It was a golden age for Asian distressed-asset prop desks in banks between 2000 and 2002. Times aren't so good these days.
Distressed deals are few and far between in Asia. On the contrary, industry and commerce in the region is doing pretty well, thanks to low interest rates and growing markets.
In the noughties, all the banks had a special-situations group investing their own capital and receiving a chunk of the balance sheet. That balance-sheet allocation has since been taken away and, in some cases, the distressed desks were made to feel like unwanted baggage.
For example, Citi told its distressed-debt team early last year that they were going into their Citi Holdings 'bad bank', its $500 billion repository for ancillary businesses. Having 'bad bank' on your calling card doesn't do much for morale.
"Troubled assets in Asia that are trading at 40-50 cents on the dollar are not the low-hanging fruit that was available after the 1997 Asian crisis," says one veteran of Asian bank prop desks, on condition of anonymity. "Now deals in Asia at that price have a lot of hair on them, by which I mean serious issues with credit. Banks don't have pressure to dispose of non-performing loans, and there isn't much supply."
So who is left standing? Goldman Sachs, needless to say. Its special-situations group is still investing, and the firm is understood to have another group doing private investments in pre-IPO structures, which is also now doing distressed/illiquid sales and trading. JP Morgan and Standard Chartered also have distressed prop operations.
Of course, Paul Volcker is saying that banks' prop desks should be shut down. The "Volcker Rule" would bar banks from several activities including: owning/controlling hedge funds and private-equity firms; acting as prime broker to hedge fund advisers; growing too large; and engaging in proprietary trading.
At the recent distressed-asset conference in Hong Kong organised by AsianInvestor and FinanceAsia, the vast majority (about 90%) of the audience voted informally for the Volcker Rule to be adopted.
The banks' flow desks buy and sell distressed assets and do not receive enough from the balance sheet to build a sustainable inventory book. (At least, not one big enough for serious bonus-building). That tier in Hong Kong includes Bank of America Merrill Lynch, UBS (where Newtonian Asia Fund former trading head Young Cho now works on distressed sourcing and distribution), Morgan Stanley, Citi (who hired John Liptak from Tribridge) and Deutsche Bank.
So we have the prospect of the Volcker Rule enacted in some form, a business migration to flow desks rather than the classic prop desks of banks, not much distress in Asia, distressed investors finding distressed opportunities in Europe and North America, and unattractive pricing.
So what's the next career move for distressed specialists?
"Probably people will want to become high-grade research analysts, or possibly join private-equity firms," says our market insider. "I guess we would quite like to be investment bankers, of the M&A type, but the bankers won't let us in.
"Loan syndication we'd have skills for too," he adds. "But I don't know anyone who has made the crossover from Asian distressed into either investment banking or syndications."
Alternatively, maybe start your own brand of new distressed-debt/special-situations hedge fund -- that's what the most talented individuals in Asia are doing.