28 May, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Insolvency & Restructuring

 

The secondary debt market in Australia has really come along in leaps and bounds in 2011. We estimate that distressed, impaired ornon core loan sales for 2011 have exceeded $11B in face value.

 

We can generally split this between portfolio sales, single credit sales and unsecured consumer loan sales. 
 
• On the portfolio front, approximately $6.5B in portfolios have been brought to market in the last 12 months by GE, BOSI and Societe Generale. In addition to this, another $2.1B is believed to have been sold in New Zealand by BOSI and GE. The GE portfolio is understood to be made up largely of consumer mortgages whereas BOSI and Societe Generale were commercial real estate and infrastructure loans.
• Single credits have continued to be the most actively traded group in 2011 with numerous sales exceeding $2B in Australia and New Zealand. This has been across a broad range of names including Nine Entertainment, Centro, Godfreys, River City, I-med, Mediaworks, Colorado and Metro Glass. Most notably, all the major Australian banks have been active participants in this market and it was only in the second half of the year that we started to notice more of the overseas banks also participating in the sales processes.
• In terms of unsecured consumer loans, we estimate sales in excess of $2.7B from all the major banks, other money lenders and telco’s. Many of these have been on a 12 month forward flow basis indicating that a level of certainty and pricing has come back into the market.
 
What is interesting however, is that regardless of the volume of loan sales as highlighted above, the level of provisions against loans has remained largely unchanged with provisions at around 1.2% for the past nine quarters. Figure 1 (All Banks Loan Analysis on page 2 of the pdf at   http://www.ashurst.com/doc.aspx?id_Content=7497) highlights the level of provisions against total loans. This would suggest that to June 2011 banks continued to experience similar levels of annual new provisions that are offsetting the value of the loans sold.
 
We would expect the Australian banks to continue to sell loans. However, the sales to date have typically been of the larger corporate names. Going forward, we expect to see an increasing default rate among SME’s. This poses an interesting question for the sellers. Will they continue to be able to attract buyers of SME debt on a single credit basis? Indeed it is unlikely that they would be able to achieve the same level of sales on an individual credit basis which would suggest the need for the Australian Banks to start looking at portfolio sales to keep provision levels from increasing.
 
When we just look at foreign banks operating in Australia, we see that to June 2011 provisions had gradually been climbing since December 2008 as highlighted in Figure 2 (Foreign Banks in Australia Loan Analysis on page 3 of the pdf at   http://www.ashurst.com/doc.aspx?id_Content=7497). However, the expected pull back by foreign banks had not taken place by then. Indeed, in the June quarter last year total loans by foreign banks increased. It wasn’t until the second half of 2011 that we really started to see foreign banks participating in the debt sales market, so we may start seeing a reducing balance over the next 12 months.

 

This would suggest that there remains the opportunity for future sales as foreign banks, particularly European banks, start to become capital constrained and pull back to core markets. We have started to see evidence of this taking place in Asia and in Australia and expect greater levels of activity over the forthcoming years.

The unanswered question however is ‘where will the replacement capital come from?’ Will the equity markets be tapped again by companies who are unable to refinance maturing debt, will Asian hedge funds and lenders fill the void or will the Aussie banks be able and willing to fill the gap.
 
On the buyer front, we continue to see plenty of foreign buyers of Australian debt from Asia, Europe and America. We believe this has been driven by the fact that relative to Asian markets, Australia has by far been the most active secondary market. However, one area of concern remains the high level of the Australian dollar making purchases in Australia more expensive for offshore buyers particularly when taking into account the hedging costs against foreign exchange risks. Irrespective of this, deals are continuing to take place. 
 
Legal update
 
There have been a number of significant legal developments affecting the secondary debt and restructuring markets in Australia this year.
 
The following is a summary of the key developments:
 
• Australia has now changed the basis upon which security over almost all types of property other than land, fixtures and water rights is to be registered and recognised with the introduction of the Personal Property Securities Act (PPSA). The PPSA regimereflects similar regimes introduced into Canada and New Zealand. Lenders need to ensure that all security interests (including interests that did not formerly have to be registered such as certain types of leasehold interests and retention of title rights) are properly registered under the PPSA register in order to confirm a priority position and to be protected should the grantor of the security interest become bankrupt, wound up or have an administrator appointed to it. 
• In the Centro decision, the Court rejected an attempt by the Senior Agent to vote in favour of the Centro Scheme on behalf of junior hybrid holders on the basis that, as they were ‘out of the money’, the Scheme did not affect their interests (which was the inter-creditor condition upon which the Senior Agent was entitled to vote on behalf of hybrid holders).
• Whilst there were many points unanswered, the Centro scheme presents an interesting case study and legal precedent for stakeholders when considering
the parameters for future restructuring proposals where a creditors’ scheme is considered as the implementation mechanism.
 

 

For further information, please contact:

 

James Marshall, Partner, Ashurst

[email protected]

 

 

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