Hedge Funds Eye Japan, China, Australia for Distressed Assets

Date: Wednesday, October 20, 2010
Author: Netty Ismail and Rishaad Salamat, Bloomberg

Hedge funds seeking distressed assets in Asia may find the best opportunities in Japan, China and Australia next year as banks sell soured loans, and small and medium-sized businesses struggle to attract funding.

Japan, China and Australia form the bulk of the $1 trillion of corporate debt that is distressed or stressed in Asia as banks balk at lending to smaller companies and sell non- performing loans, Robert Appleby, chief investment officer at ADM Capital, said at a conference in Hong Kong yesterday.

“You’re finding financial obligations mounting up for companies across Asia looking for that refinancing, but not being given access to capital markets or the traditional bank loan markets,” Hong Kong-based Appleby said. “That bump to me is going to be a very exciting time for anyone left standing in the distressed market.”

Asia-focused event-driven funds gained 6.6 percent this year through September, while those investing in distressed debt rose 10.5 percent, among the best-performing strategies in the region, according to Singapore-based research firm Eurekahedge Pte. Bonds are termed distressed when they yield at least 10 percentage points more than similar-maturity government notes.

Event-driven strategies -- which focus on distressed, shareholder activist, merger arbitrage and other special situations -- received most of the assets in the second quarter as investors allocated more than $360 million in new capital to Asian hedge funds, Chicago-based Hedge Fund Research Inc. said.

‘Best Opportunities’

Distressed investment opportunities today are different from those following the 1997-1998 Asian financial crisis, when assets were centered on dollar bonds that were trading at 20 cents to 30 cents on the dollar and structuring companies that had gone bankrupt, Appleby said. ADM Capital, founded in 1996, advises funds that make principal investments in distressed companies.

“It’s a very different profile today,” he said at the Hedge Funds Asia Summit yesterday hosted by Bloomberg Link in Hong Kong. “It’s one of the best opportunities we’ve seen in distressed in Asia.”

That’s luring new entrants: Zais Group LLC, a U.S. asset management firm with $8.6 billion in assets, said this month it plans to raise money for a fund that will invest in Japanese property-related securities including debt.

Zais is expecting an increase in sales of property-related debt as the nation’s banks rush to bolster balance sheets ahead of regulatory changes demanding a bigger capital buffer. The fund plans to invest in high-grade debt owned by Japanese banks trying to avoid refinancing risks as the values of properties tied to the bonds decline.

Japan Prices

Japan’s nationwide commercial land prices fell 4.6 percent last year and residential land values dropped 3.4 percent, a government report showed last month. Commercial prices are 60 percent of what they were in 1991 when they peaked, while residential values are at 35 percent.

Michel Lowy, Hong Kong-based chief executive officer of SC Lowy Financial Services, an investment bank focusing on distressed and illiquid investments in Asia, said consumer finance firms in Japan also present distressed investment opportunities. There may be $20 billion of debt in the nation’s consumer finance industry for sale in the next 12 months, Lowy said.

Takefuji Corp. last month filed for bankruptcy protection, becoming Japan’s biggest casualty of a four-year crackdown on coercive lending to consumers.

There will also be “a ton of opportunities” to invest in real estate and leveraged buyout loans in Australia between 2011 and 2014, said Lowy, who headed Deutsche Bank AG’s Asia-Pacific distressed products group, which he founded in 1999.

KKR Returns

Kohlberg Kravis Roberts & Co. this week offered as much as A$1.75 billion ($1.73 billion) for Australian asset manager Perpetual Ltd., marking a return to the nation after the New York-based private-equity firm was involved in bids for at least three companies in 2006.

Private-equity firms pool money from investors to take over companies, financing the purchases mostly with debt, with the intention of selling them later for a profit.

In Australia, lending to businesses shrank 0.6 percent in August from July, the most in 10 months, taking the annual decline to 4 percent, central bank figures showed Sept. 30. That’s even as the nation’s economy outperforms most developed nations as the biggest mining investment boom buoys growth.

“Today, it’s almost become a macro game,” Thomas Holland, head of Asia at Cube Capital Ltd., an alternative investment management firm which manages about $1 billion, said at the conference in Hong Kong yesterday. “If you’re looking at Australian companies, will they be getting bank refinancing, what’s the Fed going to do, what are the government policies?”

Household Lending

Australia’s economic growth may be eroded by local banks’ preference for household lending over business loans, Joseph Healy, National Australia Bank Ltd.’s business banking chief, said last week.

Credit tightening in China, where the government is seeking to avoid asset bubbles, will lead to bridge financing opportunities, Holland said.

China’s central bank temporarily raised reserve requirements for six lenders, three people with knowledge of the matter said last week. Boosting the amount of money banks must hold as reserves will lock up about 200 billion yuan ($30 billion) that otherwise could be used for lending, Goldman Sachs Group Inc. estimated, suggesting the People’s Bank of China is increasing pressure on the country’s biggest banks to rein in credit.

Elsewhere, China, India and Indonesia offer “special situation” investment opportunities as banks aren’t lending to small and medium-capitalized companies, Lowy said.

“The effective opportunity today in distressed is getting good companies that may have a problem and have run into the wall of not being able to pay an obligation,” Appleby said. “They’re technically bankrupt, but they’re still good companies, and getting them back on the rails is easier.”

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net