Sweeping up in South East Asia

The stock market crash in South East Asia is providing numerous opportunities for British lawyers in both insolvency and corporate recovery, says John Willcock. John Willcock is a freelance journalist.

Many parts of South East Asia have experienced headlong growth over the last 20 years or so without an associated development of professional services. There is a severe shortage of insolvency specialists and, away from sophisticated commercial centres like Hong Kong and Singapore, often a lack of basic bankruptcy law.

No wonder that there are plane loads of lawyers flying to the South East Asia at the moment. But most leading firms are heavily involved in helping to deal with the crisis. Robert Elliott, a banking partner with Linklaters, spent two months in Asia before Christmas with his colleague Alan Walls, an insolvency litigator, establishing what the firm could do for several clients in the region.

Gordon Stewart, a senior corporate recovery partner with Allen & Overy and a recent head of the accountant-dominated Society of Practitioners of Insolvency (SPI), actually went on a pre-Christmas lecture tour in the region, in an effort to convey the latest thinking on company rescues.

Robin Spencer and Richard Shean, business restructuring partners at Lovell White Durrant, recently flew out there to advise their existing Western client base, which has operations in Asia. The duo spent two weeks visiting six countries meeting local law firms, clients and academics to discuss how they could assist.

Among other high profile corporate restructuring lawyers spotted there recently is Mark Hyde of Clifford Chance, who has been involved in the liquidation of merchant bank, Peregrine. Freshfields and Herbert Smith are also heavily involved in that case. Not surprisingly, the Americans are there in force as well, with firms like Baker & Mackenzie and White & Case to the fore.

Most of north east of the region, such as Thailand, is being dealt with by the professional community in Hong Kong, while lawyers based in Singapore are dealing with the south east, such as Indonesia.

The financial crisis started last summer in Thailand, when a speculative property bubble burst, leading to empty office blocks and plummeting property prices. This in turn scared foreign investors and prompted a sell-off in the Thai currency, the baht. Eventually in early July, the Thai authorities were forced to scrap the vital link between the baht and the US dollar the dollar peg and the baht plunged even further.

Asset deflation and currency devaluation at the same time led to a string of corporate insolvencies. Elliott of Linklaters says that following the de-pegging, 58 finance companies in Thailand which had lent to the property sector were suspended. By the third quarter of last year, Paribas Asia Equity estimated that out of 197 non-financial companies listed on the Thailand stock exchange, only 19 were clearly not bankrupt. 140 were bankrupt, and 38 were between being bust and solvent. And that is just in Thailand so there is plenty of work for everyone.

Elliott says when something like this happens, the professionals keep an eye on everything, particularly when things are relatively quiet on the home front. Formal insolvencies here are at an all time low according to Dun & Bradstreet although there is some behind the scenes restructuring work about.

Linklaters' corporate rescue team have had a mega-job that has kept them occupied since the UK's own recession the restructuring of Eurotunnel's massive debts but this deal is due to be signed within the next few weeks, leaving plenty of slack for Asian work. Linklaters has already been working on Yamaichi, the collapsed Japanese securities house, in the UK and client subsidiaries in South East Asia, while the firm's Hong Kong office has been heavily involved in the liquidation of Peregrine.

Linklaters is advising corporate debtors such as the imperilled finance companies in Thailand, as well as advising financial creditors to Finance One, a big Thai company. The firm is also advising Thai Petrochemical on its restructuring.

How long will it take to sort out Asia's financial woes? Elliott says: 'At the moment no-one is quite sure where the bottom is. It all comes down to confidence. We do see things going upward in 1999.

'The trouble is, when the currency is in free fall, as happened with the rupiah in Indonesia, then you can't make any financial forecasts, and without forecasts, you can't restructure.'

Both lawyers and accountants have emphasised that it is vital not to be heavy-handed with local people. One lawyer recalls overhearing a US banker in Thailand recently talking to a Thai colleague: 'I'll take local cultural issues into account but I still want this done now.' Not the way to do it. The key is co-operation with local law firms, says Spencer, particularly as foreign law firms are banned from doing local work in all the countries affected by the crisis.

The issue of ex-pats has to be handled very delicately. A close relationship must be formed with local people. If a firm is after work in Asia, it is important that its senior people get out there to secure the mandates and press the flesh. They need to set up the rescue structure most of the insolvency work itself can be done by more junior staff. Most of the corporate rescue work is being provided either by people already there, particularly in Hong Kong and Singapore, or by employees from a firm's affiliates in Australia, Canada and South Africa.

There are lots of 'bargain hunters', usually US investment banks like Goldman Sachs and Bankers Trust, which are sniffing around for assets and corporate debt paper on the cheap. Local cynics have dubbed this Industrial Tourism. Many banks are also interested in buying up corporate debt, much of which is trading at a heavy discount, and then arranging a workout. Bank America, Chase and JP Morgan are all involved in this at the moment.

This may sound like a fantastic business opportunity but mainstream pundits and economists vastly underestimate the impact of the Asian crisis on the West. As Spencer says: 'There will be floods of cheap imports from the East. It will be asset deflation just like the 1930s.'

If this deflation spreads to the West despite the UK's present worries about inflation creeping up governments may lose their ability to regulate the economy. With deflation comes negative interest rates, so that the ability to use interest rates as a tool to operate the economy disappears. Japan has had next to nil interest rates for the last five or six years and it is still in recession. Economists call this pushing a piece of string. On the other hand, of course, if this scenario happens there could be a boom in insolvency work for lawyers at home as well.