With the global financial outlook continuing to look uncertain, it is no surprise that the Singapore economy has been slow-moving as well. In the third quarter of 2011, the last quarter for which statistics are available, domestic economic activity rose modestly; at the same time, key industries like electronics continued to contract alongside global economic demand. As the Eurozone crisis simmers, and the U.S.
economy seems stuck in second gear, Singapore can look ahead to slower growth amid a downturn in external demand. According to the Monetary Authority of Singapore (MAS), the country’s economic growth for 2012 is expected to be between one and three percent, with trade-related sectors likely to face significant headwinds over the next few quarters.
From a law firm’s perspective, work is declining in some cases as a result of the slowing economy, and firms are feeling the pinch, the least of which is not the continuing downward pressure on fees.
Singapore currently has 100 foreign law firms involved in a variety of structures – joint law ventures, law alliances, QFLPs and so on – to go with the myriad local practices. Competition is understandably intense, as investors look to exploit the potential of the ASE AN region and India.
But despite the negative forecasts, Singapore isn’t all gloom and doom. M&A work, while having declined somewhat, is still fairly robust, arbitration is moving ahead in leaps and bounds, banking and finance is seeing the country benefit from the woes of the West, aviation is seeing the rise of the low-cost carriers, and Singapore is emerging as one of Asia’s major entertainment hubs. “Singapore is increasingly recognised in addition to Hong Kong – and overtaking Tokyo – as a thriving international finance centre for South and Southeast Asia, and a necessary second limb to any Asian strategy for international business not just for western MNCs, but for rivate equity – both the international houses and local ones – and or Asia's own multinationals,” says Andrew Martin, principal at aker & McKenzie.Wong & Leow. Clearly, Singapore has much silver ining to savour.
Corporate/M&A: Cautious optimism
Two important developments looming ahead for Singapore include an overhaul of the Companies Act, which last saw a total revamp back in 2005, and proposed amendments to the Singapore Code
on Takeovers and Mergers, as the country looks to keep pace with market innovations and international practices. While the Companies Act is expected to be overhauled in 2013, the amendments to the
takeover code are could take effect sometime early this year. “We expect to see a number of changes being brought about by the amendments,” says Andrew Ang, partner at WongPartnership.
“For example, it will alter the existing financial assistance rules, close the gap for compulsory acquisitions, and also bring changes to procedures for schemes and amalgamations under the code.” Ang adds that the code will be “good for some, bad for others,” and says that as it will be more difficult to squeeze out minority shareholders in an acquisition, he expects a number of M&As to happen quickly before the amendments come into play. Martin from Baker & McKenzie.Wong & Leow calls the ground rules of the takeovers code and the listing manual “well understood and encouraging.” “We note recent signs of greater flexibility on the part of the regulators, in line with international standards, regarding certain areas such as the tricky issue of special deal arrangements on takeovers,” he says.
However, for many law firms in Singapore, a lot of the work has been cross border and multijurisdictional, with a focus on emerging markets like China, Indonesia and India. Ang says that more than half of his work in 2011 was related to China, particularly the delisting of Chinese companies listed on the Singapore Exchange (SGX) or S-chips, which are headed back to China and Hong Kong for relisting on the exchanges there. “I expect this to continue until all the S-chips are gone,” he says. “Good S-chips,” says Ang, or the ones with high PE ratios, are moving to Hong Kong as they find better value there than from the SGX. The ”bad S-chips,” on the other hand, are being forced out following corporate scandals involving embezzlement, forgery, accounting fraud and the like.
Ng Wai King, also a partner at WongPartnership, says he has seen a sizeable amount of work come from Japanese acquisitions in Southeast Asia. Martin concurs. “In terms of acquirers, the Chinese and Japanese strategic acquirers have been very active,” he says. “For the Chinese entities, a lot of the
focus has been on resources. For the Japanese, their focus is more across the board, especially food and beverage, but also financial services, principally insurance.” In terms of how deals are put together, Martin says that there is a lot more stress on due diligence, especially on compliance issues including antitrust and anti-corruption. Ang says that the market has evolved and become more sophisticated, with the introduction of what he calls a “PE approach to deals with unique structures.”
