| CORPORATE FINANCE |
May 2002 |
CASH CALLS
A good debt workout takes more than
just refinancing; Globe taps the global debt markets again,
and fares better.
By Jasper Moiseiwitsch
While Asia may be in better
shape now than it was five years ago, anyone who gives its
debt-laden corporations a clean bill of health is a quack.
Finance chiefs in the region have been taking advantage of
current low interest rates to refinance maturing debt, but
it may be a poor substitute where a complete transformation
of the credit profile is more necessary, says US investment
bank JPMorgan.
Sanjai Vohra and Prasoon
Dayal, JPMorgan analysts in Hong Kong, say only 20 to 25 percent
of all corporate restructuring deals in Asia post-1997 have
resulted in improved credit standing. In selecting these winners,
their measurement is simple: companies that have completed
"good restructuring" have seen investors paying more for their
outstanding bonds, because they are now less likely to default.
A year ago, for example,
investors would risk exposure to Indonesia's Indocement only
if they paid 40 cents for every dollar of its bonds. A continuing
restructuring program has improved the price of the Indocement
bonds, maturing in six years, to 70 cents.
What makes good restructuring?
Vohra and Dayal found four common characteristics in the restructuring
efforts of the companies in the chart. The first three are
common: getting rid of non-core businesses; realistic cashflow
projections and debt servicing commitments; and checks and
balances such as dividend restrictions and limits on inter-company
loans.
The fourth, at first
blush, would seem counterintuitive to CFOs. Vohra and Dayal
argue that companies operating under restrictions set by creditors
on cashflows like capital expenditures fare better. The reasoning
is that shareholders generally believe that capex is so important
to growth - and the eventual return of an appreciating share
price - that they will move heaven and earth to pre-pay and
have the restrictions lifted. The result: the company shakes
off its debt and lowers its cost of capital faster. "Equity
owners may want to remove creditors from the board or operating
oversight committees [and] buy out creditors' shareholdings,"
the analysts say. 
Jasper Moiseiwitsch is a freelance
writer for CFO Asia based in Hong Kong.
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