In Asia, many entrepreneurs have historically declined debt funding, having concerns over the image it can project. Do you believe this is still the case?
I would say that’s old news. Since the Asian financial crisis, and then again since the global financial crisis, entrepreneurs understand the terms of lending. If they’re unwilling to accept restructuring terms or unwilling to accept lending terms, you simply don’t lend. There is enough market competition and desire among entrepreneurs to grow, that they [realise they have to accept our terms]. Perhaps in the 2005, 2006, 2007 boom days they could get away with dictating terms. But the fact is, the markets are such that the lenders and the investors are the ones who are able to say, ‘These are the terms for doing a deal.’ Because there’s really a dearth of capital in the banking communities for small- and medium-sized enterprises, China and India both have relatively small amounts of lending available in those spaces.
How do you think the leverage and lending markets in Asia are changing as the private equity market matures?
We have had another record year of new issuance in the [Asian] high-yield bond market, and clearly [it] is becoming more sophisticated and deeper, though still from a relatively small base. If we think about the kind of transactions that we’re going to see going forward, from [the perspective of] private equity companies able to borrow and leverage up their balance sheets, the high-yield bond market [development] is still one of those trends we’re going to see.
In conjunction with that, though, the markets have good demand and real interest in yield, but there are also big problems in individual companies. There’s been substantial volatility in individual company names [in the high-yield market], and we expect that trend to continue and perhaps be exacerbated next year. So if you look at companies where there have been defaults or where there have been questions on accounting, you’ve seen bond pricings in those offshore credit markets drop rather dramatically.
This year, Asia has seen a lot less leverage coming from banks, with much more of it coming from private equity debt funds. What has triggered this change?
The markets are disintermediating the banks – this is a natural and healthy phenomenon: you don’t go through the banks, you do a deal that is syndicated into the marketplace. The regulatory environment for banks the world over is incredibly tough, and people shouldn’t forget that continues. That’s not just true for JP Morgan, and that’s not just true for Standard Chartered, but that’s true for ICBC, and that’s true for State Bank of India. So everybody needs to have higher capital on their bank balance sheets, and everyone is more thoughtful about risk-weighted assets (RWA). If I’m a bank, that’s my biggest issue – I’m not going to do a DD[-rated] loan to XYZ private equity company. Conversely, Clearwater has dedicated money and dedicated debt funds that want to do exactly that. Private equity is probably willing to pay higher rates to take advantage of this and that’s why middle-market companies have a really hard time getting lending.