Distressed business opportunities in Asia amidst the coronavirus outbreak - learning to dance in the rain

3 March 2020 | Applicable law: Singapore

The unravelling COVID-19 coronavirus situation has caused significant financial distress in East Asia, and is now making its presence felt in the European and American markets.

Analysts are now considering the increasing possibility of a global recession in the first half of 2020.(1) Disruptions to business sectors comprising both supply chain shocks and demand drops are taking place on an unprecedented scale, bolstered by the increased significance played by China in the global economy relative to the 2003 SARS outbreak. Existing weaknesses of businesses will be exposed and accentuated by COVID-19 during this time, even if the economic backdrop slowly recovers.

A likely net effect of these disruptions would be increased disputes and litigations, paired with corporate defaults and insolvencies. It is anticipated that there will be a surge in court applications across multiple jurisdictions for bankruptcy protection. The sooner that businesses take stock of their situation amidst the economic downturn, seek appropriate professional and legal advice, and take the necessary steps to protect their position and/or mitigate their losses, the better the chance that they have of surviving post-COVID-19.

There are however silver linings in the midst of these storm clouds.

Historical data suggests that disruptions to financial markets caused by major pandemics (such as the likes of SARS and MERS) are short-lived, and markets are quick to rebound within 6 months after the pandemic has passed.(2) The effect of COVID-19 is also not homogenous across the whole economy, with certain business sectors (such as retail, hospitality, transport) being more impacted than other sectors which have experienced minor disruptions or even a boost (such as healthcare, online services).

Geographically, some economies are less exposed to the potential economic fallout in China. There may also be greater market confidence in businesses in countries which respond positively and demonstrate resilience in the face of COVID-19 (e.g. Singapore, Vietnam). Economic stimulus packages may cushion the falls in demand by consumers (e.g. the USD 1,280 payout to residents which the Hong Kong government announced last week).

For opportunistic funds and private capital investors, the present distress caused by the coronavirus may present a short-term window of investment possibilities. With business and asset valuations dropping and short-term liquidity proving tight, the current period of caution may allow buyers to acquire targets which were out of their reach just a month ago. This is especially so in respect of targets which have sound business fundamentals, and which are likely to suffer only a short-term impact due to the outbreak.

Any special situations transactional strategy in the midst of the COVID-19 outbreak, with its climate of defaults and insolvency, must be protected and supported with the right measure of legal inoculation. The appropriate type and dosage of bankruptcy protection (e.g. moratoriums in support of scheme of arrangement) should be administered to immunize the target from debilitating creditor actions and enforcements, while necessary rescue financing (with court-sanctioned super priority even) can be put in place to ease short term liquidity, providing life support to the business and operations, allowing the target to recover from this outbreak with its long-term valuation intact.

Ultimately, it's not about waiting for the storm to pass - it's about learning to dance in the rain.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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