SC Lowy Financial (HK) Ltd., the Hong Kong-based investment bank that sells distressed and stressed credit to hedge funds, has increased staff by more than 30 percent this year to meet expected increase in demand.
SC Lowy employed 14 people when it was founded in October 2009 by Michel Lowy and Soo Cheon Lee, who previously ran Deutsche Bank AG’s Asian distressed products group. Eight additions in the last six months boosted its staff in Hong Kong, London and New York to 32, Lowy said. The hires included a bond trader, two research analysts and a lawyer, he said.
Small and medium-sized companies may face difficulty in refinancing debt in the public bond market at the near-zero interest of the last few years when rates start to climb and corporate revenue fails to catch up, Lowy said. Asian banks are still reluctant to lend to smaller companies as European lenders pull back from the region, leaving a void that some hedge funds are filling.
“There are a number of crises appearing,” Lowy said in an interview in Hong Kong yesterday. “The next few years are going to be extremely busy for us.”
SC Lowy, which has traded more than $11 billion in bonds and loans by June, is in talks to start arranging small bond issues for medium-sized companies, Lowy said. It is also expanding the businesses of arranging new private loans for companies and trading high-yield corporate bonds, he said.
The default rate in the region’s public bond market will probably rise above 5 percent and may reach the 2009 level of 7 percent, said Lowy. Standard & Poor’s put 2012 Asia-Pacific speculative-grade default at 1.34 percent in an annual study.
SC Lowy started to help companies seeking to reorganize find new loan financing about a year ago, with the target loan size of $10 million to $100 million, Lowy said.
It helped shipping company Korea Lines Corp. secure $85 million of new credit when it was on the brink of filing for liquidation in December 2012, enabling a second reorganization in preparation for a sale in the next few months, he added.
Companies in Asia outside of Japan sold $42.9 billion of new bonds in dollar, yen and euros in the three years to December 2012, almost triple the amount in the previous three years, according to data compiled by Bloomberg. Such new bond offerings hit $19.6 billion this year, 32 percent more than the full year last year.
“It’s the first time in the history of Asian capital markets that the size of the public bond markets is bigger than the private syndicated loan market in terms of new issuance,” Lowy said. “It’s a very dangerous situation for borrowers who want to refinance three to five years from now.”
Small and medium-sized companies have dominated bond issuance in Asia. Leverage of small companies has climbed to five times from two times, Lowy said, citing Morgan Stanley data.
As much as half of each recent regional bond sale was bought by U.S. and European investors, Lowy said. Allocations to private banks have also risen to 25 percent, from less than 15 percent two years ago, he said, citing Morgan Stanley data.
Asset managers that have raised capital for stressed and distressed credit include PAG, a Hong Kong-based manager of $9.4 billion of assets, which received $700 million from investors for a fund to make new loans to Asian companies this year. Alp Ercil, former Asia head of New York-based hedge fund Perry Capital LLC, raised $940 million for his own distressed-asset fund last year. Patrik Edsparr, who once led Citadel LLC’s securities unit, has also started a distressed and stressed fund.
SC Lowy has done 10 private deals with European banks in the past quarter as they resumed sales of existing loans, Lowy said.
“Certainly there’s a lot more fear in the market again and attention to problems,” Lowy said.
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