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Top Singapore lawyer says not time for bond crisis alarm as 'out-of-cycle defaults' are yet to be seen

Yujing Liu yujing.liu@scmp.com

Cracks in Asia's bond market are not as alarming as headlines suggested because market predictions for "out-of-cycle defaults" remain on the bearish side for now, a top Singapore corporate lawyer said.

The US-China trade war, oil-price swings and commodity cycles have played a part in stoking concerns about defaults among the weakest borrowers this year. Goldman Sachs predicted 3 per cent of Asia's junk-rated debt will be in default next year, up from 1.7 per cent last month.

"Default rates have been forecast to rise for a while, but to-date there has not been the out-of-cycle defaults predicted," said David Zemans, Singapore-based Asia managing partner at Milbank LLP. As such, "it is not necessarily time for alarm yet."

While there is softness in the market due to a host of reasons like trade war, the impact on credit has largely been expected, he said in an email interview with the Post. "The market has not been overwhelmed by a wave of defaults."

David Zemans, Asia managing partner based in Singapore at Milbank LLP law firm. Photo: Handout alt=David Zemans, Asia managing partner based in Singapore at Milbank LLP law firm. Photo: Handout

Companies have defaulted on 117 corporate bonds amounting to US$185.6 billion globally this year through December 18, according data provided by S&P Global Ratings. In 2018, there were 82 worth US$131.7 billion. At the peak in 2009 global financial crisis, the tally was 264 defaults worth US$627.7 billion.

"The global economy is not doing too bad, plus the US economy is relatively robust and the easing trade war will help the Chinese economy," said Frank Zheng, head of international fixed income at China Asset Management Co in Beijing. "Under these conditions, the risk of global high-yield bond defaults is overall manageable."

The spotlight on China, however, has recently intensified as non-payments increased in frequency amid an unprecedented liquidity crunch onshore and an economic slowdown.

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Corporate bond defaults are likely to tick up in 2020, while credit conditions for non-financial companies in China will be negative in the next 12 months, Moody's said last month.

"Nowadays, these defaults are not a huge deal to the market, except maybe for retail investors," Zheng said. "It's not like back in early 2018, when the market was not very aware of the default risks."

Other than Chinese bond issuers, the probability of large-scale defaults is low, he added.

Much of the debt in the market today is subject to refinancing risk, and where credit dries up, default risk will increase, Zemans cautioned. The upshot is that it will present opportunities for investors and advisers.

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As the financial hub for US dollar-denominated debt in North Asia, Hong Kong is likely to be the centre for a number of restructuring or refinancing works if market upheavals persist.

"To the extent that profitability, earnings, etc come under pressure for a particular company, they may find it harder to refinance, and they may be looking for extensions or some sort of restructuring," said Ron Thompson, head of Asia restructuring practice at Alvarez & Marsal in Hong Kong.

There is also a deep pool of money from distressed debt investors and rescue capital private-lending arms of private equity firms, according to Zemans at Milbank. They have helped engineer restructurings and limit a wider fallout in the credit market, he added.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.