Opportunists circle ailing companies

Kim Ivey

While the Australian market has fared relatively well in the global liquidity crisis, the cracks are now starting to appear, with refinancing deadlines approaching for many local companies. And international players are positioning themselves to take advantage of the ailing companies’ debt-driven woes.

A Singapore-based hedge fund has set its sights on Australian companies it believes will soon be ringing alarm bells as their debt situation becomes dire. While it’s not the first time the manager has looked to invest in distressed debt in Australia, 3 Degrees Asset Management principal Jeffrey Tolk said the current environment is creating more opportunities.

Tolk declined to nominate the sectors in which the companies are operating, but would say there are up to 10 companies the manager is currently observing.

“There’s some that we might get involved in now and there’s some that we’re watching and waiting on,” Tolk said.

It may take several years for the effect of the credit crunch and downturn in markets to be fully realised in Australia. Until now the market has been relatively unscathed, but this could simply be the result of a lag. Tolk said the manager is looking at companies that may trigger distress signals today as well as in two years’ time.

“We don’t think it’s the bottom, we think there’s going to be more distress,” he said.

Alternative Investment Management Association (AIMA) chairman Kim Ivey said this hedge fund strategy would gain traction in the current environment.

“The environment where banks are reducing their credit lines does provide these opportunities,” Ivey said.

But offshore managers are most likely to benefit from the crisis and resulting distressed debt opportunities, with Australian hedge fund managers unlikely to have the credit skills necessary for

the strategy.

According to Standard and Poor’s credit analyst Anthony Flintoff, while some signs of confidence are returning to the world’s battered credit markets, “that doesn’t necessarily mean Australia’s corporate treasurers are breathing any easier”.

In Flintoff’s words, the days of easy money have virtually disappeared.

In a recent paper, Standard and Poor’s indicated that of the $130 billion of debt outstanding for rated corporates across Australia and New Zealand, about $24 billion (or 18 per cent) of outstanding debt is scheduled to mature over the remainder of this year.

An additional 10 per cent of that debt will mature next year. Flintoff said several unrated corporates also have significant rollover funding requirements in 2008.

“Ominously, this sizable refinancing task comes at a time when global credit markets are in their most difficult shape for many years,” Flintoff said.