The alternative perspective

In 2010, most distressed fundraisings and deals transacted in Asia took place in Australia. Lazard Carnegie Wylie Private Equity launched a $91 million fund to buy Australian distressed pubs and hotels in March 2010. Apollo Global Real Estate Management expanded its operations to Asia Pacific last year, with an initial focus on real estate opportunities in Australia. Just this month Blackstone Group, Morgan Stanley and NRDC Equity were shortlisted to acquire debt-burdened real estate major Centro Properties Group, which owns more than 700 Australian, New Zealand and US assets.

According to Shearwater Capital's MD and Co-Founder Gary Stead, the momentum currently seen by the special situations category is largely a lingering result of the crisis, which is due to run out in the coming years. "There's the reality that most of what is distressed is really still legacy positions that were pre-GFC investments," he says.

Case in point, New Zealand's Yellow Pages was hit by a combination of factors that eventually rendered Unitas Capital and the Ontario Teachers Pension Plan's stakes worthless. The country's largest leveraged buyout - NZ$2.1 billion ($1.57 billion) - fell apart post-crisis. Meanwhile, months after PEP-based REDgroup Retail was touted as a strong candidate for a public float, the company came under breach of two out of three of its banking covenants associated with the company's A$175 million ($157.8 million) in debt.

Adds Stead, "There's a finite group of names that fall in that distressed bucket - maybe 10, 15 or 20 of them - but you don't have 40, 50, 60 names and growing."

And, the trend of banking institutions looking to pull together their balance sheets by hemorrhaging assets has largely been curbed. Even in markets where deal flow is understood to be healthy, distressed investment groups are finding the glass ceiling. Oaktree Capital recently gave back $3 billion to investors, and said publicly that future vehicles would be smaller than its previous fundraisings.

What's left to invest?

Even without a financial meltdown, opportunities for distressed investing will present themselves, perhaps in the form of a coal transporter that can't ship coal because of the floods, or a sugar producer hit by inclimate weather. "There's always stuff happening. You'll always have the odd company here and there under duress, but they're not systemic. Going forward, there will be distressed because problems are specific," Stead says.

A bit of creative brainstorming can also take an investor far in the world of distress. Ian Johnson, Managing Director of Helmsman Capital, says that promising targets are often hidden or are difficult to access. Helmsman's own recent acquisitions required convincing a lender in the middle of the GFC to continue funding an over-leveraged equipment-hire firm; funding a firm that has developed security control systems for the perimeter security and counter-terrorism marketplace out of voluntary administration; and acquiring the largest Australian portable toilet manufacturer in a loan to own structure out of an Australian bank.

"Distress can be difficult and requires patience and creative thinking and a capacity to work through complex transactions. It's something you have to maintain good knowledge of through your long-term partners to really recognize opportunities," Johnson says that he personally hasn't seen much change in the small- to mid-market segment in the past two years, further noting that Helmsman has maintained a 30% IRR threshhold target, but we are now seeing transactions in the distressed debt syndications such as Griffin Coal and Alinta.

Out of Oz

While these examples suggest that distressed management can still be distressing, Australia's market is also classified as over-crowded, driving the prices of existing distressed opportunities up. For this reason, investors such as Benjamin Fanger, Co-Founder and MD Shoreline Capital, which focuses on distressed investments in China, say they look outside the market. "China is a place where inefficiencies in the private markets abound because the country's financial system and markets are relatively young. Specifically, policy lending produces non-performing loans that can be worked out by distressed investors. And overreaching credit tightening in disfavored industries, like the property space last year, results in special situation opportunities," Fanger says.

"On the other hand, in developed countries such as Australia, one would expect that the longer history in the financial system, courts, and regulatory environment would mean a clearer playing field with more participants. And a clearer playing field with more participants can mean fewer opportunities to make outsized risk-adjusted returns."

But this sort of weathered model is appealing for others. Johnson considers that outside of Australia, markets with established legislative systems such as Hong Kong, Japan, Singapore and South Korea are the most appealing in Asia Pacific, simply because they're more mature with defined rules on investing.

That's not to say that Australia does not have its fair share of opportunities. As Stead noted, although the landscape for distressed is changing with the economy, there is still a wave to ride for the short-term outlook. "There's still a significant number of names and credit that can be acquired in Australia's distressed market, so it's not bad," he says. "If you asked me to predict what will happen in five years, I can't do it, but I can see the landscape for the next two to three years, and there's plenty to do."

 

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• Topics
• Australasia
• Credit/Special Situations
• The Blackstone Group
• Unitas Capital