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SC Lowy Reports Surge in Junk Debt Trading as Banks Scale Back

2015-10-20

By David Yong

(Bloomberg) — SC Lowy Financial (HK) Ltd. boosted junk bond and loan trades in Asia and Europe after a commodities slump triggered more defaults and as global banks scale back operations.

The independent fixed-income firm founded by former Deutsche Bank AG employees recorded total trading volumes of about $7.5 billion in the 12 months through September, an increase of 50 percent, according to an e-mailed statement.

Activity in the Asia Pacific region accounted for almost half of the total while the rest was about evenly split between U.S. trades and the Europe, Middle East and Africa business. Hong Kong-based SC Lowy doesn’t disclose its financial earnings.

Smaller brokerage firms are boosting their presence after Barclays Plc and HSBC Holdings Plc led banks in cutting more than 180,000 jobs since Lehman Brothers Holdings Inc. collapsed in September 2008. Goldman Sachs Group Inc. reported a 34 percent drop in third-quarter bond trading revenue earlier this month while JPMorgan Chase & Co. suffered a 23 percent slump due to subdued credit activity.

“To run a high-yield bond trading business requires a lot of resources, it requires more people, research and skills,” SC Lowy co-founder Michel Lowy said. “Many of our competitors that have been downsizing just don’t have the same commitment to the product to be successful. We’ve been able to grab more market share this year, not because the size of the market has grown.”

Default Surge

Asian junk bonds declined 3.7 percent last quarter, the worst performance since mid-2013, a Bank of America Merrill Lynch Index that tracks some $80 billion of securities shows.

China’s economic slowdown and speculation the Federal Reserve may raise its key interest rate have prompted investors to pull $76.3 billion from emerging-market equity and bond funds this year through September, according to EPFR Global data.

Bond defaults globally climbed to 87 this year, surpassing 60 in all of 2014, Standard & Poor’s said in an Oct. 14 report.

Chinese home builder Kaisa Group Holdings Ltd. and Indonesian coal producer PT Berau Coal Energy are among 18 casualties within emerging markets, the ratings company said. The Bloomberg Commodity Index is headed for a fifth year of decline after losing 14 percent since Dec. 31.

“There’s a lot less liquidity in Asian high yield than there used to be and we’ve seen a lot of investors trying to sell large positions,” Lowy said. Rivals that have reduced exposure or closed business units have taken “some of the liquidity away from the market when there is volatility,” he said.

‘New Reality’

Lowy said he has a bearish view on commodities, whose bonds form a sizable portion of the Asian junk market.

“This isn’t a market that’s going to snap back anytime soon,” he said. “It’s not purely a cyclical move lower, it’s a secular move that’s going to take years to change and it’s possible that current prices are the new reality.”

When the Fed does start to raise borrowing costs, investors will probably shift even more money from emerging market and higher risk assets into Treasuries, Lowy said. That means there’ll be less incentive to be invested in global high yield debt, making it harder for corporates to refinance their obligations, he said.

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