Singapore’s 80-Cent Loans Not Cheap Enough for Distressed Funds
By David Yong
January 26, 2016
Asian secondary loan trading thinnest in decade, says SC Lowy
Noble Group loans offered in 80s to dollar, debt trader says
Southeast Asia’s souring loans are becoming unpalatable even for some distressed-asset funds.
SC Lowy, an independent fixed-income firm founded by former Deutsche Bank AG employees, says secondary loan trading volumes are at the thinnest in a decade even with discounts near 20 percent for borrowers including Singapore-listed Noble Group Ltd. and Mercator Lines Singapore Ltd. The primary market is also receding after Southeast Asia syndicated loan volumes slumped 39 percent to a five-year low in 2015.
“The secondary loans market, in 2015 and continuing into this year, has been totally dead,” said Michel Lowy, co-founder and chief executive officer of SC Lowy, which focuses on loans, bonds, trade claims and special situations. “It’s the lowest volume I have come across in over 10 years, mainly because there’s been a massive gap between the buyers’ and the sellers’ expectations.”
Investors that buy loans, or portions of them, in the secondary trading market are being more discerning as some of Southeast Asia’s vulnerable borrowers endure a multi-year slump in commodity and shipping prices. China’s slowest economic growth in a quarter century, the lowest shipping rates in three decades and crude below $30 a barrel have pushed Asia’s bond risk to the highest in almost four months, based on credit-default swap prices.
Non-performing loans in Indonesia, Singapore and Thailand are at their highest levels in at least five years, according to data from the nations’ central banks. Net troubled loans rose to 0.8 percent of all bank assets in Singapore in the third quarter of 2015, the highest for a three-month period since that ending March 2010, official data show.
Asian junk bonds traded at a four-year low this month, based on the average price in a Bank of America Merrill Lynch regional high-yield dollar debt index. The last 15 months has seen Indonesian coal producers PT Berau Coal Energy and PT Bumi Resources and Singapore-listed China Fishery Group Ltd. renege on their borrowings. Jurong Aromatics Corp., which took a $1.73 billion loan facility in 2011 to fund its petrochemical plants in Singapore, fell into receivership in September. Ratings for energy and mining companies have been put on review for downgrades.
Commodity trader Noble Group’s credit rating was cut to junk by Standard & Poor’s this month, following a similar move by Moody’s Investors Service in late December, sending the price of its 2020 dollar bonds to 41 percent of their face value on Friday.
The company’s loans are trading at a “very high” yield on the secondary market, with its unsecured facilities due in May being offered in the 80s, said Lowy. Its loans were seen at 89-92 cents in the dollar early December, having traded at 92 in October and 87 in September, according to Bloomberg-compiled prices.
NPL ratios for Indonesia, Thailand and Singapore (blue line)
“Noble’s loans have seen very little trading,” said Lowy. “The spreads are widening. The offer prices are coming down and so are the bids. As a result, they don’t trade much at all.”
Noble Group declined to comment on the prices of its loans in secondary trading in an e-mail on Jan. 24.
Mercator Lines Singapore has reported losses for the last 13 quarters and its chief executive officer resigned last week. While its loans are more actively traded, they’re at “very stressed levels,” according to Lowy. The coal and crude shipper said a local court appointed Yit Chee Wah as its judicial manager on Jan. 18, following an application by lender HSH Nordbank AG in September, according to stock exchange filings.
Yit declined further comment when reached by phone on Jan. 22. The company earlier said he will evaluate all options to preserve the value of Mercator Lines Singapore’s assets for the benefit of its creditors.
“Asset quality will generally deteriorate in Southeast Asia, particularly mining and metal producers,” said He Xuanlai, a credit analyst in Singapore at Commerzbank AG. “Banks’ balance sheets will be tested.”
Syndicated bank loans for Southeast Asian borrowers fell to $75.8 billion last year, versus a record $124.5 billion in 2014. Barclays Plc has cut jobs across Asia and said it is exiting Indonesia and Malaysia. Standard Chartered Plc has also retreated from parts of Asia after being saddled with non-performing loans.
The cost of protecting Asian corporate and sovereign bonds from defaulting jumped to 162 basis points in mid-January, the highest level since Sept. 29, according to data provider CMA.
“Investors are nervous because there’s so much price volatility and macro uncertainty,” Lowy said. “The sector of focus will remain the commodity space, and those related like shipping or mining services, over the next three to six months.”