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By how much will the Chinese economy grow over the next 12 months?0%100% of respondents expect the Chinese economyto grow by no more than 7.5% over the next 12months, with 90% anticipating a growth rate of 3.5%7.5% and 8% predicting 7.5% growth. Meanwhile,2% of respondents forecast a growth rate of lowerthan 3.5%. Rising corporate debt (a problem madeurgent in a time of weakening international demandand lower exports in a low commodities priceenvironment) together with fiscal deficits, regionalcompetition and the devaluation of the yuan aredampening China’s growth prospects. Elaboratingon the effect of corporate debt exacerbated by a risein underperforming assets, the Managing Directorof a hedge fund based in India explains, “The marketis going to face the consequences of their high debtlevels and the decreasing size of operating unitscaused by high pressures on operational expensesand these negative factors are affecting theeconomic growth rate.”Touching on industry consolidation and the reductionof excess supply capacity, rising opportunities andintensifying competition from emerging regionaleconomies, as well as reduced foreign directinvestment, the Partner & Chief Operation Officer ofa prop desk at a bank in Hong Kong says, “Expectedunemployment as a result of the decreasedproduction houses and rise of more stable emergingcountries and investment opportunities are impactingthe Chinese economy to a certain extent and hence itsgrowth will be minimum in the next 12 months.”Similarly the Director of Investment at a hedge fundin Malaysia opines, “It has become challenging forbusinesses in China to continue their large capacityoperations as the regulations to its exports haveincreased significantly, causing an increase in coststo the buyers and therefore the Chinese will lose outon a lot of international business opportunities whichwill impact their economy.”“Following the reduced growth in China, we areseeing a direct impact on the natural resourcesand commodities sectors, and accordingly thecompanies connected to those sectors.”—Matthew Gorman, Partner, Singapore,Reed Smith100% expect the Chineseeconomy to grow byno more than 7.5% in thenext 12 months.88%2%90%Key:Lower than 3.5%3.5%-7.5%7.5%Higher than 7.5%

ASIA-PACIFIC DISTRESSED DEBT & SPECIAL SITUATIONS MARKET UPDATEWill liquidity conditions over the next 12 months be about the same, worse or better thanthose in the last 12 months?In their outlook for liquidity conditions over the next12 months, more than half the survey participants(62%) take the position that liquidity conditions willbe worse than those seen in the last 12 months, with37% expecting conditions to maintain the status quo,and a mere 2% anticipating better conditions thanthose seen in the last 12 months.The Managing Director of a private equity firmin Hong Kong explains, “Liquidity conditionswill continue to worsen in the next 12 monthsas economies are being affected by risinguncertainties and risk. The appetite for newinvestments has reduced considerably as themarket conditions are unfavourable to derivesufficient returns and therefore the liquidityconditions are being impacted significantly.”Percentage of respondentsAccording to the Head of Investment of a privateequity firm in Japan, “The volatility in the oil pricesis likely to exert increased pressure on fundingenvironments – it has reduced deposit inflows andhave affected the lending interest rates and hencethe liquidity conditions are likely to worsen.”62%Liquidity conditions may vary across geographies,and while some regional governments are showingsigns of being more willing to ease regulationsand reduce interest rates to strengthen weakenedeconomies, others are maintaining tight regulatorystandards and policies. As the Managing Directorof a private equity firm in South Korea pointsout, “The equity markets are being impacted bythe fluctuating currency values and depreciatingbusiness performance depicted by firms in theemerging markets caused as a result of the recentchanges in the regulatory environment and thereforethe liquidity conditions will worsen till there arepositive signs of economic recovery and faster paceof growth.”To generate funds and strengthen cash flows,large corporates are divesting non-core andunder-yielding assets, while others in the marketare creating more liquid finances by way ofrestructurings, reorganisations and scaling back.“Whilst the feedback suggests that most expecttighter liquidity there is no outright consensus.However the nature of the liquidity (in termsof providers) is certainly shifting. This dynamichas already been seen extensively in Europe.Corporates might therefore expect to see achange in their type of capital providers asrefinancings or restructurings occur in thecoming year, and that pricing may also increaseas the funders providing the required capitalwill require a higher return than the incumbentfunder. On the flip side, it also suggests thatthere will be strong opportunities for fixedincome investment in those situations wherethe incumbent lenders and corporates canagree on realistic values relative to the size andurgency of the funding requirement.”—Peter Greaves, Partner, PwC Singapore37%“Anticipated liquidity contractions fromregulated banks may be partially eased oroff-set by new entrants to the lending andrestructuring market, including credit fundsand distressed investors.”2%Better thanthose seenin the last12 monthsAbout thesameWorse thanthose seenin the last12 months—Charlotte Moller, Restructuring Partner,Reed Smith9

