
situations in China, we are yet to see many investors buy • One respondent stated that “export-oriented countries” would offer
into distressed debt with a view to forcing a restructuring the majority of distressed debt opportunities and added that this is
where firms are looking for debt financing in a short time frame to
on the debtor and shareholders. To the extent that meet their needs”.
opportunities exist, it is more likely to be found in funding
• In relation to China, which overall is seen as the country that will
shareholders in buying debt back at a steep discount,
offer most distressed debt opportunities, one respondent said that
given the creditor side execution risks in China.” “there will be countries like China where there are lots of distressed
situations, but it does not necessarily mean there are opportunities
Scott Bache, Partner, Clifford Chance
for investors”.
• Japan is interesting in that it is a mixed bag: while 17% of
respondents believe the country will offer significant distressed debt
opportunities, 14% believe it will in fact offer no distressed debt
opportunities at all.

3
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SURVEY FINDINGS
A slim majority predict that the amount of China is also predicted to see the largest
defaulted debt in Asia will increase in 2010 increase in defaults say 49% of the respondents

Do you expect the amount of defaulted debt in Asia (inclusive Which countries do you expect to see the largest increase
of Japan and Australia) in 2010 to: in defaults?

Increase
China 49%
Remain the same

28%
Decrease
Indonesia 26%

49%
Japan 23%

Australia 17%

India 16%

Korea 5%
23%
Vietnam 2%

Thailand 2%

• Just under a half (49%) of respondents expect that the amount of Philippines 1%
defaulted debt in Asia to increase in 2010.
Malaysia 1%
• One of these respondents took a particularly gloomy view saying that
“the recovery is very far away. Many companies are in trouble but did 0 5 10 15 20 25 30 35 40 45 50
not announce it, so they will gradually come up next year”. Another Percentage of respondents

respondent, who also felt that the amount of defaulted debt would (Respondents may have chosen more than one answer)

increase, put his opinion in context saying that while he felt it would
increase “the rate would be slowing down”.
• Meanwhile, 23% of respondents said they expect the amount of
defaulted debt in Asia to remain the same. One of those surveyed said
that “the worst [was] over in 2009”.
• At the other end of the spectrum, over a quarter of the respondents
predict that the amount of defaulted debt in Asia will decrease in 2010
with one respondent even saying that “most of the problems [have
been] resolved by government”.
• 49% of those surveyed believed that China will see the largest increase
in defaults. One of those who responded this way linked their opinion
specifically to performance in the property sector.
• Indonesia, a country that already sees a fair share of distressed debt
situations, is expected by 26% of the respondents to see the largest
increase in defaults in the coming year.
• Only 2% of the respondents believed that Vietnam will see the largest
increase in defaults, explaining that “local investment pools are small
[and it is] not easy to raise money”.
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SURVEY FINDINGS
Australia is predicted to see the smallest Tellingly, 46% of those surveyed believe
increase in defaults, but interestingly compared that Australia will offer the most attractive
to the previous chart, 21% of respondents distressed debt opportunities, followed
believe it will in fact be China by China
Which countries do you expect to see the smallest increase Which countries offer the most attractive distressed debt
in defaults? opportunities?

Australia 49% Australia 46%

China 21% China 33%

Japan 19% Japan 20%

India 11% Indonesia 20%

Singapore 6% India 9%

Indonesia 4% Korea 6%

Taiwan 3% Singapore 3%

New Zealand 1% Malaysia 2%

Vietnam 1% Thailand 2%

Brunei 1% Vietnam 1%

0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50
Percentage of respondents Percentage of respondents
(Respondents may have chosen more than one answer) (Respondents may have chosen more than one answer)

• 49% of those surveyed believe that Australia will see the smallest
increase in defaults. One of those surveyed linked his opinion to the
mining boom experienced by Australia.
• Despite being described by so many people as the least likely country
to see an increase in defaults, 46% of respondents believe that
Australia will offer the most attractive distressed debt opportunities.
One of these respondents qualified his statement by linking it to the
local legal system that meant that distressed debt opportunities in
Australia, as well as in Thailand, Korea, Malaysia and Singapore,
were most attractive.
• One respondent who invests in Asian distressed debt said “I actually do
not think Asia is a good place to invest in distressed debt. The laws
and situation on security is just not good enough to protect investors.”
• Interestingly, this question also elicited the response that opportunities
are “more corporate-specific than geography [related]”.

5
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SURVEY FINDINGS
The majority of respondents see light at the Opinion is almost evenly split between those
end of the tunnel and expect sustainable who predict a W- and an L-shaped global
recovery within a year economic recovery

When will the global economy enter a sustainable recovery? What kind of global economic recovery do you think is being
experienced, or will be seen?