Ng says that clients have become more discerning, asking for specialised lawyers to work on transactions. “Three years ago, the same lawyer may have been working on different aspects of a transaction,” he says. “These days, clients will ask for lawyers with different specialisations, such that a deal can be divided into different work streams with specialist lawyers working on each part.” Overall, the M&A picture has looked a bit bleak for the past year, and this is expected to continue into the first quarter of 2012 at least. “Partly because of the intensity of the competition, partly because of the shortage of real quality assets in emerging markets, and in part because of caution about the integrity of targets and the
broader macro environmental uncertainty which has stifled some of the traditional sources of bank credit, we are still short of where we were in terms of M&A activity levels pre-GFC,” says Martin of Baker
& McKenzie.Wong & Leow.
Ng of WongPartnership says he remains optimistic even in difficult times. “The Eurozone crisis has made it difficult for a number of M&A transactions, particularly with respect to financing,” he says. “The crisis will continue to have an impact on deal volume and deal value in Asia”. That said, he notes that the firm has made a “pretty good start” in 2012, given deals that have been signed up in January and existing corporate/M&A work in the pipeline. Firms remain hopeful for the year ahead. Ng and Ang say they are “cautiously optimistic,” noting that in difficult times, M&A deals still take place, as there are a number of distressed assets available. Martin says that he is “quietly confident” for 2012 and beyond.
“The macroeconomic picture may be one of uncertainty from which Singapore and the rest of Asia is not insulated, but there are areas of opportunity,” he says. “The depressed public markets raise prospects
of ‘take private’ transactions, and so we expect to see several of these.”
Arbitration: Singapore comes into prominence
As reported in ALB’s December issue, Singapore is now seriously vying with Hong Kong to become Asia’s premier arbitration hub and this, says Chong Yee Leong, partner at Rajah & Tann, is no accident. “This has come about… as a result of the concerted efforts made by the Singapore government, judiciary, and the whole legal and arbitration industry over the last few years,” he says.
But circumstances are also playing their part. “The current economic lassitude is leading to disputes
stemming from failed transactions, deals and investments going awry,” says Randolph Khoo, director at Drew & Napier. “The extent of foreign investment into Asia has also led to the internationalisation of arbitral disputes being resolved in Singapore.” The numbers show that arbitration is certainly on the up: The Singapore International Arbitration (SI AC) Annual Report for 2010 said that SI AC arbitral filings had risen for the 10th consecutive year.
Interestingly, a significant number of cases heard in the island state involved parties and matters that have no connection with Singapore, including matters from far-flung jurisdictions such as Iran, Cyprus and the UAE. “(Their) choice is driven mainly by Singapore's reputation for transparency, integrity and efficiency,” says Davinder Singh, CEO of Drew & Napier. India and Greater China contribute the bulk of international arbitration at the SI AC, with Southeast Asia (in particular, Indonesia) featuring prominently, notes Chong. There has been a spike in the number of arbitrations originating from the Indian subcontinent; the number of cases involving at least one Indian party at the SI AC has gone up by nearly 200 percent in the past two years.
Not surprisingly, Singapore is beginning to attract law firms with the amount of business on offer. “In addition to the local Singapore practices, there are currently over 100 foreign law firms located in Singapore, many of which have arbitration practices to service the industry,” says Chong, pointing that the last couple of years have seen the arrival of new global entrants to Singapore like Bankside Chambers and Nabarro, and also specialist arbitration firms such as Hanotiau & van den Berg.
Additionally, local Singapore law firms are fast gaining recognition as world players in arbitration. “At the same time as the landscape here is being liberalised to allow greater participation of foreigners in the
corporate and dispute resolution spaces, Singapore lawyers are increasingly involved in cross-border work and are being seen in international arbitrations seated elsewhere,” says Singh. One of the ways in which the approach of Singapore firms to arbitration has changed of late is an increased emphasis
on specialisation. “Rajah & Tann’s approach to arbitration has qualitatively moved to focus on high-yield, complex arbitration covering larger claims,” says Chong. “A major factor behind this approach has been
the increase in client demand for specialised legal advice in industries such as oil and gas, telecommunications, power and energy, infrastructure development, and process engineering.”