What do you expect for the amount of distressed debt and special situation opportunitiesin Asia-Pacific (inclusive of Japan and Australia) in the next 12 months?With China’s deceleration and the negative rippleeffect on its neighbours, 58% of respondents expectthe amount of Asia-Pacific distressed debt to riseover the next 12 months, while a far greater 80% ofrespondents expect special situation opportunities,such as buyouts and recapitalisations, to increaseover the same period. In light of continued volatilityacross global stock markets, 32% of respondentsare expecting distressed debt levels to stall and 20%think the amount of special situation opportunitieswill remain the same. 10% of respondents foresee adecrease in distressed debt opportunities, while norespondents expect special situations opportunitiesto falter.Expressing the view that special situationtransactions offer more scope for refinancing andbusiness continuity plans, the Head of InvestmentBanking at a bank in Japan states, “The likelihoodof an increase in special situation opportunities ishigh as it allows business leaders to stay involvedin the business despite the transfer of assets to theinvestor and this strategy is also doing well as thereare fewer risks involved in this.”Accounting for the greater expectations towards arise in special situation opportunities, the ExecutiveVice President of Finance at a bank in Japan explains,“Restructuring managerial competencies is greatlyhelping businesses across the globe and fundingsourced through social growth negotiations is evenbetter for the economy and thus I believe in order togrow along with the economy most businesses in thissituation will consider special situation deals overdistressed deals.”Suggesting that special situations can occur asa result of efforts to keep debt from going intodistress, a Partner at a private equity firm in HongKong says, “The gradual effect on the credit marketis increasing the demand for special situationactivities. Entering an equally negotiated deal ishelping businesses transform their performance,leaving the distressed phase and entering newgrowth heights.”“2015 and 2016 were clearly very active fordistressed debt and special situations andthe view appears to be that next year willcontinue along that trend. When you look atthe expectations of what themes will be, andcombine these with some of the expectedhurdles to restructuring that are cited later inthis survey, these may reflect that portfolioshave not been through the extent of pain thatthe market conditions would suggest is to beexpected. Therefore, until this is fully realisedand dealt with, we should not expect to seethe level of distressed debt and specialsituations declining.”—Peter Greaves, Partner, PwC SingaporeKey:Percentage of respondentsDistressed debtSpecial situations80%58%32%20%10%Increase10Remain the sameDecrease0%

ASIA-PACIFIC DISTRESSED DEBT & SPECIAL SITUATIONS MARKET UPDATEIs your firm setting aside more capital for distressed debt and special situationopportunities in Asia-Pacific (inclusive of Japan and Australia) in the next 12 months?More than half (58%) of those surveyed state thattheir firms are apportioning more capital towardsthe distressed debt universe in the Asia-Pacificregion in the next 12 months, while a greater68% plan to raise their current levels of capitalallocations towards special situations over thesame period. Distressed debt investors often lookto gain from low valuations, with some playingthe role of opportunistic bargain hunters lookingfor quality distressed assets at undervalued ordiscount prices. Elaborating on the heightenedinterest in special situations, a Partner at a privateequity firm in Hong Kong states, “We believespecial situations will help us manage time risk,price risk and deal risks more effectively, givingus higher chances of improving our return oninvestment rate.”Amid concerns over overcrowding in thedistressed investment field, an additional 30%and 32% of respondents indicate they will maintaintheir current levels of capital allocation fordistressed debt and special situation opportunitiesrespectively, while 12% are looking to decreasetheir allocation towards distressed debt, withno respondents planning to cut back on allocationsfor special situations.“Our clients have been raising capital forinvestment and tell us that they are patientlywaiting for opportunities to present themselves.They are cash rich and there will be ampleinvestor competition for the best investments.”—Diane Roberts, Restructuring Partner,Reed SmithMeanwhile, the Director at a hedge fundbased in Singapore opines, “Special situationfunds have been performing extremely well inscenarios where the portfolio managers arehighly experienced and qualified with regards totransformation or development of businesses andwe have identified such funds where we plan toincrease our capital allocation over the next yearto draw significant returns for our shareholders.”Key:Percentage of respondentsDistressed debtSpecial situations68%58%30%32%12%YesNo, our allocation willremain the same0%No, we are decreasingour allocation11

