Refinancing risk, opportunity loom in Asia in 2009

By Tony Munroe and Umesh Desai - Analysis

HONG KONG (Reuters) - With nearly $500 billion in debt maturing over the next year and banks forced to be miserly, Asian companies will need to be creative in their search for refinancing, with plenty of defaults expected.

Most blue chips will have little trouble renewing their borrowings, but smaller firms and those in capital-heavy industries like shipping and steel could be forced to find alternative sources of finance.

Non-bank investors with cash on hand such as private equity firms, hedge funds, sovereign wealth funds and even deep-pocketed tycoons are positioning themselves to find bargains where banks may fear to tread.

"The biggest elephant in the drawing room is the refinance trade," said Robert Appleby, chief investment officer at Hong Kong-based ADM Capital, which manages about $2.5 billion in distressed assets and may raise up to $1 billion more to plow into a wave of anticipated opportunities over the coming year.

"You will get widespread delinquencies and you will see some companies going bankrupt and some companies going technically bankrupt -- the land of the living dead," he said.

Growing numbers of companies in Asia have been unable to meet their debt obligations, from Australian investment firm Allco Finance Group to Hong Kong watch retailer Peace Mark to Singapore-listed steelmaker FerroChina.

More are expected to seek debt restructurings or go into default as the financial crisis squeezes banks and their borrowers and the global economic slowdown slashes corporate cash flow, crippling their ability to make loan payments. Volatile stock prices are also making it harder for borrowers to pledge their shares as collateral.

Lenders looking to shrink their balance sheets and ratchet-down risk will have little patience for laggard clients.

"We have already seen bankers taking a tougher line in H2 this year, particularly on highly leveraged borrowers," said Terry Chan, Asia-Pacific credit officer at Standard & Poor's in Melbourne.

COSTLY AND SCARCE

The flow of investment into capital-hungry companies has already slowed to a trickle, in sharp contrast to recent years where sovereign wealth funds and Hong Kong tycoons flocked to Chinese initial public offerings and hedge funds and banks were happy to finance property developers in India and China.

Borrowers hoping to be rescued by a market recovery have miscalculated as financial turmoil deepens and lenders brace themselves for a potentially long and deep global recession.

"Some of these issuers have not managed their maturities as well as they should have -- particularly those who were rolling over their dues in the hope the capital markets would re-open soon," said S&P's Chan.

Would-be investors in debt-strapped companies have mostly kept to the sidelines amid a steady stream of negative economic and corporate news, and will be reluctant to take the plunge until a measure of stability emerges.

Given the risk-aversion that has hit global markets, whatever financing that will be available will not be cheap. The cost of insuring against debt defaults, which investors use to measure and price credit risk, has ballooned in Asia.