Singh says that because some of Drew & Napier’s cases involve esoteric issues, it has required the firm to “acquire indepth knowledge on the latest developments in the fields of bilateral investment treaties, international law, and technology.” Looking ahead, Singapore can expect to see the amount of arbitration growing. “With an economic slowdown predicted in Europe cast against the broader shift in
economic influence from the West to the East, steady economic growth in mainland and maritime Southeast Asian jurisdictions is likely to represent an increase in arbitration work for… all international
arbitration practices in Singapore,” says Chong. Singh of Drew & Napier, who notes that the continuing global slowdown will result in more parties being “prepared to fight,” says that the bulk of the work
will likely continue to come from Asia, in particular India, Indonesia, China and Vietnam.
Projects and energy: A surprisingly busy year
For a country that possesses a particularly well-developed energy and infrastructure sector, 2011 was a notable year for the number of major projects and financings that achieved key milestones in Singapore, say David Platt, project finance partner, and Ajoy Halder, senior associate at Pinsent Masons MPillay.
The year’s biggest project finance deal was executed in May, when Jurong Aromatics Corp signed a S$2 billion ($1.57 billion) package to finance its Singapore petrochemical plant. In July, GMR Energy secured a limited recourse term-loan facility of $549.7 million, and a credit and working capital facility of $270 million for its 800 MW Island Power project, one of the largest independent power projects in Singapore. A consortium consisting of Siemens and Samsung will design and build the plant, which is expected to
become operational in 2013. Meanwhile, in the water sector, Hyflux was awarded a contract in March to develop the S$890 million Tuas II desalination plant – Hyflux’s biggest project – and in early July, Sembcorp started construction on a $40 million integrated wastewater treatment plant in Jurong Island.
In the energy sector, Singapore-based electricity provider SP PowerGrid started the tendering process for the construction of two multibillion dollar underground cable tunnels. Finally, in the transport sector, the Singapore Land Transport Authority has awarded contracts over the last year for the development of the 21 km Downtown Line Stage, the final and longest section of the 42 km Downtown Line. Around 12 contracts with a combined value of about $2 billion were awarded to 12 companies.
With most projects and energy lawyers in Singapore handling work from around the region, 2011 has also been a busy year for countries like Indonesia and Vietnam, say Platt and Halder. Vietnam has seen
progress in its infrastructure sector with the successful financing of AES ' Mong Duong power project. “However, the boost that investors hoped this would give to private sector infrastructure development
in Vietnam has not yet happened,” they say. “Uncertainties over the economic situation, and government concerns as to the level and nature of guarantees needed to support projects still persist.”
On the other hand, the Indonesian government continues to be a strong supporter of infrastructure development. In May 2011, it launched the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development between 2011 and 2015. Around the same time, it also announced plans for 17 new projects (including infrastructure) across four provinces, with the total cost estimated at $21 billion. “In Indonesia, there is always a concern that the announcement of projects is not always followed by the implementation,” say Platt and Halder, “but this year, there are positive signs that indicate some real activity is possible in 2012.”
One of the biggest energy projects, the Central Java Power Plant, in Indonesia was awarded in 2011 by the state-owned electricity firm, Perusahaan Listrik Negara, to a consortium consisting of JPower, Itochu and Adaro. The consortium will develop a 2x1000 MW power plant in Central Java at an estimated cost of $3.48 billion. The project is notable for two reasons: Firstly, it is the first project effected under Indonesia's public-private partnership (PPP ) law, and there are indications that future projects in both the power and other (for example, transport and water) sectors will be implemented next year. Secondly, it is the first project to enjoy the Indonesia Infrastructure Guarantee Fund’s support and guarantee, representing a major improvement in terms of clarity and transparency on the previous guarantee regime.
The further development of the PPP model, say Platt and Halder, is possibly the most significant trend in the projects and energy sector around the region. “This may seem at first to be a strange statement as far fewer PPP projects have been announced than hoped for in 2011,” they say. “However, there are indications that, in the Philippines and Indonesia particularly, progress is being made in the capacity building that is a necessary first step to implementation of projects. Most participants are hoping that after the false starts we have seen in 2011, there will be some real progress in 2012.” Looking ahead to 2012, they say that an inevitable lull is expected in construction activity in Singapore, particularly given the number of public and private projects effected over the last two years, with construction expected to recover in late 2012.