What percentage return are you targetingfor distressed debt transactions in the next12 months?What percentage return are you targetingfor special situation transactionsin the next 12 months?Half (50%) the respondents are targeting returnsof 15-20%, 45% are aiming for 10-15% returns,and 5% are targeting less than 10%. The ManagingDirector at a private equity firm in South Koreasays, “Concerns over rising operational costs andthe increasing number of underperforming assetsare affecting business performance and thereforewe are not able to fully leverage the potential ofour distressed assets in the market.”Most respondents (85%) are targeting 10-15%returns for special situation transactions in the next12 months. Higher returns of 15-20% are expectedby 10% of respondents, while more modest gains inthe 8-10% belt are expected by 5% of respondents.This is lower on average than what is targeted fordistressed debt transactions, possibly due in partto special situation opportunities being generallyamong the lower risk arbitrage.On regulatory barriers, a Partner at a privateequity firm in Australia explains, “New competitionlaws and compliance procedures are driving ourfocus away from improving core objectives andhence we are unlikely to meet our targets on time.Our distressed assets will see better growthin 2017 as we would have completed their riskassessments by then.”Taking a bearish view, the Managing Director ofa private equity firm in Hong Kong asserts, “Theprocess of transforming distressed businessesinto highly productive businesses is lengthy andhas been delayed even more due to the increasingchallenges faced by business managements inapplying effective profitable strategies and riskmanagement techniques.”“The regulatory framework within ajurisdiction can have a significant impacton the potential return of an investment.Accordingly, this is a key considerationto be factored into the equation when firmsare making investment decisions.”—Panos Katsambas, Special Situations Partner,Reed SmithLess than 10%“On a portfolio basis it is not unexpectedthat returns of 10-20% are targeted by most.However, given the jurisdictional and sectorspecific issues in many of the individual cases,we would expect case specific returns to beextremely volatile within a given portfolio.Whilst true turnaround stories can beprotracted, there are opportunities on fixedincome deals where high-teen returns areavailable due to short term 'burning platform'liquidity needs. These deals clearly comewith heightened default risk or subordinatedpositions, but they are there to be had.”—Peter Greaves, Partner, PwC Singapore100% targeting no more than20% return for distresseddebt and special situationtransactions in the next12 months.5%Less than 8%10-15%15-20%0%5%8-10%0%Over 20%50%45%10-15%85%15-20%10%Over 20%0%Percentage of respondents12