6% 7%
6% Already underway W-shaped
6 months L-shaped
29% 15%
1 year V-shaped
2 years 40% U-shaped
3 years
20%
Longer

8%

38%
31%

• The majority of those surveyed believe there is light at the end of the • The jury is out on what kind of economic recovery will be experienced:
tunnel. 28% of those surveyed believe that a sustainable recovery of 40% of respondents expect a W-shaped recovery, while a similar number
the global economy is already underway, while 8% and 31% believe of respondents (38%) expect recovery to be L-shaped.
that is will happen within six months and one year respectively.
• Those in the L-camp further say that they expect a “painfully slow recovery”
• However, while many of those surveyed are fundamentally optimistic, and that they foresee “strong growth and a slow steady recovery which will
there are still words of caution. be over a longer period of time”.
• One of those surveyed – a person who feels that sustainable recovery • Meanwhile, those in the W-camp say the “back-end will not be as low as
is already underway – qualified his statement by saying that recovery before” and predict that the “second dip will be less severe”.
is “only underway in Asia” and that “in US and Europe they're just
printing money”.
• Meanwhile, one respondent who expects sustainable recovery to take
place in a year’s time also says that the world economy is currently
“at a stage of balancing” and that we will “probably see a more
sustainable recovery around [the] second semester of 2010”.
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SURVEY FINDINGS
An overwhelming majority of respondents An overwhelming majority of respondents
believe the Asian economies will outperform (91%) believe that structured loan products
those of the US and Europe in 2010 available to investors in the 2006-2008
period have not provided adequate protection
to creditors
Will Asian (excluding Japan) economies outperform the Have the structured loan products, such a private placed loans
economies of the US and Europe in 2010? (inclusive of pre-IPO debt and share-backed loans) that were
available to investors in the 2006-2008 period provided
adequate protection to creditors?
5% 9%
Yes No
No Yes

95% 91%

• An overwhelming majority (95%) of respondents expressed their confidence
in the Asian economies and believe they will outperform the economies of
the US and Europe.
• One of the respondents explained that this recovery would be “centred
around China” explaining that the “Chinese government has the ability to
present [its] views on how the global system works” and is “quick and
decisive to react”.
• Meanwhile, another cautioned that “much of Asia's growth in recent years
can be attributed to exports, but since the decline in the US dollar and
consumer market, Asian countries will have to look for other ways to
boost GDP”.
• Of those surveyed, 91% said they felt that structured loan products
available to investors in the 2006-2008 period have not provided
adequate protection to creditors; only 9% felt this was the case.
• Of those who felt that these products did not offer adequate protection
to creditors, some had very harsh words to say. One said that “some …
are out-right frauds” while another commented that “the jurisdiction in
China inevitably leads to inadequate protection”.

7
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SURVEY FINDINGS
The majority of respondents do not believe
that having security pledges over shares and
other collateral in India, Indonesia and China
is effective
Have security pledges over shares and other collateral in India,
Indonesia and China proved as effective as had been expected
when loan deals were entered into?
The majority of respondents attribute the
difficulty of enforcement rights over security
in these structures to regulatory restrictions
against lending
To what do you attribute the difficulty of enforcement rights
over security in these structures?

6%
No Regulatory restrictions
against lending 57%
Yes

Dysfunctional judiciary
52%
and/or corrupt government

Inadequate structuring 44%

Poor documentation 31%

Poor due diligence 17%

94%

Inefficient, disorganised
creditor group 7%

• Of those surveyed, 94% feel that security pledges over shares and
other collateral have been effective when making investments in India, Nefarious debtor tactics 1%

Indonesia and China.

• Those that believe they are ineffective have been outspoken with their
criticism. One investor says that “the pledges are worth nothing" while
another said that “lending criteria need to be re-thought as movement
and values of equities [are] too rapid, [it] does not give them any
protection and so in practice it does not work”.
0 10 20 30 40 50 60
Percentage of respondents
(Respondents may have chosen more than one answer)
• 57% of respondents claim that regulatory restrictions against lending
pose the greatest difficulty of enforcement rights over security.
• On the flip side, only a very small number of respondents (1%) believe
that nefarious debtor tactics create the difficulties.
• In the comments, many respondents mentioned China and the fact that
in this country many different problems make the process additionally
difficult. One interviewee said that the insolvency laws are quite
new and one of the most problematic issues is a dysfunctional judiciary
where implementation and interpretation of these laws [differs] between
different provincial areas”. Another said that “there are a lot of political
issues” and as an example added that “bankruptcy laws in China make
it difficult for offshore parties, while the structures of lending are very
complicated for deals”.
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SURVEY FINDINGS
The majority of those surveyed have 20% There was a surprising response to
or less of the loans and/or bonds in their the question regarding the success of
portfolio in payment default or in breach troubled loans which have been restructured
of one or more covenants or resettled
What percentage of loans and/or bonds (including CB and What percentage of troubled loan and/or bonds in your
exchangeable bonds) in your portfolio(s) could be classified as: portfolio(s) have been successfully restructured or settled?

