Default Rate on Speculative Grade Debt To Be 'Worse Than In Great Depression'...

...Major firms gearing up for 'Flood of Corporate Defaults...'

http://www.bloomberg.com/apps/news?pid=20601109&sid=avdSM3l3EK9c&refer=home

White & Case Joins Laracy Gall for Insolvency ‘Storm’ (Update1)
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By Douglas Wong

Feb. 16 (Bloomberg) -- White & Case LLP, the New York-based law firm with more than 60 lawyers in its three China offices, has allied itself with Hong Kong dispute resolution boutique Laracy Gall in readiness for a flood of corporate failures.

“It’s a perfect storm,” John Hartley, head of White & Case’s Asia bank finance and restructuring practice, said in an interview in Hong Kong. “There’s a large amount of refinancing coming up, and capital is retreating with banks retracting lending and private equity and distressed opportunities funds facing redemptions.”

Banks are curbing lending as shrinking earnings increase the risk companies will be unable to repay their debts. New loan agreements in Asia-Pacific excluding Japan dwindled to $4 billion this year from $32 billion in the same period a year earlier, data compiled by Bloomberg show. The global default rate on speculative-grade debt will peak at 16.4 percent in November, worse than in the Great Depression, according to Moody’s Investors Service.

The tie-up will focus on insolvencies with a “center of gravity” in Hong Kong, including businesses from throughout Asia with holding companies in the city, according to Laracy Gall founder Nick Gall. The International Monetary Fund said last month that developing Asian economies will grow by 5.5 percent this year, the slowest pace since 1998, when the region was racked by its own financial crisis.

Corporate insolvencies started rising in Hong Kong last year after falling since 2003, according to the Official Receiver’s Office. The situation is likely to worsen, with the city’s central bank warning more than HK$100 billion ($12.9 billion) of syndicated loans will mature this year, risking defaults if companies are unable to refinance the debt.

‘Bigger Than Expected’

“We saw this cycle coming, but didn’t expect it to be as big as it is,” Gall said. His firm’s 12 litigators have specialized in insolvency since it was founded in 2004 and will work with White & Case’s banking, capital markets and private equity teams in the alliance.

Asian hedge fund assets fell 36 percent in 2008 as the biggest market declines since the Depression triggered losses and investor redemptions, Hedge Fund Research Inc. said in a report this month. Withdrawals forced funds to sell corporate bonds, pushing prices for the debt to record lows.

Complex Agreements

Few troubled companies can find so-called white knight investors to help them as they did in the 1998 Asian financial crisis, and many have complex debt and equity agreements to unwind, according to Hartley.

Chinese steelmaker FerroChina Ltd. “is a fairly typical example, with debt raised onshore in China and offshore through the parent company,” he said. “These types of deal utilized short-term debt and assumed an IPO would take place to repay the debt. That clearly isn’t going to happen any time soon.”

FerroChina said in October it was unable to repay loans because of the “economic crisis.” Its China units are facing 206 lawsuits from creditors claiming a total of 4.82 billion yuan ($706 million), according to a statement on Nov. 12.

Foreign creditors including Citigroup Inc. and Citadel Investment Group LLC hired lawyers to help them recoup loans to FerroChina. Creditors on its local-currency debt include China Construction Bank Corp. and Commerzbank AG’s Shanghai branch.

Offshore Creditors

“You have competing interests among the creditor groups depending on which level you are at, offshore or onshore,” said Hartley. “Add to that the fact that lenders often sold down their positions in these transactions to funds and other lenders using derivatives, and untangling these structures becomes a real challenge.”

Other law firms expanding their restructuring teams in Asia include Los Angeles-based O’Melveny & Myers LLP, which in August hired a team from White & Case including Mark Fairbairn and Bertie Mehigan.

The team is “quite busy, but I don’t think they’ve even scratched the surface,” Howard Chao, O’Melveny’s Asia practice chairman, said in an interview.

To contact the reporter on this story: Douglas Wong in Hong Kong at dwong19@bloomberg.net

 

If that happens I wonder if we will hear from the folks who said the credit market was pricing in a depression because of distortion created by hedge funds and just 'delevering'

 

It is only a month since Lloyds Banking Group, reassured investors that there had been no deterioration in HBOS's balance sheet in December. Now it says it will report £4 billion of mark-to-market losses on its treasury book and -- most worryingly -- £7 billion of impairments on its corporate loan book.

http://online.wsj.com/article/SB123456838710486107.html

Looks like the corporate defaults have started to be written down. If this is what we will see in the US the next round of write downs in addition to the additional housing write downs as prices contimue to fall and the jumbo priome segment runs out of savings and either has to sell (the market will be flooded with jumbo prime properties this spring and there will be few buyers) or defaults could be quite a surprise.