Michel Lowy, co-founder and head of independent, HK-based investment banking business SC Lowy, argues that midcap companies in need of capital to support growth deserve a better set of solutions than the current investment banking environment is willing or able to offer.
May 18, 2014 | Michel Lowy
The distressed debt market is on the rise in Asia. In terms of year-on-year percentage growth, completed restructuring rose 83% in 2013, edging out Europe (82%) and significantly outpacing the US (30%).
Out of the total $173 billion in distressed debt restructuring in the world last year, the US totalled $90.4 billion, while Europe, Middle East and Africa reached $66 billion. Activity in Asia was $24 billion, 14% of the global total.
It’s worth asking why the market in Asia is such a small portion of the global pie.
A clue lies in the region’s success story. Asia is, after all, generally accepted as the world’s primary growth region, and it makes sense that less companies fail in growth economies. Yet it can hardly be argued that Asia has a minimal need for distressed debt finance in comparison to markets in Europe and North America. A more likely answer lies in the funding gap endemic across the region. Many companies—especially those in the midcap range of up to $1 billion in sales—have limited access to capital across the board, and fewer funding opportunities result in less restructuring.
It wasn’t always so. Prior to the Asian financial crisis of 1998, the larger banks in the region supported the midcap sector. Since then, businesses have been funding themselves via the region’s vibrant equity markets. Yet for the last ten to 15 years, midcap companies have had serious difficulty raising debt.
The consequences of this funding disconnect are not lost on the region’s multilateral bankers. The Asian Development Bank (ADB) launched a survey to explore the supply-demand gap for finance for small- to medium-sized enterprises in Asia, released in January 2014. The study polled 431 individuals in SMEs in China, India, Malaysia and South Korea. On the supply side, the ADB interviewed 105 executives at banks, securities firms, investment companies, venture capital companies and funds.
The demand-side study found in the four countries that a great majority of respondents wanted better access to formal financial institutions and to reduce dependence on both their own capital and informal individual borrowing. The ADB also found that major constraints arising from the supply-side included collateral and guarantees a prerequisites for loans, complicated procedures to borrow money, high lending rates and hyper-strict lending policies at financial institutions.
From SC Lowy’s perspective, it is an irony that the services we have developed for stressed companies should also be precisely those needed by companies that are not in distress per se; companies with solid, working business plans, durable management and robust systems. Bankers should be knocking at their doors, not shunning them. Yet in Asia, even the best companies, if they are midcaps, lack access to the lifeblood of capital, and require the kind of attention, flexible approach, financial partnership and willingness to share risk necessary to support distressed businesses.
The abdication by larger financial institutions servicing this niche has been less a policy and more a short-sighted reaction to their own difficulties. Global banks face severe regulatory constraints in the wake of the global financial crisis. In response, commercial banks tend to focus on blue-chip clients only. The irony is that their neglect of the deserving companies that fall slightly below these entry standards for recognition is limiting the banks’ own future prosperity, like farmers that see no purpose in seeding fertile ground and only look to the current harvest.
Asia’s stunning growth markets deserve financial services providers that address the needs of future sources of prosperity, not merely those that will deliver spectacular returns today. By turning their backs on this group, financial institutions cede the legitimacy that forged their business at the start. But they have much to gain – in earnings and reputation – if they adjust their strategies to embrace a wider constituency.