0-20%
11%
21-40% Less than 10%
In payment default 65 18 10 4 3 41-60% Up to 25%
7%
61-80% Up to 50%
81-100% More than 70%
Not applicable
In breach of one 13%
50 23 20 4 3
or more covenants
57%

0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents 12%

• 65% of those surveyed say that 20% or less of their loans and/or bonds
in their portfolio are in payment default while 50% say that 20% or less
of their loans and/or bonds in their portfolio are in breach of one or
more covenants.
• At the top end of the scale, a mere 3% responded said that 81 to 100%
of the loans and/or bonds in their portfolio are in payment default or in
breach of one or more covenants.
• Given that around 75% of those surveyed are in some way credit
investors, it is surprising to see that 57% of respondents stated that
this question does not apply to them. The implication is that these
investors have no loans or bonds in their portfolios that are in some
way in default.

9
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SURVEY FINDINGS
Another surprising response… An overwhelming majority of respondents
claim they have adequate resources to deal
with problem debtors

At present, what percentage of resources does your fund Does your fund or bank have adequate resources to deal
devote to negotiating debt restructurings and/or settlements? with problem debtors?

1%
13%
Less than 10% Yes
Up to 25% No
Up to 50%
More than 70%
Not applicable
20%

54%

12%

1% 99%

• For those who admit to having defaulted loans and bonds in their • Almost all of those surveyed (99%) say that their fund or bank
portfolios, it seems that working out settlements and or restructurings has adequate resources to deal with problem debtors.
does require considerable time and resources: 20% stated that
negotiating restructurings/settlements took up 25% of their resources;
and another 12% said this took up to 50%.
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SURVEY FINDINGS
Majority of respondents have 40% or less Roughly the same amount of respondents
of their funds currently dedicated to making expect there to be more or the same amount
new investments of leverage in their portfolio in 2010

What percentage of your fund’s resources are presently dedicated Do you anticipate using more, less or the same amount of
to making new investments? leverage in your portfolio in 2010?

11%
0-20% More
22%
21-40% Same amount
9% 29% 41-60% Less
61-80%
38%
81-100%
6% No specific amount

19%

26% 40%

• The majority of respondents have 40% or less of their funds currently
dedicated to making new investments – 29% say that up to 20% of their
funds are allocated in such a way and another 26% say that is it between
21% and 40% of their funds.
• The rest of the respondents say it is over 40% but a noteworthy 11% say
that no specific amount that has been set aside to make such investments.
• One of the respondents who said that up to 40% of his funds investments
are currently dedicated to making new investments explained that in the first
semester of 2009 “a minimal amount [was put] towards investments [but in
the] second semester huge improvements in percentage [were made]”.
• Roughly the same amount of respondents expect to have more or
the same amount of leverage in their portfolio in 2010 – 38% of
those surveyed say it will be more, while 40% say it will be the
same amount.
• One of those who said it will be more put the sum into context
explaining that it will not be “up to the 2007 level”. Another said
that “companies are looking for some good opportunities to work
with and since lending banks will start to loosen up a little, leverage
may increase”.

“Until arrangers and investors start insisting on minority

equity type protections onshore, particularly in China,
Indonesia and India, they will continually be disappointed
and frustrated with the lack of traction an offshore security
package gives them in a distressed situation. Frankly, if
you're not lending against the assets onshore, you are in
effect subordinated equity.”
Scott Bache, Partner, Clifford Chance

11
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SURVEY FINDINGS
Majority of respondents say that less Compared with the US and Europe, a majority
than 25% of distressed debt situations of respondents say that in Asia IRRs are higher
in Asia they have explored in 2009 have
represented an actionable and attractive
investment opportunity
Excluding advisory work, what percentage of distressed How does the Asian market (excluding Japan and Australia)
debt situations in Asia that you have explored in 2009 compare to the US and European markets?
have represented an actionable and attractive investment
opportunity to your bank/investment fund?
2%
9% Less than 25% IRRs higher
20%
26-50% IRRs are similar
51-75% IRRs are lower
76-100%

30%
55%
59%
25%

• Excluding advisory work, 59% of respondents say that less than 25%
of the distressed debt situations they have explored in Asia in 2009
have represented an actionable and attractive investment opportunity.
• One of the respondents even put the figure as low as 5% saying that
the market has not been “attractive” and added that the “global
economy has been terrible”.
• A clear majority of those surveyed feel that, in Asia, internal rates of return
are either higher or on par with those made in the US or the European
markets, 55% say they are higher, while 25% say they are the same.
• One respondent, among the 20% of respondents who believe IRRs are in
fact lower, says that emerging markets are over-hyped. He adds, “What
you see is not always what you get.”

