The economic slowdown in China, as well as global instability, low commodity prices and changing interest rates, means that corporates in the Asia Pacific region may find themselves in strife. Restructuring and turnarounds may be called for, yet, as new research shows, more and more companies are waiting to the last minute to implement changes – which, in many instances, may have a long term negative impact on financials.
The slowdown in economic activity across Asia is likely to have a knock on effect on regional corporates that may find themselves in some, or considerable, distress in the coming period. To survive the storm, corporates may need to undergo significant transformation or risk bankruptcy.
In a new report from AlixPartners, titled ‘A Race Against the Clock’, the consultancy firm considers the current conditions in which a host of corporates in the region operate, as well as the link with restructuring demand. The research involves a survey of 100 lawyers, bankers, and fund managers across Asia Pacific who had completed turnarounds or restructuring.
According to the study, the number of corporate restructuring and turnaround professionals citing an anticipation in the level of corporate restructuring continues to increase. In 2015, 57% of respondents said there would be a slight increase and 36% said a significant increase. This year, those expecting a significant increase (48%) outnumbered those that expected a slight increase (44%). This is up significantly on 2013 and 2014, when a considerable number of respondents expected a slight increase, and few expected a significant increase – 13% for both years.
The research also considers the primary reasons for restructuring over the coming 12 month period. Top of the list from respondents (27%) are changes to regional, and global, macroeconomic conditions. The top specific factor, according to 68% of respondents, is the ‘underwhelming economic growth in China’, and its impact on the wider market – up from 40% last year. The second most cited concern is debt and liquidity. Corporates have enjoyed a protracted period of low interest rate loans, used in part for aggressive growth, and have become increasingly leveraged – payback time looms however, with up to $1 trillion in debt due for repayment over the next four years. Rolling over the debt may prove more difficult as interest rates rise (due to moves in the US base rate) and market volatility creates uncertainty.
The authors further find that the focus areas for restructuring have changed somewhat since last year. Debt/capital restructuring is now the primary reasons, up from 37% last year to 54% this year. Operational restructuring too has seen an increase, up from 37% to 49%. Management/leadership change has decreased in focus somewhat, falling from 20% last year to 12% this year. Implementing all three has fallen from 39% of respondents last year to 33% this year.
However, even with worsening corporate conditions, few organisations are embarking on restructuring projects until they find themselves in actual distress. In 2016, 28% of respondents said that they would move to restructure at the signs of stress, down from 69% of last year’s respondents. Many companies are instead opting to wait for signs of serious distress, as cited by 40% of respondents. A small fifth of companies take a proactive approach to restructuring.
According to the report’s analysts, a number of factors influence the restructuring decision making trend. One source of issue, is a lack of resources – either in terms of case or in terms of management’s time, which is reserved for other activities. The research further finds that there are two major contributing factors: “(1) lack of awareness that mounting stress was taking a toll on the business (as one respondent described it, an “if-it’s-not-broken-don’t-fix-it” approach); and (2) active disregard that a situation has become urgent enough to warrant such change even though clear indicators of distress have become apparent.”
The lack of swift action to stymie a possible long term business issue may have long term negative consequences for the business and its shareholders. When considering the extent to which the late start of a restructuring/turnaround negatively impacts the success of the overall reorganisation, 58% said it has a significant negative effect, 40% says it has some effect and just 2% says no effect.
AlixPartners in addition asked respondents about the group which bears the most influence on restructuring of the organisation for the coming 12 months. The group that was the most likely to wait until distress, the CEO and other C-suit executives, are the ones whose decision counts – at 54%. The board of directors has lost considerable influence since last year, falling from 44% of respondents to 14%.
According to respondents, the use of third parties to implement and drive corporate restructuring has increased. 11% of respondent companies say a lender appointed Chief Restructuring Officer (CRO) will hold the most sway, up from 1% last year. While 5% says a company appointed CRO will be taking the lead.
"CROs are going to come into wider use because they have the experience and the outside perspective that corporate management teams may lack", comments a respondent at a Hong Kong–based investment bank. Other respondents reinforce that opinion, noting that the problem isn’t that management teams are incapable of managing the process, but rather, that the current financial or operational turmoil is leaving them blind to obstacles in the medium to long term.