For several years, distressed debt funds have been sharpening their talons, but in Asia they have found little in the way of injured prey.
Pre-crisis, the distressed investing market in Asia was populated by investment bank proprietary desks, hedge funds doing illiquid transactions and commercial banks undertaking private lending. Today, hedge funds have moved back towards liquids and prop desks are a pale shadow of their former selves.
“Prop desks have changed their business models and changed their role to agency and broking,” said Justin Ferrier, CEO of Myo Capital Advisers, appearing on a panel moderated by Hash Dave of Tanelorn Consulting at AsianInvestor's and FinanceAsia's 2nd Asia-Pacific Debt Investor Forum.
“So there is a lot more transparency on price on the 10-15 deals we see offered widely. We like to find our own deals, ones which few people are covering and where we can make more alpha.”
There are a handful of large banks in Asia doing private lending and investment banks are looking for ways to enter that market. However, compared with the US and Europe, volumes of distressed debt are very much less and there are not many secondary deals.
But there is prey at large now. In instances where property markets have become over-blown, then there are deals arriving on the table.
“You can do as much as you like in real estate in China and India. The supply from there is quite overwhelming. In India, property firms need to find bridging finance in order to prevent default,” says Shyam Maheshwari, a partner at SSG Capital Management in Hong Kong.
In China, the question is when will NPLs officially come out? Right now they are present within the system, and if there is a default this year, what will happen after that, will they be recognised, and transferred to an asset management company for disposal? At the scale likely to unfold, it will be a game that only the bigger distressed investors have the capacity to absorb.
“In Chinese NPLs, the local player is the individual who can do the $1 million to $5 million deals and he knows everyone, including all the judges. Distress in China is likely to come from policy-based lending,” says Benjamin Fanger, co-founder of Shoreline Capital Management.
“There are few institutions there which could handle a $30 million to $40 million-size portfolio of non-performing loans. The chickens don’t come home to roost until China starts to tighten credit. They started to do so at the end of last year and we saw hundreds of fully secured real estate deals.”
All of this will be a tightly controlled and choreographed process. The Chinese lending market remains multi-dimensional nevertheless.
“In China even if official lending is being restricted, there is still credit growth by virtue of banks’ issuance of trust products and the underground lending system," says Phil Groves, president of DAC Management.
"In China, certain investors you can follow and make a note of what they buy, because they aren’t doing proper due diligence and one day a number of those deals are going to be in distress.”
What do these firms hold? In China, funds are going to the local land registry to find out exactly what titles and assets they hold. Distressed investors are not relying on the annual report and accounts, but going to source, as the hard assets will be the back-stop and the leverage that gives them a hold over the debtor.
“You don’t treat a piece of collateral as simply something you can foreclose upon,” observed Ferrier. “It is a mechanism to exert control on the counterparty and bring that party to the negotiating table. The goal is to ensure that the cashflow from the asset or business is shared so that the outcome is a win-win solution.”