“Given the distinct advantage that shareholders have

over foreign creditors in many distressed situations,
this is hardly a surprising result. Generally, if it's not
a financial sponsor owned borrower or a distressed
situation in Australia there are few, if any, attractive
opportunities to get involved in distressed situations
at the moment in Asia. To be successful, you need
leverage over the shareholders and management over
and above your rights as a creditor.”
Scott Bache, Partner, Clifford Chance
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SURVEY FINDINGS
A clear majority of respondents said that the The majority believe that less than 25%
majority of opportunities in distressed debt of restructurings/settlements in 2010 will
investing in 2010 will come from trading in be dealt with via a debt rescheduling
secondary debt with haircuts

Opportunities in distressed debt investing in 2010 will What percentage of debt restructurings/settlements in
come mostly from: 2010 do you expect to come from:

3% 76-100%
9% Trading in secondary debt Debt rescheduling 58
11 14 32 9
51-75%
Private equity
26-50%
Buying debt at discounts
with a view to participating Exchange offers 21 15 36
0-25%
in the debtor’s restructuring
Funding sponsor-led debt
23% buy backs Debt buybacks 22 33 42

Debt-to-equity
25 59
conversion

Asset sales 13 80
65%

Covenant resets 22 60

Convertible/
15 73
• A strong majority of those surveyed (65%) expected the majority of exchangeable bonds
opportunities in distressed debt investing in 2010 will come from trading Debt rescheduling
6 84
in secondary debt. with haircuts

• Only a small group (3%) expected funding in sponsor-led debt buy backs 0 10 20 30 40 50 60 70 80 90 100
to offer the majority of opportunities. Percentage of respondents
(Respondents may have chosen more than one answer)
• In addition, one of the respondents said that he felt many opportunities
“would be event-driven” and related to “rescheduling”. Another raised the
“possibility the Limited Partner market will surface more in the coming year • An 84% majority believes that less than 25% restructurings/settlements
although this market is not that mature”. in 2010 will be dealt with via a debt rescheduling with haircuts.
• Meanwhile 11% of respondents believe that over three quarters of
restructurings/settlements in 2010 will be addressed via basic debt
rescheduling, while 21% believe over three quarters will be via
exchange offers.
• One of these respondents said, “we'll see debt buybacks with
discounts... and refinancing with lower coupons (say 10% to 6%)”.

13
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SURVEY FINDINGS
The majority expect money for distressed In China, creditors are widely expected to
investments to come from existing hedge fund face the greatest difficulties in exercising
investors/prop desks that have been able to and enforcing their rights over security
obtain new commitments or mandates
Where will the money for distressed investments come from? Which country do you think is most difficult for creditors
to exercise (or enforce) their rights over security?

China 75%
Existing hedge fund investors/
prop desks that have been able 60%
to obtain new commitments Indonesia 27%
or mandates

India 6%

Vietnam 4%
Newly set up funds 49%

Philippines 3%

Thailand 2%

US and European funds

18%
Malaysia 2%
that have decided to enter
Asian markets
Japan 2%

0 10 20 30 40 50 60 0 10 20 30 40 50 60 70 80
Percentage of respondents Percentage of respondents

(Respondents may have chosen more than one answer) (Respondents may have chosen more than one answer)

• While the majority (60%) of respondents believe that money for
distressed investments will come from existing hedge fund
investors/prop desks that have been able to obtain new commitments
or mandates, 49% also believe that it will in fact come from newly
set up funds.
• A small group of people (18%) also believe that additional cash will
come from US and European funds that have decided to enter the
Asian market.
• 75% of respondent say that creditors will find it most difficult to exercise
and enforce their rights over security in China.
• Investments in Indonesia are expected by 27% of the respondents to pose
similar problems to creditors.
• One respondent compared the two countries saying that “we've only seen
one of two cases in Indonesia with problems, but things are much worse
in China. The legal framework is simply not transparent enough.”
• One survey participant commented, “In Asia there are basically three classes
of countries - well developed (HK, Singapore, and Australia); then there are
the alright ones: Japan, Malaysia and maybe Korea. Then there are ones
that would ruin investors: China, India, and Indonesia”.