“The primary reasons for the expected growth in construction activity in 2012 are execution of several large-scale commercial construction contracts in 2011, the ongoing attempt by the government to boost supply of affordable housing for Singaporeans, and the completion of tendering process for most of the railway contracts,” say Halder and Platt. Meanwhile Indonesia, with its newly minted investment grade status, is expected to be a significant help in developing infrastructure investment. “More generally, the need for infrastructure (transport and energy in particular) is becoming more and more obvious around the region, and the pressure on governments to actually deliver projects is likely to increase,” they add. “Given this, guarded optimism seems to be the order of the day.”
Banking and finance: Overseas woes bring benefits
With U.S. and European banks mired in troubles, there has been a significant increase in regional banking transactions, with Singaporean banks benefiting from their troubles, says Susan Kong,
director at Stamford Law Corporation. “More international loans and capital market transactions are now being denominated in Singapore dollars,” she says. “Previously, they were in other more international
currencies like the U.S. dollar, or borrower’s or issuer’s domestic currency. This has happened in part due to the credit crunch in other parts of the world, and the liquidity of Singapore dollars.”
Kong adds that she has seen a continued development in the wealth management space amid tightened regulatory controls and licensing requirements for professionals rendering financial advice and/or managing funds. From a professional firm’s perspective, with the introduction of the QFLPs, there
is now stiffer competition for work in the Singapore-law-governed banking and finance space, says Kong. “Also, we see many mid and junior banking and finance lawyers leaving large Singapore firms to
join foreign firms,” she adds. The proposed merger of Allen & Gledhill and Allen & Overy is also looking like it will complicate things. “The larger Singapore firms in the Tier 1 and Tier 2 space will be watching it
closely, and will be under pressure to either find a partner firm to merge or collaborate with,” she says.
“This merger is perceived to have the effect of putting pressure on these Singapore firms to compete for the Tier 1 and Tier 2 work, and poses great challenges for talent retention and recruitment.” Additionally, she says that she expects to see more fragmentation in the market, with some firms undertaking small local “vanilla” transactions, other firms undertaking such transactions and some larger domestic
real estate driven transactions, and the rest undertaking large capital market transactions and regional transactions.
Despite these pressures, she expects to see healthy growth in the banking and finance space as “Singapore becomes increasingly successful as a significant international financial center and is well-poised to take advantage of the growth in Asia.” Yu-En Ong, Singapore-based partner at Norton Rose, says that he expects to see some banks downing shutters in the country. “Singapore is a major financial centre with many Asian and international banks having a presence,” he says. “Any bank that wanted
to establish a presence is already here. This year, we anticipate there to be some consolidation in the banking and finance sector, and even one or two banks exiting from the country.”
Intellectual property: ADR comes into focus
Among the significant developments in the intellectual property (IP ) space in recent times, has been the boost to alternative dispute resolution (ADR ) infrastructure for IP conflicts in Singapore by way of the introduction of a joint dispute resolution procedure framework between the Intellectual Property Office of Singapore and the WIPO Arbitration and Mediation Centre (WIPO Centre) in 2011. “The procedure, which is expected to be available from early 2012, enables IP disputes to be resolved through mediation which is administered by the WIPO Centre in Singapore,” says Yvonne Tang, director in Drew & Napier’s
intellectual property department.
Tang says she has found more parties prepared to turn to the courts to resolve their IP disputes, and local courts signaling a willingness to depart from the UK approach in trademark infringement matters.
For example, she says, in the Polo/Lauren Co v Shop-In Department Store case, the Singapore Court of Appeal, while adopting the “threestep” test in British Sugar v James Robertson & Sons, made clear the
fact that a sign is similar to a registered mark does not automatically mean that there will be a likelihood of confusion. It also held that the court is entitled to look outside the mark and the sign, as well
as the articles, to assess whether a likelihood of confusion exists.
