Buyers of distressed assets head to Australia

For buyers of distressed assets in Asia, the top destination over the next six months is expected to be Australia, as investors stake out bank portfolios holding leveraged buyout loans estimated to be worth US$23 billion.

The buyers said that Asia’s markets could hold a payload of distressed debt worth up to US$100 billion, with much of their time and air miles spent in Sydney right now.

The portfolios of a number of European banks that invested heavily in leveraged loans are a prime target. Even as the credit crisis recedes, many of these banks find themselves holding piles of distressed debt.

BOS International Australia, HSH Nordbank, ING Bank, Rabobank, Royal Bank of Scotland, UniCredit and WestLB alone hold an estimated US$4.57 billion of the US$23 billion in leveraged Australian debt, according to Thomson Reuters LPC data.

‘This is the first large, tradeable, opportunity for a developed Asia-Pacific economy in years – and ties in well with US/European hedge funds’ focus areas,’ said Kevin Tham, a director of global loans with Bank of America Merrill Lynch’s special situations desk in Hong Kong.

Up to now, banks have been reluctant to sell secondary loans because prices put on offer to them have been unattractive, but that could all be about to change.

As demand intensifies, pricing has risen on core leveraged names. Secondary loan pricing for PBL Media and Seven Media was at 40 cents on the dollar earlier this year, but both names recently traded in the low to mid-80s.

The buyers are likely to be funds that operate out of New York and London, without a presence in Asia, interested in Australian large-cap situations, such as the Babcock complex, PBL Media and ABC Learning. Their focus sectors are infrastructure, utilities and real estate, with perhaps five to seven companies on the radar in that category.

Australia, Asia’s most mature loans market, saw the bulk of the leveraged buyouts completed during the bull run of 2005 to 2007, as the region’s bankers and executives sought to emulate the credit boom occurring in the US and Europe at the time.

Buyout specialists, namely private equity firms, bought companies and loaded them with US$19.7 billion in debt in those three years alone.

But the dream of double-digit returns soured when the credit and liquidity cycle turned during last year’s financial crisis. Buyers could not exit through the IPO markets and got stuck with the assets. Banks got stuck with the debt.

Despite signs that the worst of of the global slowdown is over and restored liquidity levels, second and third tier companies that are saddled with large amounts of debt are still struggling to obtain financing, according to industry sources.

And their debt is sitting on bank portfolios, tying up capital that could be invested elsewhere.

‘Six to nine months ago, even if the banks wanted to sell their distressed assets, they couldn’t. But a problem asset remains a problem asset,’ said Lee Soo Cheon, a veteran of Asian distressed markets who split from Deutsche Bank early this year to set up an investment bank with partner Michel Lowy.

Source: Business Times, 19 Nov 2009