“We are slightly more positive on Indonesia than the

survey participants. We are seeing some interesting
opportunities in Indonesia, especially where investors
are teaming up with an Indonesian partner who can
manage the onshore execution risk. That probably
stems from less domestic debt funded capital being
available in Indonesia than China.”
Scott Bache, Partner, Clifford Chance
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SURVEY FINDINGS
Accordingly, China will also bring the most Legal advisors are the first to be called
significant challenges for creditors looking when an investments has defaulted
to enforce their rights in the courts

Which country poses the most significant challenges for Rank in order of priority the parties you would contact
creditors looking to enforce their rights in the courts? when one of your investments has defaulted:

China 74% 1st priority

Legal advisor 63 28 9 2nd priority
3rd priority
Indonesia 28%

Financial advisor 22 41 37
India 6%

Vietnam 4% Investors/ 15 36 49
Other creditors

Philippines 2%
0 10 20 30 40 50 60 70 80 90 100
Percentage of respondents
Thailand 3%

Malaysia 3% • Should one of their investments default, the majority of respondents

(63%) would first call their legal advisors. Second priority in such a
Japan 2% situation is the financial advisor, according to 41% of those
interviewed. Investors and other creditors would be the last to be
0 10 20 30 40 50 60 70 80 called, say 49% of those surveyed.
Percentage of respondents

(Respondents may have chosen more than one answer)

• Once again, China leads the way in terms of challenges for distressed debt
investors. A clear majority of 74% of the respondents feel that creditors
looking to enforce their rights in the courts in this country will face the
most significant challenges.
• One respondent says in relation to China that the “situation has not improved
for the past year, nor do I expect to see it do so in the coming year”.
• Continuing on from the previous chart, Indonesia too will be a difficult
environment. 28% of our respondents expect this country to pose the most
significant challenges for creditors looking to enforce their rights in the courts.
• One of those that would call the lawyers first, explained this decision
by saying that “in particular emerging countries legal advisors can
give very useful advice”.
• One respondent also pointed out that “logically...I'll contact the
defaulting company first”.
“Given the legal obstacles to getting the debtor to
the table, this is not a surprising response. Given
the higher risk for directors in Australia compared
to the rest of Asia, it would be interesting to see the
Australian numbers split out as it would be more
likely that financial advisor would be just as likely
to get the first call because the directors are more
likely to act responsibly. Until the rest of Asia catches
up with Australia in terms of putting the heat on
directors in distressed situations, lawyers will likely
be the first port of call.”
Scott Bache, Partner, Clifford Chance

15
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 18
GUNS N' ROSES AND THE CHINESE
BANKRUPTCY LAW
Scott Bache, Partner, Clifford Chance
In 2008, I suggested that Korea looked like Detroit in the 70s but without the good music.
Searching for a musical analogy this year, it struck me that creditors in
China may be waiting far longer for a fully-developed bankruptcy regime
than the 15 years that Guns N' Roses fans waited for the band's widely
anticipated, but generally underwhelming, latest album.
Like the album, the Chinese bankruptcy law came out in mid-2007
amidst great hype.
Reforming the law was a great start but, after two years in force, it can
still only be considered a roughly cut demo knocked out by a band with
excellent intentions but lacking the experience and technical skills to
warrant a major label release.
So let's examine a few tracks that I have listened to so far, and see how
they stack up.
First off the rack is an upbeat rocker called FerroChina. It started off
encouragingly enough but stopped and started. It eventually left the
listener encouraged, but ultimately looking for a more satisfying ending.
For those new to China, the first thing that needs to be appreciated is
that political considerations come before rigid enforcement of the law.
Sometimes this can be a good thing, and FerroChina is a prime example.
When FerroChina's Taiwanese management left China, the local authorities
and banks were quick to act and appointed an administrator. This was
a very good thing for all concerned.
In China, local creditors and employees often implement self-help
remedies – in the most literal sense of the words – as soon as the first
signs of distress become apparent. Ask any Hong Kong-based insolvency
specialist of their experience of these sorts of situations and they will
provide countless examples of turning up at a Chinese factory to find the
business has been torn apart.
In FerroChina, the quick appointment of the administrator allowed the
premises to be physically secured before any damage could be done.
Also, by stepping in and funding employee wages for a period of time, the
local government completely avoided the sort of social unrest that could
devastate any city that relies on a few big businesses as its life blood.
This undoubtedly preserved value for local and foreign creditors alike.
Another point in the process's favour was that, whilst there were some
practical difficulties in the foreign and local creditors working together,
there was never a suggestion that foreign creditors with onshore rights
would be treated differently to local creditors. Moreover, the foreign
creditors with the benefit of security got the preferential treatment that
they contractually deserved in the final plan.
So what is this track lacking, you ask? It has to be the thumping bass line
that anchors so many great songs. As many of you know, the key to any
successful restructuring is a rigorous process that enables stakeholders to
ascertain where the value breaks in the capital structure.
Overall, the administrator did a good job in balancing stakeholders' interests.
That said, offshore creditors were not given a real opportunity to test the
market to see if the value broke in the offshore part of the capital structure.
It may well have been that it didn't, as at the time many of the logical foreign
parties who might have been interested in acquiring the assets had their own
difficulties that would have prevented them from making a bid and putting
some competitive tension into the process.
The reality is that the last 12 months has been a terrible time to sell anything,
but by not opening up the sale process more vigorously to foreign investors,
we will never know for sure that the value did not break offshore.
In my view, whilst the end result may well have been the same, by not testing
the market more rigorously, China lost an opportunity to demonstrate that it
was truly concerned about driving value for all stakeholders in a distressed
situation, regardless of whether that value lay in China or offshore.
Let's turn to the second track, the controversial Asia Aluminium. AA is a punk
rocker that has left music lovers largely divided. Some hate it, saying that the
process, similar to FerroChina, lacked any transparent process to determine
value and was ultimately a disaster for foreign creditors.
Whilst I agree that the process lacked the sort of sophistication that one would
like in a distressed deal, the ultimate result may well have been very good for
foreign creditors. Undoubtedly, it was a tough song to listen to, but those who
stuck with it did get some reward – and that is often not the case in China.
At the time, AA's provisional liquidators were criticised for not creating more
competitive tension in the process and practically delivering AA to
management on a silver platter.
On closer scrutiny that criticism seems unwarranted – because while the
provisional liquidators may have produced the track, they did not write the
song or have much control over the musicians.
As in many cases, the provisional liquidators were given only a modicum of
co-operation by management in China, so it was very difficult for potential
foreign bidders to conduct the sort of due diligence that they would expect
when considering such a substantial acquisition.
Moreover, the local authorities and banks made it clear from the outset that
a management buyout was their preferred option, and major concerns existed
about social unrest – AA had about 10,0000 employees.
As a result, a tight time limit was given to the provisional liquidators to find
a buyer – with the prospect of an onshore bankruptcy if a buyer with a largely
unconditional offer was not accepted by 30 June 2009.
What could the provisional liquidators do in such circumstances? Management
was offering approximately US$100 million to offshore stakeholders and there
was a real risk that the offer would fail if AA's onshore subsidiaries were
placed into administration.
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 19

