Has the time arrived for insolvency practitioners across the region to start asking where the expected flood of work in this area has gone?

Asian insolvency practices are not as rushed off their feet as many predicted they would be at this juncture, and for two reasons: banks in the region are in comparatively better shape than those in the West; and bondholders are displaying a Zen-like reluctance to pursue bonds in default. “It’s quiet in Hong Kong at the moment, and it’s quiet across the rest of Asia as well,” said Michael Barker, who joined Herbert Smith earlier this year to build its insolvency practice in the region. “Six to eight months ago, the economic outlook was so bad that we were asking ourselves how we could bring in the resources to deal with the rise in restructuring work.” Barker added that his team remain busy, however, working on a number of insolvencies in the Middle East, especially in Abu Dhabi and Dubai where the fallout from Lehman Brothers is being felt and some other smaller cases exist.

All quiet on Asian front

“International banks are reporting few defaults in lending and have generally been very cautious,” Barker said. “A few small to medium enterprises are keeping smaller firms busy with their problems, but on the whole we haven’t seen many major corporate collapses or restructurings commence in Asia in the past six months… yet,” he added. “There were a few instances where companies which issued private-placed bonds – for example companies in Indonesia, Thailand and the PRC – have gone into default because they were not able to action their IPOs on schedule or because their income from exports decreased due to waning demand.” Barker reported that several companies elsewhere did come close to defaulting on loans, but it was the return to health of the IPO market that came to the rescue.

For their part, bondholders have been reluctant to force the issue. “Bond defaults therefore resulted in a few bilateral restructuring discussions but it really depends on the bondholders themselves as to how far to pursue legal recourse... few are doing that at the moment, preferring to await the delayed IPO or to agree a buy back of their bonds so any problems that are there are staying underneath the surface and not bubbling to the top,” Barker said.

Add to this the bondholders’ inexperience in dealing with defaults, and the scene is set for a stalemate of epic proportions. “Bondholders may have differing reasons for not going after defaults, but I think so far this time around it’s definitely the bond holders rather than the banks who are encountering defaults, which plays some part in the low levels of activity we are seeing at the moment.”

Trigger factors

What sequence of events would trigger an avalanche of insolvency work? It is evident that banks and lenders are taking a more cautious approach to loan defaults than they did during the earlier Asian financial crisis. This remains – rightly or wrongly – the yardstick against which levels of transactional activity in the sector are being measured throughout the GFC.

Covenants have been waived, principal payments have been suspended or modified and borrowers have generally been more willing to work with their underperforming portfolios. This, no doubt, stems from the current difficulty of ascertaining what value to put on underlying assets.According to Barker, the “next six months to a year” may allow borrowers and lenders to ascertain where true market value lies.
This will provide a basis for a turnaround or restructuring “in those unfortunate cases of enforced liquidation proceedings”. Barker admitted this is still looking into the crystal ball. And while predictions are hard to make, one issue is clear. Banks and borrowers see insolvency proceedings as a last resort.

Many of the underlying assets in places like China, Hong Kong, Malaysia and Singapore are vital to individual communities and local governments, so there is reluctance to create a situation where recovery is hampered by socio-economic and political issues. Such issues will be less prevalent, however, in relation to cross-border insolvencies.

Barker makes the point that all insolvency and restructuring work is “inherently cross-border in nature” – hence most governments in the region have been active in bringing their insolvency regimes up to speed, from the promulgation of a new bankruptcy law in China, to changes to the Debt Repayment Scheme and the corporate rescue provisions under the Companies Act in Singapore. As well, a revamping of the insolvency procedures under Hong Kong’s company law are all measures designed to close what the OECD calls the “implementation gap” regarding insolvency in Asia.\
“There are frameworks in place that were not present before,” Barker said, with specific reference to China’s overhaul of its bankruptcy regime. “These remain untested, of course, but it will please investors to know that the regimes are complemented by the existence of reciprocal enforcement agreements, like that in existence between Hong Kong and the PRC.”

In relation to cross-border insolvencies, the outlook for practitioners is a little better. The insolvencies that many of them were banking on when they rushed to either establish or reinforce existing I&R practices will come, but maybe not at the rate everyone is hoping for.