More soured loans in South-east Asia to whet appetite of private investors

Singapore

THE stacking pile of distressed debt in South-east Asia could lure more private investors to circle the region for alternative assets, consultants told The Business Times.

Distressed debt is expected to grow further amid greater stresses expected from structural constraints in certain sectors. Further pressure could come from the broader trend of monetary tightening after a decade of extraordinary economic stimulus.

By KPMG's estimates, the size of distressed loans in the markets of Singapore, Malaysia, Thailand, Indonesia and Vietnam is estimated to be at least US$75.5 billion. This excludes statistics from private lenders.

Stephen Bates, partner, deal advisory, financial services, KPMG Singapore, said that the global buyout dry powder from private equity, estimated at more than US$600 billion last year, can be deployed in this space.

Speaking to The Business Times, Mr Bates observed that deal volumes in the financial services space could increase by about 10 per cent in South-east Asia this year, as regional banks in South-east Asia have shown more interest in offloading non-performing loans (NPLs) amid broader restructuring efforts.

Currently, just about 30 per cent of financial-services deals globally are sewn up by private equity investors. Mr Bates expects the dial to move closer to 50 per cent in time.

"We think we're going to see a dramatic shift in that," he told BT, saying that private equity funds have set up dedicated teams in recent times to assess investments in financial institutions in this region.

To be sure, private equity firms and investors have always been circling South-east Asia for deals, and have indeed tied up some in financials services in the last few years.

Experts pointed to the recent landmark deal done by Warburg Pincus in March this year, when it moved to invest more than US$370 million in Vietnam Technological and Commercial Joint Stock Bank. This was estimated to be biggest private equity investment on record in Vietnam.

In 2015, TPG Capital and Northstar Pacific also sold a 17.5 per cent stake in commercial lender Bank Tabungan Pensiunan Nasional to Summit Global Capital Management for more than US$450 million.

Suvir Varma, a partner with Bain & Company's South-east Asia practice, told BT that the financial services segment remains a sector of interest to private equity, given the rapid expansion of economies in South-east Asia.

Yet, there has been relatively less focus on the segment compared to sectors such as technology, as many of the available deals in the regional financial sector have been small and below the typical deal size of private-equity funds, he said.

What may turn up the interest a notch then, is the bubbling interest in distressed-loan portfolios. Ling Tok Hong, deals leader and private equity leader at PwC Singapore, noted that the stress in the oil-and-gas space over the last two years have thrown up some investing opportunities. There are also segments in South-east Asia that "cannot afford to have interest rate hikes", said Mr Ling, pointing to real estate as an example.

Overall in Asia, more than US$500 billion in NPLs is sitting on the balance sheets of Asian banks, a Deloitte estimate published in April showed.

Experts noted that Asian banks have watched how Western lenders have over the last 10 years sold their distressed loans or non-core assets to deleverage, and have taken notes.

As one indication of that trend in the last decade, an EY estimate showed that the total global private debt for assets under management stands at over US$600 billion, representing a near four-fold increase from where it was in 2006.

Meanwhile, the change to accounting treatment for financial assets under IFRS 9 may also impact the NPL levels of Asian banks, said Deloitte. The IFRS 9 in essence requires more timely recognition of credit losses.

Andrew Grimmett, restructuring services leader at Deloitte South-east Asia, cautioned that the legal environment for asset recovery in Asia remains "challenging" in most places. "It is often characterised by delay, uncertainty and excessive cost," he said.

But Andrew Orr, Deloitte's UK global transactions leader of portfolio lead advisory services, said that in places such as Malaysia, India and Vietnam, reform appears to be ahead, which would be positive for the development of individual NPL markets within the region.

Aside from distressed loans, funds are also assessing fintech deals in South-east Asia.

With fintech at the nexus of financial services and technology, it has won the rapt attention of venture capital funds, noted Bain's Mr Varma.

But PwC's Mr Ling also cautioned that given the fragmented fintech market in South-east Asia, and the resulting lack of scale, funds may be better off waiting for the wave of consolidation. Lofty valuations may also keep funds away from active fintech investments in this region.

Analysts point to the valuations of Grab and its closest competitor, Go-Jek. Grab is valued at about US$6 billion, while Go-Jek trails at about US$4 billion.

Go-Jek, which has clear plans to grow digital payments through fintech, has raised billions from investors such as KKR, Warburg Pincus, and BlackRock. Grab, which has a fintech agenda as well, is the most valuable startup in South-east Asia and has attracted funds from investors that include Temasek Holdings.

"Between Grab and Go-Jek, you're likely to dominate," said Mr Ling. "Whomever wants to get in now may be too late."