Companies across Asia expect tighter liquidity levels and rising funding costs as European banks continue to reduce their exposures in the region, according to a recent joint survey by Clifford Chance, KPMG and Debtwire.
One of the key findings was that just over half (55 percent) of respondents said they expect the amount of distressed debt in Asia-Pacific to rise in 2012, while 52 percent said that as European banks scale down their Asian operations, US and Asian banks will be able to provide liquidity but at a higher cost.
While there are a number of factors affecting an increase in Asia-Pacific distressed debt, 46 percent of respondents agree the most likely cause is the continued problems in the eurozone.
Other factors coming into play are threats of slowing Asian economies due to policy changes (39 percent), an implosion of China's economic bubble (38 percent) and the US entering another recessionary period (36 percent).
"There is increasing pressure on cash flow and working capital caused by a tightening in liquidity in the market," says Edward Middleton, Partner, Head of ASPAC Restructuring, KPMG. "Corporates lacking adequate visibility and control over cash flow will be more susceptible to a downturn in the economy."
The survey also notes that China ranks first on the list of countries investors are targeting in Asia for distressed opportunities. Meanwhile, for the second year in a row, survey respondents see Japan and Australia as the second and third most targeted countries for distressed debt/special situations investments.
Scott Bache, Partner, Asia Pacific Head of Restructuring and Insolvency, Clifford Chance, adds that the eurozone crisis has certainly reduced liquidity in the credit market, creating more opportunities for distressed debt and special situations investments.
"While there are opportunities and a high level of interest in China, execution risk is particularly high, given the inherent difficulties in the usual offshore to onshore funding structures used in China," says Bache.
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