Asian debt defaults likely to rise on shadow banking crackdown, rate hikes

China, India cited as main spots to watch for more nonpayments

A growing chorus of observers expect debt defaults in Asia will spread as weakening currencies and tighter liquidity leave riskier borrowers with higher refinancing costs.

Rising failures add to headwinds that governments have to navigate during a politically fraught 2019, with elections in India and Indonesia. Asian dollar bond market defaults tripled to at least nine in 2018 from the previous year, according to Bloomberg-compiled data.

In India, a landmark default by shadow lender Infrastructure Leasing & Financial Services Ltd. has tightened liquidity for non-bank lenders, while China’s deleveraging campaign and push to cut the number of zombie companies have prompted more failures. Mounting nonpayments may sour sentiment in the credit market, but could boost business for investors in problem assets.

China

• Edwin Wong, chief investment officer at Hong Kong-headquartered investment firm SSG Capital Management, which invests in distressed debt, sees the biggest opportunities in China and India amid tight liquidity.

• The US-China trade war is also starting to hit companies, as rising interest rates pressure businesses, according to FTI Consulting, a firm that advises on restructuring.

• “We are setting up the business on the premise that we will see an increase in defaults in 2019,” said John Batchelor, Asia head for corporate finance and restructuring at the firm, adding that the company is looking to increase its headcount in Hong Kong and China.

• The crackdown on China’s $10 trillion shadow banking market is also contributing to a rise in defaults, as many entrepreneurs have limited access to the nation’s banking system, according to Ron Thompson, a managing director at Alvarez & Marsal Asia who leads the firm’s Asia restructuring practice.

• NOTE: A US government delegation will travel to Beijing in the week of Jan. 7 to hold trade talks with Chinese officials, two people familiar with the matter said.

India

• In India, the overhauled bankruptcy regime is likely to continue to put pressure on companies to sort out their debt problems or be forced into insolvency. The abrupt resignation of Urjit Patel as central bank governor has prompted some to question his successor’s independence.

• While it’s too early to tell what the the new governor will do, the government’s “concerted efforts” to clean up the banking sector and create better protection for creditors should remain, according to SSG’s Wong.