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IN THE MARKETS

Hedge Funds Fill a Need in Asian Lending

Nervousness among investors creates opportunity to serve cash-strapped companies

 

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Lodha Group, an Indian property developer, had to pay more than it had hoped in a bond sale in

March. Photo: ATUL LOKE FOR THE WALL STREET JOURNAL

 

By ANJANI TRIVEDI and MIA LAMAR
THURSDAY, MAY 14, 2015

 

Hedge funds and trading firms in Asia are stepping up their lending to cash-strapped companies that have been unable to borrow from increasingly nervous investors.

Global investors desperate for yield have been snapping up higher-yielding, riskier bonds in Asia for several years, but have grown picky in recent months amid uncertainty over when the U.S. Federal Reserve will raise interest rates. The recent global bond selloff has added to their anxiety.

Excluding deals in Japan, just 21 high-yield bonds have been issued in Asia this year, versus 33 by this point last year, according to Dealogic, a data-tracking company.

Even large companies perceived as safe borrowers are finding it more difficult to raise money in Asia. In December, Lodha Group, a Mumbai-based firm that is India’s largest residential property developer by sales, sounded out investors for a bond that would yield around 10%, but had to withdraw the offering, according to an investor familiar with the process.

In March, the company sold $200 million in five-year bonds, less than it had hoped for, at a coupon of 12%, according to Dealogic. A spokesman for the company didn’t respond to a request for comment.

“With the debt markets being more risk averse, it’s going to be harder for issuers to finance themselves,” said Michel Lowy, chief executive of SC Lowy, a fixed-income trading firm in Hong Kong.

Mr. Lowy said his firm, which is known primarily as a trader of distressed and high-yield bonds and secondary loans, is building a business to manage debt offerings for small-to-mid-size companies. SC Lowy will be one of just a few firms to concentrate on the segment in Asia, although its focus will be global.

The fact that even established companies like Lodha are having trouble borrowing means some firms with more immediate financing needs are turning to alternate lenders willing to close the gap, but at a cost.

Hong Kong-based hedge fund Tor Investment Management operates in so-called “situational financing,” extending short-term private loans to medium-size companies for percentage returns in the teens, said co-founder Chris Mikosh.

Many company owners would rather pay high interest rates than sell an ownership stake. Midsize companies “are forced to make a decision between diluting themselves on the equity side or coming to people like us,” Mr. Mikosh said. “So you either sell equity or go to [lenders] like us and pay 15% interest rates for a short period of time.”

Mr. Mikosh estimated the private lending market in Asia for hedge funds is about $25 billion today. Preqin, a provider of data on investment funds, estimates the nonbank lending market globally at $500 billion, an 84% surge from the end of 2008. That includes dry powder, money that has been raised but not invested.

 

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The shrinking balance sheets of global investment banks as postcrisis regulations force them to cut back on riskier financing and trading operations have also opened up opportunities for alternative investors in Asia. That echoes a trend already seen for years in postcrisis Europe.

Jason Brown, the former head of Goldman Sachs Group Inc.’s Global Special Situations Group, in August formed Arkkan Capital Management, a Hong Kong-based hedge fund, to capture business being left behind by investment banks.

“We felt the next set of opportunities for stressed and distressed investments would be in emerging markets and we saw a real shift in the ability for banks to take on that risk,” Mr. Brown said.

“When I was at Goldman, the main competition that we faced for investing in private loan transactions were the other investment banks,” he said. Today, “banks are looking to bring funds into the transactions, not hold all the risk on their balance sheets.”

This shift in Asia was illustrated last July in a $235 million private-financing deal arranged by Credit Suisse Group AG to help Indonesia’s Rajawali Group gain a controlling stake in a palm-oil plantation from Louis Dreyfus Commodities, according to people familiar with the deal.

Looking for speedy funding to complete the acquisition, the debt-laden conglomerate tapped alternate lenders for an 18-month loan at a cost of 15% to 20%, the people said. Credit Suisse held only a portion of the loan.

A spokesperson for Rajawali Group said the transaction had “regulatory and time constraints.”

To be sure, the outsize returns on offer in private lending don’t come easily. Such strategies are highly illiquid, typically requiring investors to agree to lock up their money for long periods. And managers must navigate a complex web of regulations in Asia that remains largely unfriendly to foreign creditors. Fund managers say private deals can take months longer to pull together than they would in the U.S. or Europe due to a dearth of information and poor corporate transparency.

“There’s a million different things that come at us out of all these different markets that don’t make any sense,” Mr. Mikosh said. “You have to be able to quickly realize what does and doesn’t make sense.

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