GUNS N' ROSES AND THE CHINESE BANKRUPTCY LAW

The only thing they could do was to make the management bid non-exclusive,
thereby allowing a better bid to come in at the last moment. Of course,
another bid was not forthcoming – given the circumstances, making an
unconditional bid would have been suicidal.
However, the provisional liquidators should not be criticised, as they at least
gave the market the opportunity to test management's resolve by making a
higher bid.
So what to make of this track? If you look purely at the numbers, I am not
aware of another distressed situation in China in recent times where so much
value has been paid to the offshore part of the capital structure.
However, I have to agree that it was a very tough listen and that the process was
far from satisfying – but ultimately not off the mark for a China restructuring.
So to the last track I have heard recently. For copyright reasons, I can't name
this song but let's just say it is practically unlistenable to foreign music lovers.
My daughter's school band knocks out music more worthy of international
release than this little ditty.
In this particular case, the administrator has refused to take advice on
foreign law even though the company has entered into a number of contracts
with foreign parties governed by foreign laws. He has also sought to apply
Chinese law to these contracts – and appears to have got the Chinese law
wrong as well.
It appears that the administrator sees his job as being to actively reduce the
quantum of claims when there is no credible basis for doing so. This is
completely at odds with the approach taken by liquidators in just about every
country on the planet.
By refusing to acknowledge the governing law of contracts and refusing to take
appropriate local law advice, he is undermining the basis of what could be, in
time, a bankruptcy law in which foreign investors could have some degree of
confidence. This track is a disaster and without a substantial rewrite will never
be worthy of release.
One of the respondents to this year's survey commented that one of the biggest
problems in China is that the implementation and interpretation of the Chinese
bankruptcy laws differ between provinces. This one comment alone sums up
the real difficulties encountered in China more than all others.
In my view, it may take far longer than the 15 years that Axl Rose spent
perfecting his last album to develop the level of sophistication and certainty
required to make China's bankruptcy law truly worthy of an international release.
The law will get there, eventually, but it will be a long and hard process. So,
until we get there, foreign investors should make themselves "Welcome to The
Jungle" that is distressed debt in China.

17
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 20

A COMPLETE SERVICE ACROSS ASIA

Clifford Chance provides the full range of restructuring and insolvency services throughout Asia.
Our award-winning team has acted on many of the most important restructuring and insolvency
matters in the region this year.
With over 30 restructuring and insolvency lawyers based in Asia, supported by another 100
lawyers in 18 offices worldwide, we provide a multi-lingual English, US and civil law service,
as well as local law advice wherever regulations permit.

Experienced in restructuring from every angle

We have extensive experience of voluntary and involuntary Clifford Chance has advised on all aspects of restructuring and
restructurings – having acted for both creditors and debtors, we insolvency transactions; including:
understand the tension points that often arise during a restructuring • reschedulings • voluntary reorganization
and are well placed to guide our clients to ensure that their interests
• loan-to-own transactions • court-driven rehabilitation
are best served.
implemented through • receiverships
As Asia has become more open to non-bank, non-relationship debt-for-equity swaps • voluntary and compulsory
based participants, our involvement in these complex cross-border • distressed M&A liquidations
restructurings has meant that we know and act for some of Asia's • schemes of arrangement • bankruptcy
most active distressed debt investors.
• administration

For more information, please contact any of the individuals listed

on page 24.

