Hong Kong boutique player looks beyond Asia
NICK FERGUSON, Contributing writer
HONG KONG — In a world of banks that are too big to fail, Hong Kong’s SC Lowy is proving that being small and nimble can have its advantages.
The boutique financial company employs fewer than 50 people but has its sights set on international expansion amid growing demand for private debt, its speciality.
Headquartered in Hong Kong’s Central district, SC Lowy started out with 10 employees in 2009, when co-founders Michel Lowy and Soo Cheon Lee quit their bulge-bracket jobs at Deutsche Bank to set up their own fixed-income trading business.
“We decided it would be a lot more fun to do it ourselves,” said Lowy, who helped set up Deutsche Bank’s special situations group in Asia, a unit that looks for investment and lending opportunities among distressed businesses.
Embracing “risky” debt
SC Lowy started out trading loans, a market that typically involves debts that are distressed or below investment grade. Lowy said his company now accounts for 30% of this market in Asia, making it one of the largest players in the field.
Launching the business after the global financial crisis meant that it could pick up plenty of assets being shed by large investment banks, which had to reduce their balance sheets to meet tougher capital rules. In the dollar bond market, bank inventories peaked at $235 billion in 2007 and are now down to around $50 billion. In Asia, this phenomenon was particularly acute as European lenders retreated from the region after the crisis.
SC Lowy bought the risky debt that the banks had to get rid of and sold it on to investors such as hedge funds. It set itself up as an expert on putting a credible price on distressed loans or bonds and explaining the valuation to investors, which helps to close deals.
“They’re very good at doing fundamental analysis and pitching stories around bonds,” said Rob Stanley, senior portfolio manager at BFAM Partners, a hedge fund in Hong Kong. He added that SC Lowy and other debt specialists have benefited from a “massive” increase in the number of high-yield issuers of dollar debt compared with 10 years ago as the Asian financial markets become more sophisticated.
When Chinese property developer Kaisa defaulted on two interest payments due in April on about $1 billion in dollar-denominated bonds, conventional trading in the bonds ceased. That might have created a panic a decade ago, but unhappy Kaisa bondholders were able to find buyers through specialists at companies such as Deutsche Bank, SC Lowy and various hedge funds.
Such orderly resolutions have helped the market to continue growing. Asian companies borrowed a record $31 billion in high-yield debt in 2014, according to Dealogic data, compared with roughly $5 billion a year in the mid-2000s.
SC Lowy traded a record $4.4 billion of loans and bonds during the first half of its current financial year (October to March), compared with a turnover of $5 billion for the previous full year.
Such success has encouraged the Asian specialist to expand into new markets. In June, it announced a move into European high-yield bond trading with the hiring of Hussein Nasser, Nomura’s head of European bond trading, in London. Last year, it quietly bought a stake in South Korea’s Shinmin Mutual Savings Bank, and it has ambitions to acquire onshore banking licences elsewhere in Asia and Europe during the next few years.
Even so, there have been times when SC Lowy was itself in danger of becoming distressed. Funding the business was difficult in the early days, several hires didn’t work out and turnover was high, Lowy admitted.
Other fixed-income startups in Asia have come and gone, such as Amias Berman, set up by Jeremy Amias and Charlie Berman from Salomon Brothers, who are now both back working for global institutions.
SC Lowy might have suffered the same fate were it not for undisclosed private-equity backers that invested in the business in 2010.
While his company is still small compared with the big banks, Lowy said it had to scale up in order to stay in this business. “We needed the critical mass and the balance sheet to be able to operate and feed the engine,” he said.
He stressed that SC Lowy will always avoid becoming a large institution in terms of its operational style. The company’s culture and business model hark back to the days of traditional investment banking. The owners of the company sit on the trading floor with everyone else, there is no hierarchy based on titles and all employees have a stake in the long-term success of the business by having shares in the company.
“I think titles in investment banks are completely unnecessary,” said Lowy. “It creates an environment where you can’t reward for performance.”
SC Lowy is currently expanding both its geographical reach and product range. It has entered the debt capital market, raising new capital for companies in the form of loans, loans issued with warrants, convertible bonds or public bonds.
It arranged its first public bond offering last year: a $125 million deal co-led with HSBC and Morgan Stanley for Redco Properties, a Chinese developer. In February it hired Florian Schmidt, an experienced Asian debt capital market expert, from ING to head the new unit.
Having opened offices in Seoul, Sydney, New York and London, SC Lowy is exploring opportunities in providing “onshore” services in China, India and Indonesia, as well as in Europe and the Middle East. So far most of its business is conducted in dollars, but Lowy wants the company to be able to borrow and lend in local currencies. This strategy was what drove it to team up last year with a local private-equity fund to take over the troubled Shinmin Mutual Savings Bank in South Korea.
Lowy reckons the business will need another three to five years to put in place the full product offering that is in the pipeline.
After that, does Lowy expect to sell the business? “Possibly, but as long as we’re enjoying what we do, why should we exit?”