IFR Asia 882 – February 28, 2015 | By Steve Garton

Asia’s growing high-yield bond market has attracted a new competitor with the arrival of SC Lowy’s first head of debt capital markets.

Florian Schmidt joined the fixed-income specialist last week in a newly created role, with the task of originating high-yield financings in both the public and private debt markets.

The appointment of Schmidt, who joins after almost nine years as head of Asian debt capital markets at ING, underlines the growing appeal of the region’s corporate high-yield bond market, where volumes have doubled in the past two years.

It also suggests that the scrutiny of risk-weighted bank capital is creating opportunities for new entrants as major international investment banks retreat from fixed-income trading.

“(High yield) is a large business and it’s a growing business,” said Michel Lowy, chief executive and co-founder of SC Lowy. “The idea is not to focus on the largest corporates that are already very well covered, but more on the mid-tier clients that are not well covered by the bulge brackets.”

Lowy and Soo Cheon Lee, former Deutsche Bank distressed-debt traders, set up SC Lowy in 2009 to trade distressed Asian loans, and the firm expanded into high-yield bond trading two years ago. The addition of a primary business shifts the model closer to that of a fixed income-focused investment bank, with research, trading and advisory services, as well as its own balance sheet.

“We started as a loan house and have developed into a public markets house, as well. So, we have the ability to speak to corporates about a private loan deal, a mezz deal, convertible bond, bond with warrants or a public bond. It’s all well integrated,” said Lowy.

Redco debut

SC Lowy won its first bookrunner credit on an Asian high-yield bond last July, helping China’s Redco Properties price a US$125m five-year non-call three bond at a yield of 13.75%.

The firm also arranged a US$85m debtor-in-possession financing for shipping company Korea Line in 2013.

Lowy’s plans for 2015 include alliances with local institutions in markets, such as China, India and Indonesia, where he is confident the firm can offer international market access without being seen as a local competitive threat. The firm is also expanding its European business, having relocated partner David Beckett to London late last year.

While a bigger origination footprint means competing with global investment banks, Lowy believes there is a gap in the market for a pure high-yield specialist.

“I don’t expect the big banks to be threatened by us, though I would love that to be the case,” he said. “Their focus will be on US$500m issuance that can be linked to an IPO. Our focus will be on the US$100m–$250m deal, which is probably the least attractive to them from a return point of view. Their cost base is very different to ours.”

Asian corporate issuers, excluding governments and agencies, sold US$37.2bn of high-yield bonds in 2014, up 54% on the previous year’s total and more than three times 2011’s US$10.2bn.

Schmidt, who joined ING in March 2006, has spent much of his long career in the Asian bond markets working on high-yield offerings, including deals for the likes of Mongolian Mining Corp in 2012 and Vietnam’s Vingroup in 2013. He previously worked at Deutsche Bank, Nomura, HSBC and Bank of America.

“SC Lowy’s research-driven approach, strong balance sheet and leading secondary market presence provides an excellent platform to originate capital-market transactions, thereby assisting new and existing clients of the bank with their capital-structure management,” said Schmidt.

He will be based in Hong Kong and report to Soo Cheon Lee, who besides being SC Lowy’s co-founder, is also its chief investment officer.

SC Lowy plans to broker high-yield transactions for third-party investors, but will also underwrite deals and invest for its own account.

The ability to take risk, Lowy says, gives it an advantage over the banks in volatile markets.

“Volatility helps us,” he said. “It forces you to take a view, it forces you to do your homework, and that’s where clients are interested in our view. They’re interested in the value we can add with our research team.”

“I don’t know where the market is going to head this year, but it’s going to be volatile.”

 

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