2017 is certainly shaping up to be the year of living uncertainly, as geopolitical changes and challenges rattle markets.
And with record debt loads reaching maturity in Singapore – particularly in the oil and gas, mining, commodities and shipping sectors – some may find themselves quickly squeezed out of the traditional bank and bond finance markets. Recent defaults in the Singapore dollar markets have already slowed that market.
The key is to start researching scenarios and alternatives now, not when doors are already closed.
It is not all doom and gloom, despite the headlines. Strong credits will always be able to tap the capital markets as investors search for less risky homes for their cash in a volatile world.
Also, the negative interest rate environment in Europe is turning investors towards Asia for yield – a number of Asian credits recently raised funds at really attractive pricing from the European markets.
European markets aside, there will always be issue windows of lower volatility during the year, but you must be ready to act. Establishing a medium-term note (MTN) programme will allow you to be ready to tap markets as and when issue windows open.
Even if the capital markets are closed to you, the Asian loan markets are still fairly liquid. Again, we’re seeing a lot of issuers unable to access the debt markets, tapping the loan markets to refinance existing bonds and notes instead.
Those organisations funded through the bond markets may be able to entice bondholders to exchange existing bonds for new bonds with an extended maturity, by offering margin and security incentives.
Companies that are primarily bank funded may be able to negotiate payment deferrals, or ‘amend and extend’ deals. Much will depend on whether you will be able to refinance at the end of the extension, perhaps having de-leveraged via asset sales, and by your ability to meet ongoing interest expenses.
It won’t necessarily be a cheap option. Expect additional fees and increased margin, and possibly additional security requirements, tighter financial covenants and more regular and detailed reporting obligations.
If bank or market funding is no longer an option, alternative capital or “special situation finance” is a fast-developing source of bespoke finance for fundamentally sound businesses facing liquidity constraints or additional capital needs.
While more expensive than traditional bank and bond markets, it can provide a flexible breathing space to undertake restructuring or turnaround measures where bank and bond markets are no longer willing to refinance or extend.
If your company is significantly over leveraged, alternative capital is unlikely to provide a full solution. Some degree of restructuring may be required to ‘right size’ the company’s balance sheet.
Again, early intervention, together with specialist financial and legal advice is critical. Restructuring and insolvency law regimes across Asia have been evolving rapidly, as has the sophistication of the market.
A number of tools are available for companies to implement sensible financial restructurings to reduce a company’s debt load (typically as part of a ‘debt for equity swap’), some of which can be implemented even where there are minority dissenting creditors.
In particular, recent government proposals to radically reform Singapore’s restructuring regime are particularly welcome news for local and regionally based borrowers and issuers looking for a local solution to financing problems.
With additional thanks to Partner Philip Lee in Singapore and Partner Paul Apáthy in Sydney.