“This approach was followed or referred to in notable subsequent cases,” says Tang, citing as examples MiTac International v Singapore Telecommunications, City Chain Stores v Louis Vuitton, and Ferrero SpA v Sarika Connoisseur Cafe. Tang notes that ADR options and recent developments in local case law have become increasingly important in her firm's approach towards IP conflicts. “We can expect the alternative dispute resolution scene to gradually shape up, and play an increasingly important role in IP conflicts over the next one to two years,” she says.
Shipping: A perfect storm
While it is obvious that the shipping markets are in a fairly difficult state, what has surprised industry watchers is just how bad it is. “It’s obvious that this is a tough market,” says Martin Green, managing
partner of Stephenson Harwood’s Singapore office. But this downturn is unlike any other. Unusually, both lenders and borrowers are facing problems - banks in accessing funding, and shipping companies in creating value from the loans they’ve taken.” The upshot, he says, is that there is bad news on the horizon. “Quite a few substantial shipping companies are having problems,” he says. “I foresee trouble ahead in 2012.”
A consequence of this market, he says, is an increase in the amount of restructuring and enforcement work. “There’s a far greater requirement for enforcement of security,” says Green. It has been a
similar experience for Goh Mei Lin, partner at Watson Farley Williams’ Asia Practice. “There has been a marked decrease in predelivery (construction) financing of ships, and a marked increase in the number of restructurings and enforcements over the last 12 months or so, which is another area in which we have been actively involved,” she says. “We were, and are, involved in the majority of ship arrests undertaken by banks in Singapore.” Goh adds that with access to commercial bank funded transactions
being tightened, there has been a significant increase in the number of ECA-backed ship finance transactions, particularly SINOS URE and K-SURE transactions.
Hard times have meant that an increasing number of borrowers are now approaching courts in order to seek protection from creditors. Green from Stephenson Harwood says that one avenue is attracting increasing attention: U.S. courts. A verdict won last year by Netherlands-based global maritime
shipping company Marco Polo Seatrade in the Southern District of New York showed that U.S. Chapter 11 proceedings were a viable restructuring strategy for international shipping companies, as long as they had the minimal connections needed to satisfy U.S. jurisdictional requirements, and confirmed
that U.S. bankruptcy courts would maintain jurisdiction over foreign debtors as long as the Chapter 11 filings were made in good faith and with the intention to properly reorganise the business. “Since much of the shipping business is a U.S. dollar business, I think we will see more local shipping companies seeking recourse to U.S. courts now,” says Green.
Looking ahead, Green sees the trend of enforcement and restructuring work continuing. At the same time, he says, banks will continue to lend in order to make loans to cover loans that have been repaid or otherwise recovered. “However, they will be a lot more selective about it,” he says. Goh expects about a year or more of pain before things begin to look up. “The continued tightening in the banking market, the still-challenging shipping market, and the fact that many companies no longer have the cash reserves which they had two or three years ago will make the next 12 to 18 months a difficult period.
But with it come opportunities, and from this we anticipate a consolidation cycle occurring over the next 12 to 24 months,” she says. “Given our experience and expertise in the corporate, commercial, finance and dispute resolution areas within the maritime and aviation sectors, we are well placed to help the borrowers, lessors, lessees and the banks, and financial institutions through this challenging period.”
Aviation: Budget carriers buck turbulence
Much like the global economy, the world aviation industry has been facing turbulence of late. According to Paul Ng, partner and global head of aviation at Stephenson Harwood, the reasons are numerous.
For one, new lending practices introduced under Basel III regulations, some of which will be enforced as early as 2013, will increase the cost of funding for banks, and whilst not specifically targeted at the
aviation industry, is expected to be passed to borrowers (such as airlines) through increase in pricing of their loans. Aircraft flying into and out of European airspace began to be subject to the EU Emissions
Trading Scheme from January, potentially increasing operating costs greatly, and a number of countries are talking about bringing into force retaliatory measures.
