Funding & Investing

Question Answered: Refinancing

Published: Mar 2017

This issue’s question

“With corporates in Singapore allegedly facing a US$12bn debt scramble this year as bonds fall due, what should treasurers at these companies be doing to refinance this debt?”

Katie Gray, Partner, Herbert Smith Freehills Singapore

Katie Gray

Herbert Smith Freehills Singapore

Emmanuel Chua, Senior Associate, Herbert Smith Freehills Singapore

Emmanuel Chua

Senior Associate
Herbert Smith Freehills Singapore

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.

Benny Koh, Managing Director, SEA Treasury Services Leader, Deloitte

Benny Koh

Managing Director, SEA Treasury Services Leader

Managing liquidity risk is a key strategic function of CFOs and corporate treasurers. CFOs and treasurers have to focus on four critical activities to successfully manage the “wall of debt”.

Know your liquidity position
  • Build a taskforce to drive and enhance cash forecasting.
  • Have a good assessment of how much cash your company needs over the next 12 to 24 months. Be as granular as possible and perform stress tests for worst case scenarios.
Diversify funding source
  • Pay for insurance and secure as many credit facilities and funding sources as possible, even if that entails paying commitment fees for credit lines that may not be drawn.
  • Think outside the box to explore financing beyond the traditional bank and bond market.
Engage external advisors
  • In emergency situations, it is common for business leaders to identify talent gaps in the organisation. This is usually where external advisors can help to navigate the complexity of your company having to react to short-term financial market pressures and executing long-term plans to enhance the organisation’s liquidity risk management function.
  • Clear stakeholder communication is important, especially during this period. Bankers, shareholders and investors are critical to your success. They need to understand the financial position and operational priorities of your companies in order to help. Designate a senior member of the management team to engage with key stakeholders if your company does not have an investor relations function.

Lastly, after surmounting this “wall of debt”, it is important for companies to invest in talent and technology to drive cash visibility as well as perform regular risk assessments.

Andrew Brereton, Partner, Clifford Chance

Andrew Brereton

Clifford Chance

Gareth Deiner, Counsel, Clifford Chance

Gareth Deiner

Clifford Chance

How corporates approach the refinancing of maturing debt in their capital structure will depend largely on whether the debt was initially raised in the capital markets (ie bonds or other debt-like securities) or in the banking market.

One of the fundamental differences between capital markets and traditional bank debt lies in the tradability of bonds as securities: unlike bank debt, borrowers (ie issuers of debt securities) from the international capital markets do not typically know who their creditors (ie bondholders) are from one day to the next.

The increasing adoption of the immobilisation of debt securities in clearing systems (where a global security is registered in the name of, or held by, a nominee for the relevant clearing system), with the increasing velocity of trading that that has led to, has amplified the anonymity of the ultimate beneficial owners of the underlying debt securities to their issuers. As such, the first step of identifying bondholders to engage with can present a significant challenge, even before refinancing options are considered or proposed.

Accordingly, the term “liability management” is used to describe a variety of procedures and techniques used by debt capital markets issuers for the purposes of buying back, exchanging or altering the terms of outstanding bonds in order to restructure – or “manage” – their balance sheet liabilities.

In light of the difficulties inherent in seeking to restructure capital markets debt given the anonymity of bondholders. Advanced planning and early engagement with investment banking and legal advisers who have experience in the application of these procedures is crucial. Having a knowledge of the investor profile in the debt securities in question, is also vital to any successful refinancing, restructuring or balance sheet optimisation exercise.

Similarly, in the context of loan transactions, early engagement with lenders and (if the situation merits) advice from a professional financial adviser on options for refinancing and restructuring, can have a critical impact on outcomes. Refinancing options may fall away if not implemented promptly, or if borrowers seek to negotiate terms too heavily, and this may leave borrowers with options that are less likely to preserve value, such as restructuring, dilutive equity raising or accelerated M&A disposals.

In circumstances where these outcomes might be possible, even if uncertain, it is important that borrowers begin to plan their approach at an early stage, with the benefit of expert advice, in order to navigate the complex interplay between different stakeholders (including shareholders, lenders, bondholders, trade creditors, employees, the tax authorities and any other relevant government entities). This will help to ensure the best possible outcome for the company and provide a sustainable platform for future profitability.

Next question:

“China offers many interesting opportunities for corporate treasurers to further their professional development. What though do treasurers looking at taking a job in China need to know about living and working in the Orient?”

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