SINGAPORE: Persistently high interest rates are putting stress on corporate balance sheets and leaving increasing numbers of firms here and across the region at risk of bankruptcy, according to a new report and experts.
The report noted that high interest rates have created an unfavourable borrowing environment, operational challenges and dented consumer spending.
These have resulted in a broad-based increase in distressed companies, unlike previous cycles in Asia where the pain was concentrated in specific industries such as the shipping and oil sectors.
The report from global consultants AlixPartners noted that Asia’s restructuring market is expected to heat up over the rest of this year and into 2024 with financial players expecting a tougher period ahead.
The global environment is expected to remain challenging or deteriorate as inflationary pressures dent corporate profits and cash flow while loans will be refinanced at much higher rates, it added.
Large companies and banks are becoming more risk-averse due to the global economic headwinds and will struggle to find solutions to boost profitability amid the higher interest costs, the report said.
“We are definitely seeing an increase in inquiries.
“As companies are forced to refinance their debt at higher interest rates, many marginal companies are finding themselves with stressed balance sheets and constrained liquidity,” said Michael Haftl, a Singapore-based partner at AlixPartners.
Terence Chan, senior research fellow at credit rating firm S&P Global Ratings, said that more companies could turn cash-flow negative, a situation when a company uses more cash than it brings in.
“Amid record-high global leverage, a trifecta of rising defaults, higher return thresholds and more cautious lending will challenge borrowers over the next two years,” Chan said, adding that Asia-Pacific corporates are the most vulnerable.
Home builders and developers, leisure and sports, and transport sectors will fare worse if credit access becomes more restrictive and interest spread further increases, he added.
Haftl said boards should be preparing to head off trouble.
“It’s important to get ahead of liquidity crunches and not wait until the company is out of cash. Turnaround professionals can be much more effective when there is sufficient time to take action.”
The Law Ministry data showed 24 companies here were wound up from January to August this year compared with 159 for the same period in 2022.
However, individual bankruptcy applications rose to 2,617 from January to August, compared with 2,403 for the same period in 2022.
Court orders that declared individuals bankrupt stood at 753 from January to August, compared with 679 for all of 2022.
Many restructuring jobs involve companies in the cryptocurrency space, Haftl said, noting that many professionals are also busy with work related to neighbouring countries and Asia.
“Singapore has made significant efforts in positioning itself as a restructuring hub with growing traction in the past few years and it serves as an important forum for restructuring professionals and activities in the region,” he added.
Haftl noted that a broad range of industries locally and regionally have hit trouble, with companies and industries that are asset-and debt-heavy the most prone to downturns.
“We have seen stress across real estate, industrials, construction and consumer. We also expect to see another round of stress in the airline business, as the stronger and weaker players diverge.”
In contrast, non-discretionary industries appear to be faring better, including healthcare, food and beverage and lower priced retailers and grocers. High interest rates are also cushioning some financial services firms, Haftl added.
Accounting giant Deloitte estimated that a conservative US$707bil of non-performing loans (NPLs) were held by banks across the Asia-Pacific at the end of 2022.
Total NPLs here stood at around US$18bil at the end of 2022, against $27bil at end-2020.
Deloitte said the NPL exposures of major Singapore banks were generally manageable, but warned that a number of risks and uncertainties in the global economy could put this under pressure. — The Straits Times/ANN
