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Understanding Asia’s evolving credit markets

Asia’s developing credit markets offer exciting opportunities for private equity investors. The region is seeing a new influx of capital, mainly from private equity, while demand is now stronger than it was a decade ago, SuperReturn Asia heard.

Donald Yang, managing partner & CEO at Abax Global Capital, said: “This is a very exciting time.”

Grant Fleming, partner at Continuity Capital Partners, said the Asian market had grown in recent years in terms of both depth and the number of managers and the understanding of those managers.

But he said that while Limited Partners were presented with a lot of opportunities in the private credit channel, there was also a lot of misinformation about Asian credit markets.

“It is a very diverse region and the risks are no larger than in Europe or the US, but the default rates are lower and the returns rates are higher,” he said.

“For many countries across the Asia region, non-bank lending can offer substantial opportunities.”

He added that China, India and Australia offered some of the best opportunities.

Justin Ferrier, managing director at BlackRock, also pointed out that Asia did not just have developing markets, but also developed markets.

“Asia has more direct business. There is less sponsor, less private equity shops, less competition, particularly in private lending, and because of that we are able to generate mid-teen returns,” he said.

He favours India because of banking sector change, good economic growth and the new bankruptcy laws.

He added that there were also “tremendous opportunities” in Australia, particularly in mortgage finance, construction financing and in some niche areas, due to consolidation in the banking market and tight regulation.

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China’s liquidity cycle

Yang said in China, the demand for structured credit by companies was largely driven by their desire to acquire.

He pointed out that Chinese banks do not lend to the private sector and middle market companies, and because China does not have a well-developed domestic bond market, one of the only options for many middle market companies had been to borrow through the shadow banking sector.

He said the deals he was doing were generating gross returns that were “somewhere in the 20s”.

“In the last few years, another opportunity has surfaced due to overseas investment by Chinese companies,” he said.

He added that the risk profiles and dynamics for these deals were different to the opportunities in Europe and the US, but they did require a very large ticket size.

Greg Peng, founding partner and CEO at Cindat Capital Management, said China had been in a significant liquidity injection cycle for the past 10 years but there were signs that was beginning to change.

He said new loans had been increasing at a rate of 15% every year, except in 2009 when a RMB4 billion stimulus package led to a 36% increase in loans.

“This has really supported the economy in an investment-driven manner and a lot of growth has been generated by this injection of liquidity,” he said.

But he added that it had led to the depreciation pressure on the RMB and a depletion in China’s capital reserves.

“It has got to a stage where it has to slow down and non-deforming loan opportunities will start emerging again,” he said.

He added that some unofficial estimates put non-performing loans as high as USD800 billion to USD1 trillion.

Peng said large-scale sales had just started in the past year with about USD100bn of loans sold by the banks.

He said loans were currently expensive but he expected prices to come down when the liquidity-squeeze really started to be felt.

“We are not in liquidity tightening yet, there is still a lot of liquidity in the system, but we do think when the tightening does start to hit a lot of Chinese capital will dry up, competition will reduce and prices will come down,” he said.

Opportunities in India

Venkat Ramaswamy, executive director at Edelweiss Alternatives, pointed out that India performing credit had one key characteristic, namely that it has always been collateralised, whether this was through equity shares in the company or real-estate.

“Over the last six to seven years this opportunity has opened up to more international investors to come into fund structures,” he said.

He said investing in non-performing loans in India had been extremely attractive with gross rupee returns of between 21% and 23%.

But he warned that it required a lot of “heavy lifting” compared with pursuing a performing debt strategy.

“We have 97 to 100 people in our NPL investment team, including a meaningful number of lawyers,” he said.

But he added that the new bankruptcy laws, under which India is following the British system and putting creditors, rather than debtors in control, was a “huge step forward” for credit investing in India.

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