ASIA-PACIFIC DISTRESSED DEBT & SPECIAL SITUATIONS MARKET UPDATEIf you expect an increase in distressed debt, please indicate which of the following is/arelikely to be the cause(s). (Please indicate all that apply.)Out of the respondents forecasting an increasein distressed debt in the next 12 months, almostall (98%) are attributing its cause to China’seconomic slowdown, along with 93% citingslowing Asian economies due to monetarypolicy or regulation. The maintenance of pricestability, the controlled expansion of bank credit,and restrictions on inventories and stocks aresome elements of monetary policy that arecontributing to the slowdown in Asian economies.Expounding on the effect of China’s slowdown,the Principal at a private equity firm in Singaporeobserves, “China was considered to be the topmost economy in the Asia-Pacific region, and itsdepreciating conditions will certainly impact theeconomic recovery pace in the Asia-Pacific regionposing pressures on businesses to sell of theirunderperforming assets or restructure theircapital structures which will lead to the increasein special situation opportunities.”At the same time, 88% of respondents pointto continued problems in the Eurozone. As theManaging Director & Chief Executive Officerat a bank in China discusses, “The continuedproblems in the Eurozone are likely to impact thelargest sector in the Asia-Pacific region, which ismanufacturing, as regulatory changes and exportlaws are being tightened, reducing the demandfor Asia-Pacific goods and this will drive thedistressed and special situations environmentin the Asia-Pacific region.”Meanwhile, half (50%) the respondents haveidentified oil price volatility as a key factor.The Managing Director of a hedge fund in Indiaexplains, “The volatility in the oil prices areaffecting business financials in the Asia-Pacificregion and managements are unable to protecttheir businesses from this unseen uncertainty.In order to recover from their low performancesthey will either have to sell off their assets atcheap valuations or restructure their activitiesby gaining support from foreign acquirers, drivingdistressed opportunities in the market.”“A multitude of factors have contributed to anincrease in distressed debt, including but notlimited to the economic slowdown in China,the decrease in oil prices, the uncertainty ofthe future direction of interest rates and otherchanges to monetary policies, the increasedcosts of banking and trade regulation andthe uncertainty of the US elections andBrexit implications.”—Diane Roberts, Restructuring Partner, Reed Smith“The importance of Eurozone uncertainty isalready being seen, but unlike that in China,this does not appear to be purely trade/demand led in this region, but also includesthe impact on liquidity from Eurozone lendersretrenching capital to Europe.”—Peter Greaves, Partner, PwC SingaporeChina’s economic slowdown98%Asian economies slow because ofmonetary policy/regulation93%Continued problems in the EurozoneOil price volatility88%50%Percentage of respondents13

Which of the following situations do you think will offer the most attractiveopportunities for special situation/distressed debt investors in the next 12 months?Amend and extend situations will offer the mostattractive opportunities for special situation ordistressed debt investors in the next 12 months,according to three-quarters (75%) of respondents.In an exemplification of this stance, the Partner& Chief Operation Officer of a prop desk at a bankin Hong Kong explains, “Investor sentiments to themarket decline are driving the amend and extendtransactional activity. Investors are hoping fora better market in the years to come and so arehelping businesses improve their performancesby fulfilling their funding requirements to helpdevelop their operational performances.”Backed by 68% of respondents, debt-to-equityconversion comes in at a close second, a situationwhich allows distressed businesses under debtpressures to renegotiate and offer equity positionsto creditors to reduce their debt burden andimprove operations.Moreover, 65% of the survey respondents haveselected the provision of emergency funding orworking capital, making it the third-most attractiveopportunity. As the Principal at a private equity firmbased in Singapore puts it, “Investors are lookingto make additional returns on their investments bytaking advantage of the challenges in the traditionallending market such as lending limitations frombanks and other financial institutions due to theuncertainties in the economic environment. Theyare also becoming good in their due diligence andso are lending to businesses who are restrictedfrom borrowing from banks but have significantgrowth potential, and this demand for additionalcapital is provided to businesses at a higher interestrate, benefiting the investors significantly.”Pertaining to funding sponsor-led debt buybacks,backed by 63% of respondents, the ManagingDirector of a hedge fund in India says, “Lenders areagreeing to share the risk with businesses and sothe attractiveness of debt buybacks is increasing.”Respondent interest in the remaining situationsis spread out somewhat evenly, with all of thesituations garnering nominations from at leasthalf (50%) of the respondents. According to theDirector of Investment at a prop desk at a bankin Singapore, “The fall in the real estate market isthe main attraction to distressed debt investors.Investing in distressed real estate non-performingloan (NPL) portfolios will bring greater returnsto investors in the long run and hence I believe theNPL transactions will prove to be most attractiveover the next 12 months.”14Meanwhile, a Partner at a private equity firmin Japa

In the third quarter of 2016, Debtwire canvassed the opinions of 60 private equity investors, prop desk traders, hedge fund managers, credit risk or workout managers, and emerging market investors in the Asia-Pacific region. Respondents were questioned about their expectations for the Asia-Pacific distressed debt and special situations market over