THE Federal Reserve’s rapid interest-rate hikes in 2023 and tough regulations on banks have put private credit on the roadmap to becoming an asset class in its own right. In the US, it has grown bigger than the high-yield corporate bonds market or leveraged loans; its prominence even brought heated debate over whether this type of lending can ignite the next financial crisis.
It’s a different picture in Asia. Granted, KKR & Co. managed to raise $1.1 billion for its first fund in the region and Blackstone, Inc. saw “incredible” subscription for its flagship offering in Japan. But with only about $90 billion in assets under management, private credit is still in its infancy.
However, there are good reasons to believe that the asset class can finally take off in 2024, starting with the sharp disruption in high-yield corporate dollar bond issues. For years, this space was a fertile ground for wealthy Asians, who gobbled up the yield and were drawn to the perceived safety of the investments.
The serial defaults of China’s real estate developers that started with China Evergrande Group’s spectacular blowup in 2021 changed the entire landscape. In notional terms, this market has shrunk by 47% since 2020 to about $154 billion. Last year, junk-rated companies raised only $6.3 billion, a fraction of 2021’s record $26 billion. Once we exclude notes that trade at distressed levels, the actual investible space amounts to just $70 billion, according to Barclays Plc estimates. This ATM is broken.
There are other aspects that have eroded junk bonds’ lure. Those on major indices on average yield about 12%, near par with returns on direct-lending deals that the likes of Blackstone participate in the US. Their trading volumes have also declined markedly, therefore diminishing the argument that investing in private-credit funds is less liquid.
But it’s not just US asset managers luring Asian money away. In recent months, large direct-lending deals have started to be struck in the region. For instance, Singapore’s Temasek Holdings Pte and KKR have joined a A$950-million ($638 million) loan deal for Silver Lake Management Llc’s TEG Pty, an Australian firm that sells tickets to concerts, musicals, and sporting events. Last month, Indian billionaire Anil Agarwal’s mining operation Vedanta Resources Ltd. reportedly raised $1.25 billion in private loans — at between 18% and 20% — from funds such as Cerberus Capital Management and Davidson Kempner Capital Management to refinance outstanding dollar bonds.
These are green shoots, but very classic examples that demonstrate private credit’s potential in the region. The TEG loan was a dividend recapitalization transaction that gave Silver Lake a payout after earlier talks to sell TEG stalled. This type of financing is on the rise again as buyout firms struggle to exit their investments, and are looking for ways to extract cash from companies they control.
Meanwhile, the Vedanta deal was a typical distressed investment that dominates Asia’s private-credit landscape. In January, Vedanta won majority investor backing to extend the maturities of $3.2 billion of bonds, which S&P Global Ratings said could be perceived as a selective default.
One pushback against private credit in Asia is that banks still dominate because they have been less hampered by tighter regulations after the Global Financial Crisis. Difficulties with legal enforcements in emerging markets also mean dealmaking is less scalable compared to the US.
However, plenty of private-credit deals are meant to serve the interest of private-equity firms. Overseeing about $2.9 trillion in assets under management, private equity has blossomed in Asia. But with the public offerings market shut and exit deals sparse, PE firms will want to lever up their portfolio companies and boost equity value to appease impatient investors. Private credit will be a useful tool for the PE titans.
BLOOMBERG OPINION