ABOUT CLIFFORD CHANCE

International law firm Clifford Chance combines the highest global standards with local
expertise. Leading lawyers from different backgrounds and nationalities come together as one
firm, offering unrivalled depth of legal resources across the key markets of the Americas, Asia,
Europe and the Middle East.
The firm operates across Asia, with offices in Bangkok, Beijing, Hong Kong, Shanghai, Singapore
and Tokyo. With over 350 lawyers in Asia alone, it is one of the largest international firms in the
region, enjoying a market leading reputation across a number of practices.
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 21
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 22

LOOKING AHEAD TO 2010

Robert Schmitz, Managing Director, Head of Restructuring and Debt Advisory, Asia, Rothschild

To many Asian corporates, the headlines in the last few months have been reassuring. It’s the
end of the global recession they are told and Asia is recovering especially well. The markets
are also giving very positive signals: most Asian indices have bounced back spectacularly and
investors having been piling into rights issues and CB offerings. The debt markets seem to be
welcoming back borrowers too, judging by the spate of high yield bond issues, and loans being
provided by commercial banks in the last few months. Indeed, even some LBO deals have
completed in the last several months.

It is in this environment that Rothschild is advising clients that they
should continue taking a cautious view.
From Rothschild’s point of view, the outlook for 2010 is more complex
than the previous two years. In 2008, it was not that hard to foresee a
downturn. We had falling leading indicators, inverted yield curves, and
extensive data pointing to a recession. In November last year, while the
markets were in the midst of a “Black Swan” event, the outlook was
virtually a “one-way trade” towards massive distress.
Coming into 2010, as this survey shows, the mood among many investors
is either careful or pessimistic. There is considerable doubt that the US
Federal Reserve will be able to sustain the massive growth of its balance
sheet, and hence its support for the economy in the years ahead. Japan’s
rise as the most indebted sovereign among the G8 countries also raises
questions as to how far the country’s government can support its financial
system and increasingly troubled corporates. The recent spike in both US
and Japanese bond yields underscores that US and Japanese governments
will increasingly find that the printing presses cannot run as fast and as
hard as they did over the last year.
Over the next few years, a massive amount of debt will be due for
refinancing in Asia and the rest of the world. We have already seen
attempts to refinance or restructure those facilities, and while some have
been very successful, many of the fixes that have been achieved are
largely band-aid solutions.
Take for example, the kind of exchange offer that proposes that principal
outstanding on the notes be reduced, but that the borrower accept, as
a quid pro quo, a substantial hike in coupon rates. Here, the borrower
has improved the look of its balance sheet but has also taken on the risk
that it will not be able to service its coupon payment obligations when or
if its market or the economy fails to recover as much as anticipated.
Covenant resets made for many LBO financings have also done little to
address the issue of unsustainably high leverage. How will these facilities
be refinanced when they mature?
Companies that need to restructure and recapitalize might be encouraged
that commercial banks are lending, but these institutions have gone back
to conservative lending practices and are largely lending only to top credits.
Given banks’ lending practices, it is worth noting that, in some sectors,
debtors’ financeable, or shall we say, real balance sheets, have contracted
by even 30% the value of their underlying assets.
This is especially relevant given that there remains considerable global
overcapacity in many manufacturing sectors, and that consumer demand,
amid rising unemployment in G8 countries, could be anaemic for years
to come.
In this environment, asset based lending could continue to be constrained.
And if the V-shaped economic recovery that some assume is underway
instead turns into an L-shaped or indeed W-shaped cycle, then bank creditor
committees will tighten even further their grip on bank lending polices.
As has been seen from some of the failed or recalibrated offerings in Asian
high yield bond markets latterly, investors are still very cautious: companies
that have chequered credit histories are either having to pull their deals or
think about different ways to fund.
Asian equity markets might continue to provide for refinancing/recapitalization
needs for a while longer, but as more cash calls are made and if investors are
disappointed by earnings, that window could start to shut.
Finally, given the rout of the last year, hedge funds will be less able to play
the role of last lender of resort. Certainly, new funds are emerging and some
old funds have been able to raise new capital but given the scrutiny they are
under, their investment practices will have to be much more disciplined and
discretionary than they had been.
All of this is not meant to paint a wholly negative outlook for 2010, but
rather, as we stated earlier, to note the need for corporates to anticipate the
problems that could emerge ahead. Certainly, the world’s central banks and
governments have prevented the world from sinking into what could have
been a global depression. A base for the world’s economies has been set and
businesses are better able to see into the future. Also, policies that have been
put in place just might be successful in keeping economies well supported in
2010. But the longer term outlook remains quite uncertain, especially if the
source of this year’s recovery - the seemingly endless flow of funds from
central banks, starts to dry up.
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 23
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 24

