Private credit avoids bank clash in AsiaRather than taking market share away from banks, the influx of private credit funds into Asia is filling underserved parts of the market and creating new business for financial institutions. In the US and Europe, private credit ate into the leveraged finance market, especially term loan Bs in recent years, as issuers sought certainty with club-type deals during rates volatility – a trend that has since reversed. In Asia-Pacific, the dynamic has been different. While Australia and India are extremely competitive battlegrounds for banks and funds looking to provide credit, the rest of the region has more room for new players. “In Asia, private credit is complementary as opposed to competing or substituting for loans,” said Joe Cheung, head of loan syndications for Asia ex-Japan ex-Australia in the leveraged capital markets and special situations group at UBS. “It provides capital that banks would not typically finance – high growth but negative Ebitda companies, underperforming companies that have crown jewel assets or challenging sectors for the bank market.” Andrew Tan, CEO for Asia-Pacific and head of Asia-Pacific private debt at investment firm Muzinich, said that regulatory trends have caused banks to focus their lending on the biggest names, creating a gap in the market for private credit in Asia. “Banks are gravitating towards large and upper middle-market companies, pushing them away from SMEs and low to core middle-market companies, which are the ones that will take up more regulatory capital,” said Tan. Some global asset managers that have raised multi-billion US dollar funds and tend to write US$100m-plus tickets are heard to have struggled to deploy their funds in Asia since they target the biggest companies. “If you are a private credit fund focused on mainstream lending to larger companies, definitely you are going head-to-head with banks,” said Tan. “If you are focused on capital solutions, trying to do something banks are not able to get their heads around, like special situations and distressed debt, there’s more room.” More room In some markets, like Singapore, government policies have encouraged local banks to lend to SMEs, but in others there is more room for credit providers. “Hong Kong is an example where we are seeing some gaps forming,” said Tan. “Banks are distracted by the real estate crisis in China and pulling back on risk-taking, so that throws up opportunities in financing smaller businesses.” Private credit funds may also be willing to take positions in subordinated debt tranches, while banks are only willing to provide senior debt. “Banks in Asia are likely to view the rise of private credit as more an opportunity than a threat,” said Eng-Lye Ong, partner at law firm Dechert in Singapore. “Private credit lenders can participate in syndicated or club loans originated by banks and buy debt that banks no longer wish to hold. They will also be willing to look at lending junior debt where senior bank debt is already in place, and lending to companies introduced by banks that are unable to satisfy the bank’s lending criteria.” Companies that once met banks’ lending criteria might no longer qualify. “In a higher interest rate environment, asset valuations typically weaken and banks face loan-to-value limitations that might prevent them from lending or refinancing, which presents private debt with an opportunity to come in,” said Muzinich’s Tan. Conversely, if smaller companies grow using private credit they might graduate to syndicated loans. Companies can choose between the two sources of financing depending on whether they want to prioritise keeping interest costs low or paying 10%–15% but obtaining more flexible terms. “If an issuer wants more leverage and flexibility, it might explore the private credit market for bespoke financings, s
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