Does China crack?
The growth of turnaround as a profession in Asia and its use in work out strategies for financial institutions.
Cracks are emerging in the Asia growth story. A lack of capital, declining growth and profitability and less aggressive creditor banks are creating an environment of inefficient enterprises that survive, but do not prosper. No longer hidden by dividend distributions, longstanding shareholder disputes, magnified by cultural differences, are now emerging.
Corporate bond maturities in Indonesia, Singapore and China are hitting a peak from 2017 to 2019.NPLs, when they are recorded, are only increasing.In China, underground banking is estimated to total almost a third of official banking activities, certainly a new perspective on Fintech.
Businesses and their stakeholders need to address underlying operational and structural issues, rather than simple debt rescheduling. This includes negotiating with their creditor banks and bond holders.
Creditor banks and bond holders need to act strategically and manage a possible credit crunch and counter party risk.This can be achieved by implementing processes and systems and acquiring the human resource to navigate this challenge, including outsourcing.
Hedge funds will see this challenge as a significant financial opportunity.
The gap in available legislative tools to stakeholders in distressed businesses in Asia and specifically in Hong Kong and China, coupled with this increasing demand for change management has resulted in a growing trend for transformation and turnaround strategies as opposed to insolvency based strategies. Today, a distressed workout in Asia will culminate in either a consensual restructuring or liquidation (often with little recovery).
As a result, transformation and turnaround professionals are emerging, distinct from insolvency practitioners.
As a counter to this, a group of transformation and turnaround professionals established the Asia Transformation & Turnaround Association ("ATTA") in 2010 in conjunction with the support of the UK's Institute for Turnaround ("IfT").
The missing ingredient in a genuine turnaround has often been access to capital in order to finance the changes required to business operations, while maintaining a standstill agreement with creditor banks and maintaining trading and staff relationships.ATTA's activity has been complimented by a growth in providers of asset-based lending and private equity funds investing in turnaround opportunities.The Hong Kong and Singapore Courts have accepted the principle of priority in security and risk-related returns to providers of working capital.With private equity looking for quality deals and demanding quality management, access to professionals to mitigate execution risk accredited by ATTA and trusted service providers, presents one of the most interesting counter cyclical growth areas in the region and a viable option for traditional creditor banks to explore.
By: Rupert Purser, CEO Limehouse Consulting & Strategy, based in Hong Kong.