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29. 04. 16 MARKET

Non-performing loans on the rise

ERNST HERB

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“Banks have many problem loans,” says Michel Löwy
in an interview with FuW. (Picture: Dominic Nahr)

Michel Löwy, chief executive of boutique investment bank SC Lowy, does not foresee a new banking crisis despite financial problems in the commodities sector.

More bankers are knocking on SC Lowy’s door in the heart of Hong Kong’s financial district looking for jobs these days. There are several reasons why. First, the whole financial industry is changing. In response to pressure from regulators, many traditional banks are pulling back from areas of investment banking deemed to be particularly risky. This has created niches that new financial service providers with bigger risk appetites can exploit. But above all, the services of a boutique investment bank such as SC Lowy, which specialises in trading and restructuring risky loans and bonds, are in higher demand when economic growth is slowing.

“The number of job applications we receive has increased several times since 2014,” says Belgian citizen Michel Löwy, who founded the bank seven years ago with Korean Soo Cheon Lee. Although SC Lowy is now also active in issuing new bonds and securitised loans, its core business remains trading non-performing loans and high-yield bonds.

Reasons for the boom
For Löwy, who worked in a senior position in the Asia Pacific Strategic Investment Group at Deutsche Bank before striking out on his own, the region offers particularly interesting growth opportunities today. He identifies three reasons for this: slowing economic growth in Asia, the turnaround in interest rates in the US and increasing structural change, particularly in commodities and the shipping sector.

Companies that loaded up on too much debt in the boom years and built too much capacity are now being forced to restructure. The same also applies to banks that now have too many problem loans on their balance sheets after years of uninterrupted growth.

Löwy, who came to the region at the height of the Asian financial crisis in the late-nineties, sees this as a normal cyclical phenomenon. In the high yield to distressed debt business, there is always another opportunity around the corner, as has been demonstrated during the past 20 years by the crises in Asia, Russia and Mexico, and with the bursting of the dotcom and housing bubbles in the US. Today, the services of bad-debt specialists are in demand worldwide due to profound structural changes.

Credit Suisse exposed?
He gives the example of the coal industry, which is experiencing a similar decline to the Yellow Pages a few years ago, when such services were replaced by online search engines. “At best, coal production will be stable in the short and medium term, but in 20 or 30 years there will no longer be any new coal plants,” Löwy predicts. “Above all, this is because the industry will find it increasingly difficult to access credit.” He cites the example of US coal producer Peabody Energy and, in Asia, Indonesian companies such as Bumi Resources and Kaltim Prima Coal, which already have funding problems.

SC Lowy, which claims to have a share of around 30% in Asian secondary loan trading, also sees a significant increase of non-performing loans and illiquid credit in the real estate sector. The most heavily geared to these emerging Asian credits is British banking giant Standard Chartered, which has said that it plans to sell $4.4 billion of risky assets during the coming months. Credit Suisse is also reported to be particularly heavily exposed.

This growth in distressed debt is also reflected in the headcount at SC Lowy, which has more than tripled during the past six years from 15 to almost 50. However, Löwy does not foresee a full-blown banking crisis, as the loan portfolios of the systemically important financial institutions are too diversified. However, countries such as Indonesia face a greater risk, he says, because they are highly dependent on commodity exports and are struggling with chronic balance-of-payments deficits.

On its website, SC Lowy describes itself as “providing liquidity”. That sounds better than “vulture fund”, as investors who invest in distressed debt or bonds are often called. Löwy comments on this sloppy expression: “We are focused on high-risk investments and help companies struggling with financial problems to survive by restructuring their debt,” he says. By taking these non-performing loans and illiquid bonds off banks’ balance sheets, firms such as SC Lowy play a valuable role in national economies.

Not for private investors
The returns from this asset class are commensurate with the risk. Löwy talks about a potential yield from about 10% to as much as 25%. While the risk of losses, including even total loss, is very real, it can be reduced by proper risk assessments — and added value is created in the process through in-depth research, says the investment banker.

Such products are not for retail investors, but rather for hedge funds or family offices that are experienced in investing in high-yield debt. “This is a product for institutional investors who assess the risk properly and can hold the paper for the long term,” Löwy points out.

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