SC Lowy Sees Asia Distressed Debt Trading Boost as Zombies Fail
By Lianting Tu and David Yong
(Bloomberg) — SC Lowy says distressed debt volumes and trading will pick up in Asia over the next two years as lenders give up efforts to delay more corporate failures.
“I expect some real defaults to come in the next few years” as banks stop expecting turnarounds they had been hoping for, said Michel Lowy, co-founder and chief executive officer of the Hong Kong-based independent fixed-income boutique. “We have seen quite a bit in Asia of the ‘pretend-and-extend’ situations in the last couple of years.”
Distressed opportunities remain scarce this year as the fallout from the 2008 global financial crisis is cleared up and central banks cut their policy rates to near-or-below zero to support markets. Lowy said there is a lag of at least 24 months between difficult economic conditions and a pick-up in trading activities of distressed loans because banks often extend financial support and pretend their clients are healthy to delay provisions for bad assets.
While China is experiencing its slowest growth in a quarter century, its official bad-loan ratio has only risen to 1.75 percent in the first quarter from 0.96 percent three years earlier.
China has tolerated a few defaults among onshore companies in industries struggling with overcapacity and loosened some non-performing loan rules, while banks began packaging bad loans into asset-backed securities. Offshore bond defaults in Asia have mostly concentrated in the mining industry following a slump in commodities since 2010.
“New problems have not been ripe yet for trading activity,” Lowy said. He said the firm’s high-yield bond trading volumes have been flat while loan trading volumes are at an at all-time low.
While the Bloomberg Commodity Index has climbed almost 13 percent this year, the gauge is still down 63 percent from its 2008 peak. China’s economy grew 6.9 percent in 2015, the slowest since 1990. Emerging-market distressed bonds have returned 13 percent so far this year, versus a 2.9 percent gain in 2015 and a 20 percent loss in 2014, according to a Bank of America Merrill Lynch index.
“We expect in the next two years, places like India, Korea and Indonesia will be more attractive for distressed investors,” Lowy said.