Japan restructuring opportunities on the rise – PE survey

"What we are seeing in Japan is a lot of focus on industrial consolidation. The government has set up groups like Innovation Network Corporation of Japan (INCJ) and they are active in specific sectors like electronics manufacturing and heavy equipment," C.V. Ramachandran, AlixPartners' Asia president, told AVCJ.

"Japanese companies are also trying to refocus outside of Japan to drive growth because the domestic market is not able to meet their ambitions, so getting that moving is another kind of restructuring."

Eight in 10 respondents expect restructuring activity in Asia to increase this year, primarily driven by a combination of debt and liquidity issues and macroeconomic conditions. Over half say locally-owned businesses in Japan and South Korea will be a key area of focus, rising to 80% for foreign-owned companies.

Corporate Japan's weakness is also reflected in AlixPartners' early-warning model. It has 27% of companies on high alert for potential restructuring, 39% on the watch list and 24% classified as healthy.

If and when restructuring happens, it is most likely to come in the form of facility closures, employee layoffs and the divestment of non-core assets. The latter should also feature prominently in Korea where second-tier conglomerates, or chaebols, are under pressure - either economic or political - to curb corporate spread and remain focuses on their major businesses.

The principal obstacle to effective restructuring in Japan is by some distance refinancing debt. Ramachandran noted that once a creditor gets into a court-sanctioned process with a trustee, situations become more difficult because debtors get priority.

Foreign private equity players might argue that INCJ itself is an equally large obstacle to capitalizing on restructuring opportunities. After the government-backed fund outmuscled KKR's bid for struggling chipmaker Renesas Corp, the Japan Private Equity Association called on Tokyo to rein in such entities, saying they are squeezing out private capital and delaying restructuring.

The AlixPartners early-warning system is far kinder to corporate China, with only 12-15% of companies on high alert, 30% on the watch list and 60% deemed healthy.

However, the scale of the economy means there is no shortage of potential restructuring candidates. Survey respondents expect most activity among locally-owned businesses, principally through layoffs and the sale of non-core assets. Some private equity investors have already benefited from this process, with Unitas Capital carving out a subsidiary of electronics giant ZTE Corp. earlier this year.

The challenge in China remains the long arm of the state. "China should do more restructuring but the role of government in monetary policy has an impact on what actually gets done," said Ramachandran. "Take the solar panel industry, for example - there is twice the capacity relative to demand so every other company should be consolidated."

As such, the principal opportunities may lie among the foreign multinationals that are under threat from fast-growing local competition, notably in the retail sector. Last November, Morgan Stanley Private Equity Asia acquired Hi-24, one of Beijing's largest convenience store chains, after its Hong Kong-listed parent decided to focus its attentions elsewhere.

AlixPartners' turnaround and restructuring survey was based on in-depth interviews with 150 bankers, lawyers, fund managers and other restructuring experts from across the region. There were 30 private equity industry respondents. Other findings included an increased appetite for operational restructuring and the use of interim management in conjunction with financing restructuring efforts.

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• Topics
• Credit/Special Situations
• Restructuring
• North Asia
• Greater China
• Distress
• Japan
• South Korea
• China