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SC Lowy breathes fresh air into secondary debt markets

By Jonathan Rogers

VIEWPOINT

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When fixed income specialist SC Lowy was established at the height of the global financial crisis, few people fancied the neophyte firm’s chances.

The coming into existence of a firm which was aiming at specializing in broking secondary loans and high-yield bonds seemed something of an unnecessary extravagance at a time when bulge-bracket firms were going cap-in-hand to the government for their very survival.

Flash forward a decade and it’s more than clear that the naysayers were wrong. The company now owns a fair chunk – probably as much as a third – of the secondary loan market and is getting up to that number on the high-yield bond side too.

Moreover, it has accumulated balance sheet since its founding by Michel Lowy, Soo Cheon Lee and Jamie Tadelis in 2009, and now more than gives the big investment banks a run for their money in the business of making markets in debt, whether in Asia or Europe.

Whereas many of the banks have run up against balance sheet constraints thanks to delinquent loan books and the onerous capital requirements of Basel III, and other regulatory interventions, reducing in the process their ability to warehouse paper, SC Lowy has ploughed its own furrow and shown a keenness to book positions and make firm bids.

This independence – thanks to a willingness to put balance sheet to work – forces into the spotlight the new dynamic of the secondary loan and low-grade bond market; that increasingly the investment banks are behaving like brokers in their unwillingness to stand behind firm bids without having a further taker down the line.

Of course, this is not to say that this “new normal” will necessarily persist, as rate normalization begins to bite in the dollar and euro markets, and bank recapitalization proceeds, thanks to block portfolio sales and rising earnings as yield curve positive carry returns to the market.

But what SC Lowy has demonstrated since inception is that a calibrated business model can be effective in the secondary debt markets. They were not alone in their realization that markets were undergoing a period of rapid and profound change.

We saw in the wake of the global financial crisis the establishment of “eat what you kill” bond brokers, which attempted to get inside the profoundly wide bid/offer spreads being provided by banks desperate not to catch the falling knife, which presented a huge risk back in those days of dangerously fast markets.

Those firms are no more, not only because liquidity has turned and two-way prices have normalized, but because their essentially selfish commission-based corporate culture ended up as self-defeating in the long run.

SC Lowy has earned a reputation in the market for an entrepreneurial culture which capitalizes on the firm’s obvious economies of scale. Discretion in terms of positions held is a far easier feat to pull off when you’re relatively small rather than a global behemoth where books are easily leaked out to the street.

Meanwhile, the company has engaged in something which would have seemed an ambitious near pipe-dream back in the day: it is active in the primary markets too, notably pulling off restructuring a new debt placement last year for Mongolian Mining.

If the investment banks are undergoing something of an identity crisis these days, it’s refreshing to note that a different business model can gain traction. It’s a tribute to entrepreneurial ambition in an arena which too often tries to solve problems by throwing money around and brutally cutting headcount. I find it all rather refreshing.

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