China viewed most difficult country for distressed debt investors

Respondents to a recent survey about the Asia-Pacific distressed debt market in 2010 were optimistic about distressed debt opportunities in the region in general, and in China specifically, but also expressed concerns about the enforcement of creditor rights in China.

Three-quarters of the respondents voted China the most unfavourable place to exercise rights over security, ahead of Indonesia. "In China, the political considerations normally come before rigid enforcement of the law," said Scott Bache, partner at law firm Clifford Chance. "Getting access to the assets is certainly the biggest problem in China. If you can't get access to the assets and further information, it is hard for the guys holding those assets to sell them for their intrinsic value."

Bache added that, in China, offshore creditors have not been given a real opportunity to test the market to see if the value broke in the offshore part of the capital structure. With the market not being tested more rigorously, China could possibly have lost an opportunity to demonstrate that it is concerned about driving value for all stakeholders in a distressed situation, he said.

Of the respondents to the survey, 57% attribute the difficulty of enforcing rights over security to regulatory restrictions against lending. "Hedge funds will be less able to play the role of lender of last resort as the investment practices will have to be much more disciplined and discretionary than they have been," said Robert Schmitz, managing director of investment bank NM Rothschild.

However, despite the difficulties it presents in exploiting opportunities, China is still viewed to be among the top countries currently offering attractive distressed investing opportunities. Respondents to the survey predict that further distressed debt opportunities will emerge in China, Indonesia and Australia next year.

With respect to the state of the global economy, 29% of respondents think that it has already entered a sustainable recovery and another 39% agree that this will happen within one year. An overwhelming 95% of respondents expressed confidence in Asia and believe Asian economies will outperform those in the US and Europe.  

Although the findings suggest investors are regaining confidence, Schmitz suggested that many investors still have a careful or pessimistic attitude as there are still doubts whether the US and Japanese governments can continue to support their economies and financial systems in the years ahead.

With regard to industries, respondents expect the real estate and natural resources sectors to provide more distressed opportunities in 2010. The majority of respondents are currently dedicating 40% or less of their funds to new investments, and 57% of the respondents who are credit investors have no troubled loans or bonds in their portfolios.

The survey was conducted in October by Clifford Chance and Rothschild in association with Debtwire. It canvassed the opinions of 100 people on their views about the Asia-Pacific distressed debt market in 2010. The majority of respondents were financial advisers or worked at the trading desks of investment banks.