Slow global economic growth and higher domestic corporate debt are putting pressure on companies’ balance sheets. In addition, greater competition, capacity expansion and large regulatory changes mean that more firms across many industries are facing liquidity and solvency difficulties, according to a report released yesterday by AlixPartners, an international business advisory firm.
As many as 39% of respondents said that slow economic growth in the West would be the top driver for restructurings during the next 12 months. Restructurings and turnarounds are expected to increase most in Japan and South Korea, followed by Greater China, India, Australasia and Southeast Asia.
Japanese and South Korean companies “face declining demand, excess inventories, operational inefficiencies and mounting debt, all of which could force them to restructure operations to address underperformance”, say AlixPartners. Respondents were unanimous that Japan and South Korea would witness more shake-ups.
The report, called “Staying in the Game: An Outlook on Turnaround and Restructuring in Asia-Pacific 2013”, is based on interviews in January and February with 150 bankers, lawyers and fund managers from the Asia-Pacific region.
Greater China is also expected to experience an increase in restructurings during the next 12 months. Respondents point to several reasons, including the intense competition faced by foreign multinational corporations from fast-growing local competition, weak global demand and over-capacity in some industries.
In terms of industry vulnerability, the financial services (76%), industrial (70%) and automotive (69%) sectors are singled out as the top three industries in need of change. Other sectors identified include property, retail, telecoms, electronics, airlines, shipping and renewable energy.
Also, a significant amount of corporate debt is set to mature across Asia in 2014, and there are likely to be problems finding lenders to refinance it. Slightly more than a quarter of respondents say debt and liquidity issues will be the top driver for restructuring in the year ahead.
The report’s findings also emphasise the importance of executing operational restructuring and of using interim management, such as a chief restructuring officer. Together with financial changes, these three aspects create what AlixPartners calls a “holistic-turnaround” approach, which seeks to address all areas of distress to correct a company’s course.
“While there is no one-size-fits-all solution for different companies across such a diverse region, the combined elements of a holistic turnaround are key to the future success of these companies,” says CV Ramachandran, managing director and head of Asia for AlixPartners.
Banks and private equity firms will be the primary sources for financially supporting companies in distress, with investing by hedge funds also becoming part of the mix.
