How has the recent volatility in the public markets around the globe affected Asia’s credit market and Clearwater’s distressed investment strategy?
The sharp volatility and increasingly dramatic risk aversion over the last few months, combined with the heightened concerns around governance issues in India and China, have led to a dramatic widening of credit spreads across the full spectrum of Asian opportunities. Prices are off from 5 to 20 points across most parts of the corporate credit markets with spreads now wider than the peak in 2010 – itself, a great year for credit investing. What continues to underlie our strategy, however, is that the core economic fundamentals underpinning Asia are so at odds with the credit market picture.
Our core view, which we have held and advocated for several years now, is simply that Asia is not as inherently risky as it is perceived. All fundamentals – steady economic growth, youthful demographics and, most importantly, fiscal and monetary disciplines point to the opposite state of affairs. That said, the Asia region now faces serious challenges that are not to be ignored, especially in the political stability and corporate governance arenas, and these uncertainties coupled with fickle and transnational capital have historically created and are now creating great investment opportunities for very focused credit and special situations investors, especially those with long-term capital to support companies through a range of economic and market vagaries.
The second important component of this global market volatility, exacerbated by low interest rates in the US and most Euro markets in the Asian context that is often forgotten, is the intense pressure on Asian central banks to battle inflation, manage their currencies and try to restrict lending in most domestic environments. This sharp dichotomy from US and European issues has also created local market situations for direct financing as companies financing choices can be found restricted, onshore as well as offshore. These markets, both local currency and the offshore credit environments, have made for a very busy summer and we expect this to continue well into next year. The world will remain rightly nervous and it is now, and will continue to be, a great time to be a very selective investor in those Asian corporates that will not only survive and service their debt, but search for high yield financing and refinancing in an environment of capital scarcity.
What are some themes you’re seeing in Asia’s debt markets?
The biggest theme in the Asia’s credit market today is the development and growth of onshore debt markets. Historically, Asian companies could rely on one source of debt financing – the local banks. Today, some companies have begun to reach a scale to access the offshore debt markets which themselves are growing notably, but the great phenomenon is the growing sophistication and range of local lending and credit market instruments. While the onshore debt markets have been developing to a varying degree across Asia, some have also suffered setbacks such as the collapse of many mutual savings banks in Korea that took place earlier this year. In the current macroeconomic context, local companies are increasingly turning to bridge loans, project completion linked financing and other non-bank lender solutions and it seems clear that this long term trend will continue for years and this growth will clearly continue to provide an array of opportunities for special situations investors with an ability to invest onshore.