• 86% of executives in Asia anticipate business disruption, with over 90% suspect greater pressures on profitability despite optimism for rebound
• Increasingly restrictive lending environment demands operational improvements to strengthen business resilience

Singapore (24 September 2024) – AlixPartners, the global consulting firm, today announced the findings of its 19th Annual Turnaround and Transformation Survey Asia Report. The survey reveals that over half of respondents expect lending standards to become more restrictive in the year ahead than the previous year. Increased material costs, interest rates, and high labor costs, compounded by geopolitical tensions and US election uncertainty, continue to be the biggest drivers of pressure impacting profitability.

As the lending environment is set to become more restrictive, companies need to recognize the importance of making meaningful operational improvements to drive cash flow and take proactive actions.

Lian Hoon Lim, Partner & Managing Director and Asia Regional Lead for Turnaround and Restructuring Services at AlixPartners, said, "This year's survey finds that Asia's executives are more positive about corporate profitability than their global counterparts, with increased availability of capital in the region. However, this optimism needs to be put in check. As intensifying disruptions have led to heightened lender scrutiny across the board, an increase in restructuring proceedings could lie on the horizon."

High anticipation for disruption, with profitability under pressure

Of the 200 participants in our survey, a majority (86%) anticipate disruption to their business, while 9 in 10 anticipate that these pressures will affect company profitability, with more than one-third (39%) expecting those pressures to be greater than last year. The biggest drivers of pressures are said to be high material costs (53%), high interest rates (49%), and high labor costs (49%), while incomplete market recovery post-COVID also features highly (36%).

In anticipation of the US elections in November, amplified geopolitical tensions are impacting the flows of international capital. This increased stress is further exacerbated in some instances by the high relocation costs (35%). A change in political direction could also increase friction regarding global trade and tariffs, driving higher levels of distress and underscoring the importance of careful cash management for businesses amid uncertainty.

Tightened standards across traditional banking and private lending markets

Turnaround experts' outlook for the lending environment remains grim – over half of survey respondents (52%) expect lending standards to become more restrictive in the year ahead than the previous year, marking a 20% increase from the 32% recorded in 2023's Asia survey. In particular, 52% of respondents expect lenders to be more likely to proactively alert borrowers to take appropriate actions against risks, significantly up from 31% last year, suggesting a recalibration of risk appetites to address challenges amid the current economic cycle.

Companies are expected to experience increased pressure in both commercial and private lending spaces. Traditional banks are exercising greater caution by reducing their engagement with customers deemed higher risk. Meanwhile, despite record dry powder in the private debt and equity market, smart investors are looking for opportunities to combine fresh capital with meaningful profit improvement and/or growth, requiring companies to demonstrate abilities to drive more promising results.

Caution against optimism for improved profitability for companies in Asia

Respondents in Asia are hopeful for a rebound despite the macro headwinds. 74% of respondents expect overall corporate profitability to improve in Asia, a significant increase from last year's 39%. Almost all respondents (95%) anticipate the availability of debt financing and capital to remain flat or increase in the next 12 months. Of note, nearly half of respondents (49%) expect the availability of capital in Asia to increase compared to the previous 12 months, significantly higher than the 28% from global survey data.

Lim added, "Growth outlook for most Asian countries remains robust and the economic picture in Asia is markedly different to that of the rest of the world, thanks to the absence of the spike in inflation and linked interest rate rises. This has saved many companies from immediate needs for restructuring. However, as geopolitical uncertainty and lenders scrutiny escalate, businesses that are unable to implement enhanced levels of agility and resilience, which will define their success stories, are likely to face distress in the coming year."

Cultivating business resilience amid uncertainty

As refinancing continues to get harder and more expensive, companies need to recognize the greater strain this will place on their liquidity requirements and be more proactive in optimizing their businesses. AlixPartners outlines four key approaches to reconfigure a company for success:

• Lean into liquidity and cash generation – Borrowers must put their capital to work and keep a keen eye on cash generation, in addressing the pressures of elevated input costs, potential consumer spending contraction, and geopolitical uncertainty.
• Realism around refinancing – Now is the time to confront and resolve any underlying business challenges head-on, with a plan to drive organizational efficiencies and improve the fundamental operational systems.
• Focus on the business fundamentals – Leaders must strike the right balance in addressing their most pressing challenges against securing a viable, sustainable capital structure for the long term. If the forces of disruption are finding focus, how can leadership teams caught in the eye of the storm activate a reality check and reconfigure a company for success?
• Enhance agility across the board – Flexibility remains vital in both capital structure and operational strategy. Responsiveness and resilience guided by pragmatic realism must be the goals, to secure an improved business outlook.

Methodology:

Research for the 19th Annual Turnaround and Transformation Survey: Asia Report was conducted between 30 July and 5 August 2024.

Respondents comprised 200 lawyers, investment bankers, lenders, sponsors, financial advisors, and other industry executives involved in corporate workouts, representing more than 20 major industries in the Asian market.

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