Asia-Pacific Private Credit Newsletter
In our inaugural newsletter we begin to address many of the facts, misconceptions and aspirations of the Asian-Pacific private credit asset class. In this edition we discuss:
1. Thematic Focus – A four trillion-dollar funding gap
2. Market Insight – Covenants: The best a loan can get
3. News Centre – Links to several articles and white papers we found interesting
THEMATIC FOCUS - A FOUR TRILLION-DOLLAR FUNDING GAP
The last 20 years has seen the Asia-Pacific region become the driver of global economic growth, a trend that is expected to accelerate as the world emerges from the COVID-19 pandemic. SMEs are at the heart of this expansion, as they account for 95% of all firms and power the core drivers of growth, employment and exports, across the region.
Asian economic growth has been accompanied by a rise in credit from international lenders. Since 1997, cross-border claims of BIS reporting banks more than quadrupled, to around USD2 trillion. Common lender channels have shifted over time. Post Asian crisis, Japanese banks were replaced by Europeans who, post-GFC, were supplanted by a range of APAC-domiciled lenders. In each phase a regional segment has been ready to step in and seize the opportunity presented by Asian growth.
Post-COVID, however, Asian SMEs face a potentially shrinking market from providers of bank finance and a broken client experience from those who remain.
INTERNATIONAL BANKS ARE RETRENCHING
ABN Amro and Westpac have both publicly announced their retreat from Asian lending in the last few months, while ING have decided to refocus wholesale banking operations. Common reasons are cited – improved capital efficiency, focus on large, core clients and a general reduction in business costs and complexity. These banks will not be the last we expect. We hear whispers of peers with similar intentions and anticipate that COVID will prove to be an accelerant of current trends.
A BROKEN CLIENT JOURNEY
Asian SMEs face significant challenges even if they manage to gain access to bank finance. Onboarding is painful, borrowers are often directed to untailored services for cross-sell and they face heightened operational risk due to time lags between requesting and receiving funding. Going into 2021, implicit and explicit forbearance programs are ending. We expect that incumbent banks will look to work through loans in distress and further push out smaller clients. Closed and shrinking lending books will not be willing to refinance.
A FOUR TRILLION-DOLLAR PROBLEM
These trends compound an annual funding gap already estimated at USD4.1 trillion. The explosion in private credit markets which occurred in North America and Europe post-GFC helped spur significant economic growth thereafter as the banks retreated from middle market lending. Levels of direct lending are now on a par with other forms of debt financing. By comparison, Asian private credit is still in its infancy and the majority of debt finance is primarily via bank lending.
A DEVELOPING ASSET CLASS
This huge imbalance in the supply and demand of debt capital in the region supports high expected returns via exposure to corporate earnings which cannot be accessed through public markets. Compared to other regions, Asian direct lending accounts for a fraction of total corporate debt. In terms of assets under management, the region only amounts to seven percent of the global private credit asset class.
Furthermore, post-COVID, attractive return expectations align with the mitigation of socio-economic risk in the region. Today, institutional investors focus increasingly on the “triple bottom line” and how they can balance financial objectives with environmental, social and governance (“ESG”) concerns. The current funding gap in Asia materially increases the risks of business failures, structural unemployment and attendant long-term social problems. Investors who wish to “do well by doing good” should look no further than this developing asset class.
Covenants: The best a loan can get
In 2019 around 85% of global leveraged loans were “cov(enant)-lite”. Direct lending, which takes structural and pricing cues from this market has also been heading in a similar direction in the US and Europe
The rapid pace of covenant erosion even amongst the pre-GFC and post-GFC cov-lite loans is stark. Cov-lite loans originated post-2010 versus pre-2010 show an average discounted recovery drop of 18 percentage points to 59% - as a comparison bank loan recoveries were 80% in both periods (S&P LossStats).
