Asia Pacific: Strong demand drives secondary trading

07-Jan-2016 17:00 PM HKT

By Sharon Klyne

The secondary market for par loans in Asia had a lively year in 2015 with strong demand from lenders for assets, punctuated by a number of significant portfolio sales. With plenty of willing buyers, sellers were able to clear trades at par or close to par value resulting in lower yields.

“Last year, business was pretty good against the backdrop of a pretty weak primary,” said JP Morgan executive director Kate Kwan, who chairs the Asia Pacific Loan Market Association’s secondary loans trading committee. “Most banks are looking for assets, and the only way they can look for it is in the secondary.” Activity is likely to increase as banks face stricter regulations to lift capital ratios.

Portfolio sales from Royal Bank of Scotland and GE also bolstered the supply pipeline as these lenders exited the market. RBS sold some US$5.6bn of its loan book in Asia, primarily comprising assets in Australia, China, Hong Kong, India, Singapore and Indonesia. China Construction Bank, Deutsche Bank and National Bank of Abu Dhabi, among others, were buyers of the various assets, which were primarily high-grade in nature and were sold close to par value.

In November, GE Capital sold its commercial lending and leasing portfolios in Australia and New Zealand to Bain Capital’s Sankaty Advisors as part of its strategy to exit its financial businesses to focus on its industrial units. In March, the US firm had sold its Australian and New Zealand consumer lending arm for an enterprise value of A$8.2bn (US$5.8bn) to a consortium of KKR, Varde Partners and Deutsche. ANZ also sold its A$7.8bn vehicle-finance portfolio Esanda to Macquarie Bank to free up capital to redeploy to other higher-yielding business segments. There were also buyers for more tricky industries such as commodities, shipping and mining. “I wouldn’t say commodities are a no-go. We do see trades being done,” said Kwan.

Michel Lowy at the firm’s Head Office in Hong Kong

Unlike the par loan market, trading activity in distressed loans languished due to the lack of supply as most legacy work-outs have been completed. The market is waiting for a dip in the cycle as the economic slowdown from China and falling oil prices start to bite and hurt local companies.

“Trading volumes on the loan side for Asia Pacific are still pretty much at an all-time low,” said Michel Lowy, co-founder and chief executive of specialist credit firm SC Lowy in Hong Kong. However, the cycle is slowly turning, judging from the number of credits under financial stress and the volume of inquiries the firm has received from banks for pricing quotes to create liquidity for stressed names. “That is a strong indicator that in the foreseeable future, you are going to have a significant increase of activity,” Lowy said.

Distressed trading in commodity and mining-related service firms, real estate and shipping names will continue in 2016. However, high-yield bond trading in sectors such as China and Indonesia property, commodities and Australian high-yield credit continues to be quite lively, traders said.

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