ABOUT ROTHSCHILD
Rothschild is a leading independent advisor on corporate strategy, mergers and acquisitions,
debt and equity financing, restructuring and privatizations. Rothschild’s objectivity, its
global network, and its commitment to a relationship-driven approach, combine to create
value for its clients; building value through stability, integrity and creativity. Rothschild is,
through its 1,000 advisory bankers, the trusted advisor to corporates, individuals and
governments worldwide, often on a repeat basis.
Globally, Rothschild has one of the largest independent restructuring and capital markets
practices. The Asian restructuring and debt advisory arm was established in 2006 with
dedicated bankers based in Mumbai, Singapore and Sydney.
Rothschild acted as exclusive financial advisor to the principal Indian lenders in the Dabhol
power company restructuring, one of the world's most complex restructurings. Rothschild
also advised Lehman Brothers (Asia) on its sale to Nomura. At present, it is the exclusive
independent financial advisor to Garuda Indonesia, PT Arpeni, Suzlon, Semen Gresik and
Air India.
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 25

CONTACTS

CONTACTS
Rothschild

Robert Schmitz Alister McConnell

Managing Director, Head of Restructuring and Debt Advisory, Asia Managing Director
T: +65 6531 1437 T: +61 2 9323 2303
F: +65 6535 9109 F: +61 2 9323 2040
E: Robert.Schmitz@Rothschild.com E: Alister.McConnell@Rothschild.com

Robert has over twenty nine years' experience with corporate
finance, and credit, derivative and capital markets transactions
in North America and Asia. Since 1990 Robert has specialized in
capital restructuring. He frequently represents shareholders and
managements of companies with complex insolvency and fund
raising issues.
Alister joined Rothschild in January 2009, heading up
Restructuring and Debt Advisory in Australia. Prior to this
he established Grand Samuel's independent debt restructuring
and advisory business from 2003 and worked for the Australia
National Bank.

Rakesh Singh Michael Yao

Director Managing Director
T: +91 22 4081 7026 T: +852 2116 6350
F: +91 22 4081 7001 F: +852 2810 6997
E: Rakesh.Singh@Rothschild.com E: michael.yao@rothschild.com

Rakesh is the head of debt advisory and restructuring based in
Mumbai. He recently joined Rothschild from Morgan Stanley where
has was responsible for principal investments in India. He has
previously worked with Merrill Lynch and Standard Chartered Bank
and has over 16 years of experience in fixed income capital markets,
structured finance and leveraged finance.
Michael has over 19 years experience in capital markets,
strategic advisory and mergers and acquisitions having worked
in the United States and Hong Kong where he has been based
since 1993.

www.rothschild.com

23
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 26

CONTACTS
Clifford Chance

Scott Bache Donna Wacker

Partner, Hong Kong and Head of Asian Restructuring Partner, Litigation,
& Insolvency Group Hong Kong
T: +852 2826 2413 T: +852 2826 3478
F: +852 2825 8800 F: +852 2825 8800
E: scott.bache@cliffordchance.com E: donna.wacker@cliffordchance.com

Scott specialises in finance and securities matters with a
particular emphasis on corporate restructuring, distressed
mergers and acquisitions, and special situation investments.
He regularly advises on insolvency issues, security enforcement,
distressed debt trading and general banking litigation.
Donna specialises in insolvency, banking and commercial litigation,
security enforcement and regulatory matters (both contentious
and advisory).

Matthew Truman Nish Shetty

Partner, Finance, Restructuring and Insolvency, Partner, Singapore, and Head of South East Asian Arbitration
Hong Kong and Dispute Resolution
T: +852 2826 3497 T: +65 6410 2285
F: +852 2825 8800 F: +65 6410 2288
E: matthew.truman@cliffordchance.com E: nish.shetty@cliffordchance.com

Matthew specialises in complex financing, with particular
experience and expertise in banking, restructuring and insolvency.
He has worked on some of the most complex restructurings in Asia
this year, in addition to advising clients on early-stage refinancing
in response to market conditions.
Nish is regarded as a leading expert in the field of dispute resolution,
in particular in arbitration, restructuring and insolvency. He has
advised on many of the most complex cross-jurisdictional disputes
in south and south east Asia in recent years, including insolvency,
restructurings, receiverships, judicial managements and liquidations.

www.cliffordchance.com
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 27
MER 1097 Asia-Pacific 2010 AW4.qxd 25/11/09 14:09 Page 28

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This publication contains general information and is not intended to be comprehensive nor to
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This publication is not a substitute for such professional advice or services, and it should not be
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