An Exclusive Interview with Michel Lowy, Co-Founder of SC Lowy: The high-yield bond trader is looking for “Chinese Partners”
By Zhu Lina, Special Correspondent, Hong Kong
COMMERCIAL and investment bankers that lived through the 2008 financial meltdown tend to recall it as a time of turmoil and loss. Michel Lowy, former head of Deutsche Bank’s strategic investment group, sensed a hidden opportunity.
“After the financial crisis, some European and Australian commercial banks started to reduce or even sell their secondary loans in Asia. The top investment banks were confronted with stricter supervision and capital requirements, which provided us an excellent opportunity to enter the market,” recalls Lowy, co-founder and chief executive of SC Lowy, during his exclusive interview with 21st Century Business Herald.
Lowy and co-founder Soo Cheon Lee exited Deutsche Bank in 2009 and established SC Lowy on their own. The new investment banking business focused exclusively on fixed income products and investments. Five years later, transaction volume at SC Lowy hit USD 5.4 billion, making it a leading company in the secondary loan market in Asia, the Middle East and Australia and a top 10 high-yield bond trader in Asia.
The outspoken Lowy likens the operating mode of traditional big investment banks to a “supermarket”, large, comprehensive and offering a broad range of products. In contrast, he compares SC Lowy to a more exclusive grocer, operating in a distinct niche, seeing no reason to be “everything to everybody.”
“We integrate our independent research and professional capabilities in trading and finance to support client transactions and seize opportunities backed by our strong balance sheet,” he says.
SC Lowy has its own balance sheet, unique for an independent fixed income firm. “Some banks don’t have capital themselves, they just act as brokers during the transaction. And for banks with too much capital, clients can feel threatened and that they may be squeezed out. Our capital size is just fine, so we’re able to establish a trusted relationship with clients.”
SC Lowy’s early capital mainly came from three sources, namely seed money from management, capital raised from selling minority stakes to PE funds and capital raised from large global institutions.
Lowy said that after the 2008 financial crisis, many global institutions began setting up funds in Hong Kong and Singapore to focus on investing in the Asia bond market. Investors were keen to be in the game. “In 1990, when I first started off in this business, there were only a dozen investors in the Asia-Pacific region and now there are over a hundred.”
SC Lowy’s current pipeline is approximately 80% on shipping, mining and real estate. “Those industries depend on economic cycles; many companies have difficulties raising capital in these sectors,” Lowy says.
“The potential clients we’re looking for are the ones with strong competitiveness and a mature operating model. The industries they’re in should have certain entry barriers, and these companies will have broken through them. Still, they are facing liquidity issues in the short-term due to changes in circumstances.” Lowy said.
Lowy is extremely proud of its fixed income research group, one of the largest in Asia, currently led by co-founder, Soo Cheon Lee.
“One third of the firm are full-time analysts. Their responsibilities involve studying financial data of the company, field-inspecting, daily operations and visiting their suppliers, clients, etc.” Lowy said that the average research caseload of each analyst involves about 20 companies, compared to 50 from the large investment banks. Placing talent as their core competitiveness, SC Lowy attracts the most talented employees, rewarding top performers with equity in the firm.
Having worked at Cargill and Deutsche Bank for 15 years, the two founders have little patience for the hierarchical and bureaucratic office politics of big companies and banks. “Everyone sits in one big room, and no one gets an independent office. Everything is open and transparent.” says Lowy.
In search of Chinese partners
“China’s onshore bond market is becoming more and more mature in recent years. Companies of various industries are facing liquidity issues and increasing occurrences of contract breaches. We see lots of opportunities in the market which are very appealing,” Lowy says.
The company is negotiating with banks, securities firms and major asset managers and is working to identify its China joint ventures in the next year or two, Lowy discloses.
“The Chinese partner we’re looking for should be able to help us expand our client network of the onshore bond market and also help us better understand China’s regulatory environment so that we could lend to Chinese companies through proper channels,” Lowy says.
Lowy said that China’s onshore bond market is still closed to overseas investors. In addition, the local issuers have a reputation for poor disclosure, which has held back local investors.
The medium-scale advantage
Although big institutions have an obvious competitive edge, Lowy argues that medium scale companies with strong client networks are able to operate with higher decision-making efficiency than their larger, more bureaucratic competitors.
Meanwhile, SC Lowy is growing itself. The company is expanding in Europe, and in South Korea, they recently provided DIP (Debtor-In-Possession) financing to Korea Line and acquired Shinmin Savings Bank, making it one of the few foreign companies granted a banking license in Korea. Lowy said that the company plans to soon increase its group in London to ten, expanding its scope from sales to include strong research and other investment banking capabilities, replicating the success of the Hong Kong office.
In the secondary loan market, the company has about 30% market share in Asia-Pacific (ex-Japan).
Looking ahead, SC Lowy plans on entering the primary bond market. In July, SC Lowy was selected by Redco to serve as joint bookrunner and underwriter for the inaugural 5-year US-dollar bond issue for Redco Properties Group Ltd. (HK stock code: 1622).