HONG KONG (Reuters) - From Chinese non-performing loans to property developers' debt, distressed assets are piling up in Asia and some investors expect a fire sale at least as big as the one during the region's financial crisis of a decade ago.
The few buyers with the cash and the nerve will have their pick of potential bargains on a range of investments that include roughly $500 billion to $900 billion in Chinese non-performing loans, to assets at small family-run firms facing trouble.
Hedge funds have been decimated by the financial crisis, while proprietary desks at investment banks in Asia are pulling back to preserve balance sheets under orders from risk-averse headquarters.
That leaves the field open for hedge funds and other specialists players that had already built up war chests, and means less competition for good assets from distressed sellers.
Many investors expect to find the best bargains in the second half of the year, as the worst global economic crisis in decades is not expected to ease until at least next year.
"For us, it is basically pulling the pages out of the playbook from during the Asian crisis and sitting down with companies to say this is what we have done in the past and what we can do again now," Edan Lee, managing director at Olympus Capital, told the Reuters Private Equity and Hedge Funds Summit.
Unlike the Asian financial crisis a decade ago, the region is unlikely to be rescued by big-spending U.S. consumers, a bad omen for economies such as Singapore and Hong Kong that have already fallen into recessions.
For Laure Wang, co-founder and managing director at fund of private equity funds manager Asia Alternatives, that means economies will suffer more than they did last decade, creating plenty of opportunities, especially in India and South Korea.
"It looks like it's going to get worse to us, but it's going to be a different type of crisis," she said.
Small and medium-sized companies are especially vulnerable. Standard & Poor's last month warned of the liquidity challenges facing emerging corporate Asia, from capital goods to the building materials and automotive sectors.
Proprietary desks at investment banks with distressed assets could be another source of purchases for these players.
"The big banks, which are semi-nationalized now, have to shed more assets, and no matter what plan you come up with, you are still talking about the same thing: these assets have to be shed one way or another," said Christophe Lee, chairman of Alternative Investment Management Association, a hedge fund industry body.
The financial pressures squeezing companies will also lead to a growing pile of non-performing loans (NPL) at regional lenders, which have so far held up well in the global financial crisis.
That is especially the case in China, where the abundance of NPLs is traced back to a legacy of the financial system cleansing early this decade and newly soured commercial and property loans.
Bundles of Chinese NPLs can be bought by the cents to the dollars and can provide returns even if only a small portion are recovered.
"In China there is a critical mass of supply," said Tom Holland, a director at Cube Capital in Hong Kong.
"This cycle is cleaning out a lot of the traditional buyers of (NPLs) and so that means a lot of competition is getting removed."
Debt markets present another opportunity, whether in convertible bonds (CBs) or straight debt. According to ING, $26.5 billion of emerging Asia's corporate debt is at distressed levels, or with yields trading at more than 10 percent.
"We still think there's tremendous value there, in terms of liquidity and the types of companies you can pick up," said Holland at Cube Capital, referring to debt and CBs in Asia.
ING analysts, for example, recommend investors buy into Chinese property developer Greentown China Holdings' 3900.KS 2013 bonds and Shimao Property's (0813.HK) 2016 bonds, both of which are trading substantially below par.
There are plenty of pitfalls for investors, however, including arbitrary enforcement of regulations by governments, especially when investing in Chinese NPLs.
"There are some firms that want to do NPLs throughout the country. We think that's a very difficult strategy. You have to really know the judge sitting at the courtroom and see how they are going to get to your lien and how he is going to enforce it," said Wang at Asia Alternatives.
Smaller companies in Asia also tend to consist of businesses started by entrepreneurs who have built up their businesses with "a lot of blood and sweat," and will find it hard to sell assets, said Lee at Olympus Capital.
"For them to walk way from this successful business ... it's tough emotionally and otherwise," he said.
(For summit blog: blogs.reuters.com/summits/)
Editing by Muralikumar Anantharaman