Finally, under the 2011 OE CD Aircraft Sector Understanding (ASU), the cost of export credit (ECA financing) has increased. ECA financing has become one of the backbone sources of financial support for the industry, and as the cost of such funds, in some cases, have doubled, industry players may be forced to seek cheaper financing in an already liquidity-scarce environment. This has contributed to a period of belt-tightening in the aviation industry, says Ng. Over the course of last year, quite a few aircraft lessors have also been going through a phase of divestment of their fleet; these include IL FC, Macquarie and the aircraft finance arm of RBS.
This shortage of funds, says Mehraab Nazir, partner at Watson Farley Williams’ Asia Practice, is leading to more borrowers seeking funding from capital markets, and equity from third party funds. Nazir
adds that the number of Japanese operating lease transactions has also been increasing. Assets covered by the Japanese operating leases include both aircraft, and an increase in the use of Japanese operating leases for container box transactions. There are also an increased number of private equity, junior debt, and mezzanine finance players and products available in the market.
Ng says that the silver lining in the industry has come from low-cost carriers, especially regional low-cost carriers like Lion Air, AirAsia, Cebu Pacific and Indigo. “These airlines have the steepest growth
trajectory at the moment,” he says. With profits continuing to grow – AirAsia made $500 million in 2010 – they are targeting corporate customers now by introducing business class seats and other perks.
“Budget carriers are now established brands,” says Ng. “They are the ones who need capital now; they are the ones who the market arguably have the most confidence in. It is no surprise that the
investors are circling.”
Media and entertainment: A new level of excitement
With Singapore growing in prominence as an Asian entertainment hub, financing opportunities for its entertainment industry have increased correspondingly. Samuel Seow, managing director of Samuel Seow Law Corporation, says that Singapore’s Media Development Authority’s (MDA) recent announcements of new funding schemes have “sparked a new level of excitement in the entertainment industry in Singapore, and indeed, worldwide.”
He adds that these should have the effect of renewing interest in Singapore as a fast-developing
entertainment base. In October 2011, the 46 assistance schemes previously made available by the
MDA were streamlined to just five, with a $88 million budget being set aside for these five schemes, all of which were open to the seven sectors of the media industry namely animation, broadcast, film, interactive media, music and publishing. Seow says that a key change in these new financing schemes is that MDA will no longer seek to own a share in funded projects, and companies under the schemes can own all rights to their works.
“The regime has changed from one of ‘investment’ into ‘grants,” he says. “As much as the new found freedom is welcome, it also brings with it the responsibility of ensuring that companies develop their own expertise in the protection and exploitation of their intellectual property around the world,
without the formidable shadow of the government funding body looking over them in protection.” Seow adds that he believes the new grant scheme will allow enterprises to build on their capabilities, and
develop competitive advantages for long-term growth.
Another development is that funding is now available to any company incorporated in Singapore, with the previous requirement of a minimum percentage of local shareholding being removed from the funding criteria. “This could have the effect of attracting even more international entertainment businesses to set up a base in Singapore for the financing opportunities,” says Seow.
Seow adds that international cooperation between Singapore and other countries will lead to the creation of new work for consumption worldwide. “Singapore has signed many co-production treaties with other countries, including Australia, Canada, New Zealand and China,” he says. “However, few official co-productions have been completed and exploited under these treaties. It is anticipated that there will be increasing pressure to use these coproduction treaties in the coming years.” Seow’s firm has worked on Bait 3D, an upcoming horror film that is the first Singapore-Australia 3D co-production, and he says he believes this film could provide Singapore’s film industry a shot in the arm. In a similar vein, the partnering of the MDA and Singapore’s Cybersports and Online Gaming Association with
China Information Broadcast Network has allowed Singapore produced games access into the
Chinese market, which consists of an estimated 60 million gamers, says Seow.
Looking ahead, he says that with international heavyweights turning their eyes to the region, as well as substantial government support in the form of funding and partnership platforms for local businesses to reach a regional and international audience, the media and entertainment industry should “grow more outward looking for its local players to become more mature in their negotiations and approaches to intellectual property.” “We are heartened by the tremendous growth in the industry within the region in the last few years, and anticipate sustainable future growth,” he adds. “The development of sound stages in
Mediapolis in Singapore and Pinewood Iskandar Malaysia Studios in Malaysia is set to further
establish the region’s significance in the global media and entertainment market.”
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