Vol 11 (2014) - Issue 1

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Investing in Distressed Assets in Australia: An Overview

Introduction
While the Australian economy has weathered recent global economic upheaval better than most, opportunities are still available for investment in distressed assets. In the last two to three years, a lot of the focus has been in the property sector. This has primarily taken the form of the sale of distressed property loan portfolios1 and trading of debt. However, the property sector is beginning to recover and we do not expect as much activity in that area in the foreseeable future. Given the nature of the Australian economy and the industries within, we expect particular opportunities in mining services, retail and agribusiness.
This paper provides an overview of the key options available for international investors interested in distressed assets in Australia and highlights some differences between the Australian and other jurisdictions in how these options may be approached.

Buying Secured Debt
Activity in distressed asset investment in Australia prior to 2009 was very low to non-existent. But the collapse of global financial markets in 2008 (referred to in Australia as the Global Financial Crisis) following the collapse of Lehmann Brothers and an apparent cultural shift by Australian banks to embrace the option of selling both single debts and debt portfolios, suggests that distressed debt trading is now an accepted and understood feature of the Australian financial landscape.
Perhaps one of the reasons Australian debt has been an attractive investment in recent years is an underlying view that debt which Australian banks are interested in off-loading may hold less risk and greater chances of recovery, than debt being sold off by European or US banks. Another is that there is less competition for the debt.
For purchasers of debt portfolios the process is well accepted and holds no real legal landmines other than ensuring they fully understand the portfolio they are buying and how to manage them to achieve the internal rate of return being sought.
Single borrower debt purchases offer the opportunity for the investor to either work with the borrower in a traditional banker/customer relationship, sell the secured assets via enforcing their security or to work towards acquiring equity in the borrower via a ‘loan to own’ strategy (discussed further below).
Assuming there is an opportunity to improve the struggling borrower’s position by close supervision of the borrower’s position and the maintenance of funding to support the borrower’s restructuring objectives, the investor may wish to maintain a traditional banker/customer relationship for so long as it seems that this strategy may succeed. However, there are restrictions on how much the investor can get involved in the restructure and drive that process while they maintain only a banker/customer relationship. It is not uncommon for secured creditors to recommend to borrowers that they engage turnaround consultants that the secured creditors are comfortable with to review the business operations and propose a restructuring/ turnaround strategy for the secured creditor to consider. This gives the secured creditor some comfort that the customer has a considered, viable plan.
One of the key issues which turnaround consultants grapple with in Australia is making sure they do not fall foul of Australia’s tough insolvent trading laws (which, as discussed later, also impact upon the extent to which Australia has adopted 'pre-packs').