More High Net Worth Individuals (HNWIs) are seeing distressed businesses as viable alternative investments
RECENT trends seem to indicate that there is growing interest among Asian High Net Worth Individuals (HNWIs) and their families to come in as ‘white-knight’ investors for financially troubled and insolvent companies, suggesting that HNWIs may increasingly be seeing distressed companies and businesses as viable alternative investments.
Several debt restructurings in the Singapore market featuring (potential) investments by HNWIs in recent years support this trend:
Marco Polo Marine Ltd
The SGX-listed offshore and marine (O&M) company received a capital injection amounting to S$60 million. Interestingly, a large majority of the injection was from HNWI investors who were outsiders to the O&M sector, including Super Group's David Teo, Goldbell Group's William Chua, Soilbuild's co-founder Lim Chap Huat, the CEO of Yanlord Land Group Zhong Sheng Jian, and Oxley Holding's deputy CEO Eric Low.
Pacific Radiance Ltd
In an article in The Business Time in May 2018, the SGX-listed O&M group was reportedly in talks with Singapore's "Popiah King" - founder of the world's largest popiah skin maker, Tee Yih Jia Food Manufacturing - Sam Goi, who was reportedly interested to fork out the majority of a proposed S$120 million equity injection.
Falcon Energy Group Limited
Boustead chairman and CEO Wong Fong Fui personally invested S$2 million by acquiring an 8 per cent stake in the beleaguered SGX-listed offshore oil and gas contractor.
The Hong Kong-listed engineering solutions provider, which filed for court protection in multiple jurisdictions, was reportedly in discussions with an unnamed Singapore family office as a potential investor.
Although some of these deals eventually did not materialise, they clearly show HNWIs' interest in the distressed sector. Coupled with the availability of investment capital and a pent-up demand for yield, the interest in such investments is likely to continue to grow.
Unlike institutional investors, HNWIs can be more creative in how they create value for themselves in the midst of a restructuring exercise. Commonly-observed methods are the injection of equity through an investment holding company, or the provision of funds through a loan agreement with an option for the investor to convert the debt into equity at the investors' option.
Another option is to purchase existing non-performing loans in companies undergoing restructuring exercises. The Business Times observed in May 2019 that there is "bubbling interest" in the South-east Asian region in investments in distressed loan portfolios, with regional banks showing interest in offloading non-performing loans to private investors.
A few factors contribute to the attractiveness of distressed companies as viable alternative investments for HNWIs. With the threat of the company's potential demise hanging over them, shareholders and management of distressed companies are more amenable to the entrance of new equity investors, whose capital injection gives the company a much needed lifeline.
Quite often, these companies are still viable in the long run but are experiencing short- to medium-term financial or liquidity issues. Unlike institutional investors, HNWIs are generally more prepared to take a longer position with their investments, and may have interests in these distressed companies that may take a longer time to turnaround.
As observed with the recent interest in the O&M sector by non-O&M investors, there appears to be an increasing trend in HNWIs willing to take a punt in alternative sectors. A possible explanation is the desire to diversify their businesses/investments and thereby insulate themselves from structural downturns in the economy. Furthermore, such investments typically provide higher yield to the lender/investor, in the form of higher interest rates or lower share issuance prices, albeit at a higher risk of non-recovery. With the reported increase in distressed debt portfolios, this may be an increasingly attractive investment option for HNWIs.
As Singapore positions itself to be a debt restructuring hub in the region, it remains to be seen how HNWIs can leverage the new restructuring laws in Singapore, consisting of the 2017 amendments which took reference from the US Chapter 11 regime, and the Insolvency, Restructuring and Dissolution Act 2018, which was passed in October 2018 but has yet to be given effect to.
An interesting space to watch would be the invoking of the new rescue financing provisions, which allow the Singapore Courts to grant super-priority status to financing provided in the midst of court-supervised restructuring exercises. With greater market awareness and advice (financial, legal and otherwise), such super-priority financing could be of greater interest for HNWIs to invest.
A version of this article was first published in the October 2018 issue of The Business Times Wealth Magazine