Uncertainty deters distress investors - M&A Forum

Yong Kai Wong, a managing director at CITIC Capital, told the Mergermarket Asia M&A Forum that the need for rescue financing is increasing because businesses that were able to contain disruption during the first quarter cannot withstand it over multiple quarters. However, CITIC is reluctant to act.

“There are opportunities in sectors pre-COVID and we were willing to pay for those opportunities,” Wong said. “The real issue now is how has the COVID situation affected the business model and economics going forward?”

It is not purely a question of how long industries take to recover, but whether fundamental changes in consumption behavior will make business models unviable. Within real estate, for example, investors must assess the long-term demand for office space and retail space, given the rise of work-from-home arrangements and online shopping.

Jason Kardachi, a managing director at restructuring consultancy Borrelli Walsh, pointed to seaplane operator Trans Maldivian Airways (TMA), which was acquired by a Bain Capital-led consortium in 2017. The Maldives was closed to tourists in March and only reopened last month, while the international tourism market remains weak.

“Those planes are sitting there at the moment not doing much at all. At what point do people return to leisure travel? How quickly does it pick up?” said Kardachi. “For owners and bankers, how do you decide how much money is required and what the value will be down the road for an exit?”

Debtwire reported last month that TMA had signed a standstill agreement with creditors, allowing the company to continue withholding interest and principal payments on its senior debt. Interest and amortization payments were skipped in May and June, respectively. The standstill agreement is intended to allow time for a restructuring plan to be formulated.

CITIC and CDH Investments are both seeing more opportunities in China – not only in badly hit areas like leisure and travel, but also more generally as liquidity issues emerge. This corresponds with an observation from George Long, chairman and CIO of Hong Kong-based hedge fund Lim Advisors, that Chinese companies are turning to the offshore bond market, in some cases because they are struggling to get financing onshore.

Offshore China bonds sit alongside Australia and Japan as the areas Lim finds most interesting right now. While there is evidence of distress across real estate, services, and some parts of mining in Australia, Japan has yet to replicate the conditions that proved so lucrative for investors in the wake of the Asian financial crisis.

“We are not seeing distress, but we are seeing a lot of mergers and corporate restructuring and divestitures,” Long said. “That was happening before COVID.”

Kardachi of Borelli Walsh added that some companies can take advantage of the uncertainty to renegotiate financing packages on attractive terms. This tends to apply to businesses that had problems before COVID-19 but didn’t push ahead with restructuring. If there is a reluctance to pursue bankruptcies, lenders might have little choice but to accept what is presented to them.

“The relief that some companies can get is appropriate, but it also works in their favor,” Kardachi said.

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• Topics
• Greater China
• South Asia
• Australasia
• North Asia
• Restructuring
• Restructuring
• Distress
• CITIC Capital
• CDH Investments Management