WEEKLY BRIEF: CREDIT
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India, Italy Are SC Lowy’s Top Credit Picks: Q&A
Michel Lowy, chief executive officer and co-founder at Hong Kong-based SC Lowy, says India and Italy are his top picks. Italy is behind its European peers in terms of its resolution process of bad loans, creating opportunities for credit investors. Changes in India’s insolvency laws have opened up that market for foreign money managers.
SC Lowy traded $16 billion of loans and bonds this year through July and its CEO spoke with Denise Wee on Aug. 27. Comments have been edited and condensed.
Where do you see the biggest opportunities?
The two largest markets for us are by far Italy and India, and they remain our top picks. Turkey has emerged as a potential land of opportunity over the last few weeks, but it remains to be seen what the opportunities there truly are and whether the situation is going to stabilize there. In China, there have been more defaults, and more bonds trading in distressed territory in the past few months, but it remains very difficult for traditional distressed investors to be involved in China because of the lack of information and the fact that local banks typically don’t sell bad debt to foreign investors.
Are you looking at doing any joint ventures in India?
We plan to set up a presence in India, which could be through a combination of joint venture and our own office. We are talking to Indian groups about potentially establishing a platform with them but in some ways we want to replicate what we have done in Italy. We have a Milan office and we also purchased a bank that gives us a local network. We plan to have an office in Mumbai before the end of this year.
Would you consider buying into an asset reconstruction company?
That’s one of the possibilities that we are discussing, establishing an asset reconstruction company on our own or buying into an existing one. We could also establish a non-banking finance company or partner with someone to establish one. There are various possibilities. From a regulatory standpoint, if you want sufficient support from the regulator to establish a platform, it is always very helpful to have someone on the ground with good connections. We are talking to various banks and family groups, and are in the process of narrowing down the conversations we have and are hopeful to make some choices about partners in the next couple of months.
What do you make of the competitive landscape in India?
It is competitive and there is a lot of capital in the sidelines. At the same time, investing in India is not easy. A lot of corporates aren’t used to working with foreign investors. The new insolvency law keeps changing, and although it’s a massive improvement from the regime we used to have, it’s still trial an error and there are appeals and uncertainty on the outcome of companies that are going through the insolvency process. I have no doubt that over time very large amounts of money will be invested. We see a great opportunity there due to the changes in the insolvency process. It’s a sea change, but everyone is taking their time. We see two types of transactions in India. You can buy existing loans in the secondary market and Indian banks have been increasingly selling them. Or you can work with a promoter or owner of a company to do a one-time settlement, where you make a new financing offer and the promoter uses that capital to buy out 100% of the existing bank debt and completely cleans the capital structure. The former works better for an asset reconstruction company and latter fits a non-banking financial company.
Why do you like Italy as opposed to Spain or Portugal?
We like Italy because it is much less advanced in terms of its resolution process of bad loans. In Spain and Portugal, the crisis started much earlier, and was largely driven by the collapse of real estate prices. To a large extent that has been resolved through a lot of mergers of banks. The Italian economy is different, it’s less real estate driven and more SME driven, and because they didn’t have the shock of a real estate crisis forcing banks to sell assets and foreclose, there was no resolution of the problems. Because there is no resolution, the problems have continued to balloon including at the government level and now it’s coming to a head especially with IFRS 9 and pressure on banks to put proper provisions into books. In Italy there are 300-400 billion euros of NPLs, while Spain and Portugal have less NPLs. We bought a bank, Credito di Romagna, in April and then did a large shipping deal. We have an exciting pipeline in Italy.
What sectors are you targeting in Italy?
We are targeting sectors like shipping, real estate and medium sized industrial businesses. We are also doing direct lending since we control a bank and the bank can lend. Our business in Italy is a combination of buying NPLs and financing new deals, whether done on our balance sheet or with the money of clients or friends of the firm. We have a banking license in Italy and we plan to use it as a springboard for expanding in Europe.