Asia-Pacific generally did not follow this cov-lite trend. The dominance of commercial banks has meant a resistance to cov-lite loan structures, even for private equity-backed borrowers
The direct lending market is still nascent and a lack of competition as well as a plethora of opportunities led to more robust loan structures
Typical covenant packages include leverage, DSCR, capex and other maintenance covenants for reporting and monitoring the credit worthiness of the borrower
Other covenants prevent transfer of assets and use of cash flow to pay dividends or invest outside of agreed purposes
In addition, enhanced security packages including personal guarantees from majority shareholders, personal assets for additional security and control over bank accounts and lender co-signing authorities
US and European lenders may hark back nostalgically to the days when these were common in their market, but here in Asia-Pacific the lenders still drive the bus
AIMA Alternative Credit Council’s white paper Private Credit in Asia
International banks are retrenching from Asia
ABN Amro, ING and Westpac
Trends in private credit investing in Canada
Preqin’s The Future of Alternatives 2025
How cov-lite survived COVID-19
After epic credit cycle, recoveries on defaulted debt point lower
If you have an article on Private Credit that you think is interesting, please send it to us at email@example.com
Zerobridge Partners Asset Management Limited is focused on giving institutional & high net worth investors globally access to APAC alternative credit opportunities. The strategy seeks to take advantage of the less developed banking and capital markets in the APAC region and capitalize on our strong proprietary deal flow.
Zerobridge Partners Advisory Limited is a debt advisory firm focusing on raising new capital, creditor negotiations and debt restructuring for companies in Asia-Pacific. We come with deep investment banking experience and a strong track record across multiple credit cycles in Asia.
Zerobridge Partners Asset Management Limited and Zerobridge Partners Advisory Limited (together “Zerobridge”) have prepared this Newsletter (the “Newsletter”) for the exclusive use of the recipient. The Newsletter is proprietary to Zerobridge and is intended solely for the information of the person to whom it has been delivered. By accepting delivery of the Newsletter, the recipient agrees not to reproduce or distribute the Newsletter in whole or in part and not to disclose any of its contents to any other person except as agreed in writing by Zerobridge.
The Newsletter is for informational and discussion purposes only and does not constitute a solicitation or an offer to buy or sell any securities. Any offering of securities will only be made pursuant to a private placement memorandum and definitive subscription documents (the “Definitive Documents”), which will be furnished to qualified investors at their request in connection with any such offering. The information contained in the Presentation is qualified by reference to the Definitive Documents, which will entirely supersede the Newsletter.
The investment contemplated by the Newsletter will involve significant risks, including the potential for loss of the entire amount invested. Any securities offered will not be registered under U.S. or other securities laws and may not be transferred or resold except under certain extremely limited circumstances. Prospective investors should pay particular attention to the risk factors to be appended to the Definitive Documents and should have the financial ability and willingness to accept the risk characteristics of the proposed investment, and to bear those risks for an indefinite period of time.
The Newsletter has not been submitted to, reviewed or approved by any regulatory authority in the U.S., Hong Kong, Cayman Islands or elsewhere. Further, the Newsletter does not constitute financial, legal, tax, investment or other advice or a recommendation to make an investment. Accordingly, recipients may not rely on the Newsletter for any purpose and instead must rely solely on their own judgment, analysis and review in evaluating an investment, and should obtain independent professional advice with respect thereto.
Although the Newsletter has been compiled from sources which Zerobridge believes to be reliable, Zerobridge has not independently verified the Newsletter and expressly disclaims any liability for the accuracy, completeness or reliability of the Newsletter, for updating the Newsletter, or otherwise in connection therewith. The performance data contained herein is not indicative of future results, and there can be no assurance that comparable results to past performance will be achieved, or that performance targets will be met.
Certain information contained in the Newsletter constitutes “forward-looking statements”. The actual performance of the investment contemplated by the Newsletter may differ materially from the projected performance reflected or contemplated in such forward-looking statements. Prospective investors should not rely on such forward-looking statements in deciding whether to make an investment.
The Newsletter is only intended for and will only be distributed to persons resident in jurisdictions in which such distribution is permitted by applicable law. Any investment contemplated by the Newsletter may not be eligible for sale in some jurisdictions. Specifically, Zerobridge is not authorized under the Alternative Investment Fund Managers Directive (“AIFMD”) and no notification has been made to any regulator in the European Economic Area (“EEA”) in respect of any proposed investment opportunity. As a consequence, no securities are being actively marketed by Zerobridge to any investor in the EEA.
The information contained in the Newsletter should be treated in a confidential manner and any reproduction or distribution thereof, in whole or in part, or the disclosure of any contents therein without the prior written consent of Zerobridge is strictly prohibited.