A few months ago, US electronics maker Tyco put its ADT Korea unit up for auction. Thebidding for Tyco Fire & Security Services Korea was fierce, with private equity investorsand small Korean domestic funds combining with each other to muster enough capital tomake a credible offer. Domestic banks were also happy to provide bidders with record amountsof debt. That is why, when Carlyle won, it paid almost $2bn for a company with an operatingincome of around $125m.

“Everyone went nuts when this deal came along,” one bidder recalls. It helped that the lastmajor deal in Korea was KKR’s purchase of Oriental Brewery five years ago – on which theprivate equity group made more than five times its money. ADT was also the biggest deal inKorea since 2008.
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A few days ago, KKR also bought a stake in Koreit, a Korean company that provides servicesfor real estate developers, from a distressed seller. But, in contrast to the frenzy around ADT,this was a smaller deal that attracted far less attention and competition. And while Koreanbanks were happy to provide debt for ADT, they appear to have very little appetite for realestate these days.
The market for distressed assets in Korea and many other Asian countries is not deep. Butinvestors such as the special situations arm of KKR are gearing up for what many expect to bemore widespread opportunities across Asia as both the level and the cost of debt rises.
“In contrasting developments, leverage in developed markets has come down since the 2008crisis, while in emerging markets particularly in Asia, it has risen significantly,” wroteeconomists from JPMorgan in a recent note. “EM Asia’s stock of debt stood at $9.5tn in 4Q08,and rose to over $21tn by end-2013. Total debt increased from 90 per cent of GDP in 4Q08 tonearly 120 per cent of GDP. EM Asia’s foreign liabilities are now a higher share of exports(nearly 50 per cent) than at any time in the past 10 years.”
In Korea, the distress is now centred on construction, real estate and troubled shippingcompanies, such as Hanjin Shipping. But it may well spread to more industrial companies – justas distress in Japan is beginning to spread from real estate to industrial companies.
Moreover, Korea is – along with China – the primary victim of the depreciation of the Japaneseyen. Its private sector is heavily indebted, while its markets in the emerging world face apossible weakening in demand.
In India, by contrast, the need for foreign capital can only grow. The initial euphoria over theModi regime has been replaced by a more sober assessment of economic realities. Promotersof deals in the power industry and other infrastructure-related sectors who, just weeks ago,told potential overseas investors that their money was no longer needed are now coming backto the table. New regulations from the Reserve Bank of India require bidders for distressedassets to put more capital up – which will also create opportunities for foreign players.
And then there is China. By the standards of the rest of the world, the speed with which credithas been extended in China has left many analysts convinced that there will be a financialcrisis on the mainland. But not everyone is certain that this will prove the case.
Warburg Pincus, the private equity firm, was part of a group that recently took a stake inChina Huarong Asset Management for $2.4bn. Huarong was established 15 years ago to takeover the troubled loans of Industrial & Commercial Bank of China, before China’s biggestbank went public. Huarong itself is expected to soon go public – the second of the big assetmanagers to do so.
Most investors consider these asset management companies as a way to play distressed debt inChina, since their portfolios contain loans to the most troubled sectors in China wher overcapacity is most dire: including cement, glass, and steel. And part of the capital Huarongraises is likely to help restructure the debts of such borrowers.
But executives at Warburg prefer to see Huarong as a proxy for China itself – agovernment-backed firm that will be the beneficiary of the country’s eventual shift from beingan exporter with a voracious appetite for commodities to a less commodity intensive,domestic-led economy.
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That shift may not be good for the countries such as Indonesia that previously prosperedfrom Chinese demand. But it means the opportunities for investing in distressed companies willonly grow elsewher in the region.