12 October 2015
A boutique investment bank set up by former Deutsche Bank distressed debt traders is betting on the growth of the nascent Asian market for collateralised loan obligations.
Hong Kong-based SC Lowy has started a trading business for par loans – debt valued at 90% or more of its face value – to tap into the growth of Asia’s secondary loan market.Banks that originate par loans in Asia have typically held them until maturity, usually turning to the secondary market only to exit distressed holdings. But a more active approach to risk management by banks and a nascent market for CLOs – which play a key role in the syndication of debt by buying portions of leveraged buyout loans from banks – is increasing secondary trading in par loans in the region.
SC Lowy estimates secondary loan volume in Asia at $3 billion to $5 billion a year excluding syndications, compared with about $500 billion in the US.
As capital constraints reduce big banks’ appitite for having loan products on their balance sheets, boutiques face less competition.
SC Lowy chief executive Michel Löwy said: “In the last couple of years, the loan market in Asia has really expanded, and the leveraged loan market has really expanded. And so you see more and more institutions that want to sell or buy a loan not because a corporate is in trouble but because of risk management needs, their desire to lower or increase their exposure to a certain market.
“There are also rumblings about a nascent CLO market in Asia and, if it does develop, which I believe it will, that will again increase the size of the opportunity for secondary loan trading.”
Löwy said the CLO market is “pretty much non-existent” in Asia apart from some activity in Australia in the mid-2000s. He said: “At the peak of the CLO market you had a number of leveraged deals that were financed by CLOs that were done in Australia, and then that pretty much died. And now there are a number of firms that are exploring again whether that’s an opportunity or not.”
SC Lowy is having conversations with “a couple” of CLOs in Asia that are in progress as well as financial institutions that are considering establishing a CLO platform, said Löwy. Services the firm can offer include originating secondary loans for CLOs, as well as offering them liquidity and pricing services.
Theron Alldis, a Hong Kong-based loan trader who joined SC Lowy last year from professional services firm KPMG, will lead the new business.
Löwy and Soo Cheon Lee set up SC Lowy in 2009, having led Deutsche Bank’s special situations group in Asia. The firm has traded more than $7 billion of loans and bonds in the last 12 months, according to the firm. Competitors in the region include global banks such as Deutsche Bank and Bank of America Merrill Lynch.
SC Lowy has traditionally specialised in trading sub-par loans and high yield bonds, but also has a debt capital markets business. It also co-invests alongside its hedge fund clients in distressed debt opportunities.
The firm has offices in London and Seoul and relocated an analyst to Sydney last year, but later decided the opportunity was not big enough to warrant a separate presence. The analyst recently left the firm.