Private credit fills gaps in Asia
Recent hires in Asian private credit show the potential the sector has for banks in the region, and the growing demand for the products as primary bond markets remain muted.
Earlier this month, UBS announced that Ben Sung, most recently co-head of debt capital markets for Asia, would be taking over the bank’s private credit business under his new role as head of corporate book for South-East Asia. JP Morgan also recently named Reuben Ong as head of financing solutions for South-East Asia, responsible for growing the lender’s private credit business. Ong’s position is a new one for the bank, while UBS would not comment on whether Sung's role is new.
“This market started primarily in the distressed space and for special situations a few years back,” said Madhur Agarwal, head of DCM for Asia ex-Japan at JP Morgan. Now it includes mezzanine debt, venture debt and direct lending, he said, estimating the size of the market in Asia to be US$70bn–$80bn.
“The market grows when the access to bank loans and public bonds becomes more difficult,” said Agarwal.
Private credit has become a buzzword in Asia Pacific in the last year or so as borrowers, bankers and investors look for alternatives as other funding sources dry up.
James Hogan, CEO of the Asia Pacific Loan Market Association, said there is no question that the ecosystem in Asia is building, as regulations are restricting traditional banks from entering specific capital structures, and a need has grown for alternative forms of capital. Foreign investment funds from the US and Europe are positioning themselves in Asia, he said.
Singapore-based fund managers are expecting private debt to increase in popularity as a strategy in 2024, according to survey results published by the Investment Management Association of Singapore last month. A survey of 79 high-level respondents from 68 firms, which manage more than US$35trn in assets combined, found that 33% of respondents thought private debt would increase in popularity this year, the most common answer ahead of alternatives and income strategies.
The exact definition of private credit has been a bit nebulous in Asia. Agarwal said many people use the term private credit to refer to any financing outside of bank loans or the public bond market, essentially just making it an alternative form of credit funding.
The dynamics of Asian markets have also created a different kind of private credit growth. Developed markets, including Australia, see private credit funds like Apollo Global Management or Bain Capital taking big market shares, but issuers in Asia are still focused on existing bank relationships.
"Direct lenders and banks have an opportunity to exist cohesively solving into the differing needs of sponsors and corporates,” said Nelly Harapoff a banker at ANZ. “As a US$1.6trn asset class, representing patient and flexible long term capital, banks can work together with private credit lenders to structure into and syndicate risk."
Finding funds
For borrowers, private credit can offer more nimble options for fundraising, such as longer tenors, creative structures, and access to funds when the public bond market is closed off or prohibitively expensive. This has been particularly notable in the last year as high-yield borrowers in Asia were cut off from the public bond market due to rising interest rates and a wave of defaults from Chinese property companies. Asian high-yield issuance in the G3 market shrank around 20% in 2023 to just US$5.5bn, according to LSEG data.
That led to some creative fundraisings, like Indian property company Goswami Infratech's Rs143bn (US$1.7bn) private credit-style bond issue last year, which was syndicated to private credit funds and wealth managers. The bond pays no coupon, but accrues interest at 18.75% compounded annually.
“You have problems in the high-yield bond market in Asia, and you have supply-side constraint. All of that has resulted in private credit being accelerated,” said Sumit Bhandari, lead portfolio manager for Asia private credit, alternative investments at Allianz Global Investors.
JP Morgan's Agarwal said that economic growth in Asia has also produced young, growing companies that are yet to establish a track record, but are in search of financing. “High-yield issuance volume in Asia is pretty small," he said. "This means corporates that don’t have access to bank loans … have limited opportunities to raise financing, and that’s why they’re relying on the private credit market.”
An Asia Pacific loan banker sees a similar dynamic. “Even with the limited deal flow, banks are trying to stretch their credit appetite. We have been seeing banks trying to do structures closer to what credit funds can provide, in order to provide more flexibility for borrowers,” she said. “There is collaboration as well as competition between banks and credit funds.”
Private credit funds have been able to provide more flexibility to borrowers when it comes to the terms of deals, but also to the types of borrowers that they can work with, said the Singapore-based banker. For instance, most banks cannot work with companies with big coal businesses, but private credit funds might not have such restraints. “Credit funds will be the first port of call for anything in the resources space,” he said.
Activities like energy transition and supply chain diversification in the region could also create opportunities for private credit, said Allianz's Bhandari.
Private credit in Asia “is coming from a very small base”, and still has a lot of room to grow, Bhandari said.
(Additional reporting by Chien Mi Wong, Apple Li and Daniel Stanton)