Private Debt Investor
November 29th, 2018
by Adalla Kim
As smaller companies in the region face liquidity constraints, non-bank lenders are coming to the fore with financing solutions, writes Adalla Kim
They may have less than $25 million in EBITDA but that doesn’t mean small and medium-sized enterprises are less in need of capital. A growing number of private credit managers are now making their presence felt in the SME lending landscape, with many responding to a particular need in Asia-Pacific.
Of almost 70 private credit managers that took part in a survey for the Alternative Credit Council, an industry body, and Dechert, a law firm, published in November, more than 40 percent are lending to SMEs. Of these, 15 percent, or about 10 private credit managers, are headquartered and run their main asset management businesses in Asia-Pacific.
Like their Western counterparts, the need for a private credit option to grow is crucial for smaller Asian sub-contractors and suppliers to bigger corporations as they face a subdued capital supply from the banks that have traditionally been responsible for most corporate loans made across the region.
The OECD’s latest annual report, Financing SMEs and Entrepreneurs 2018, published in February, says many of these smaller companies have substituted traditional bank debt for alternative sources of financing since the global financial crisis.
As traditional lenders have retreated from SME loans, smaller companies have increasingly been financing themselves by using asset-backed financing such as factoring since 2008, according to the report.
Factoring is a financial transaction whereby a small business sells its accounts receivable to another party at a discount. This is one of the most well-known and widely used methods of asset-backed financing as an alternative to plain vanilla senior debt for many SMEs, the OECD report adds.
Two-thirds of the 41 countries in the report saw an increase in factoring volumes since 2008.
Another trend in SME lending is rooted in the demand for credit to support growth.
The OECD analysis, based on historical data, has found SMEs looking to acquire physical assets and make investments tend to seek new loans, creating higher demand for credit.
Researchers said there was a strong correlation between credit flows (new lending) and corporate investments, as proxied by ‘growth in gross fixed capital formation’ over the medium term – between 2008 and 2016. On the other hand, they also argue that the slow investment recovery found in some countries may be attributed to subdued demand for credit since the financial crisis.
Australian SMEs borrowed the most among the six countries featured in the Asia-Pacific region in the OECD report. Investment and new SME lending increased in the country between 2008 and 2016.
The report adds that SMEs can be expected to increase their borrowing as corporate investments in fixed capital are forecast to rise over the next few years.
Among alternative investment managers, KKR and OCP Asia are among those actively lending to Australian companies. Both firms have made Australian deals for their global and pan-Asian strategies.
KKR has been particularly active, amassing a $700 million allocation to Australia across 10 credit transactions as of June 2018, according to a spokesman for the firm. It recently launched a A$100 million ($72 million; €64 million) asset finance fund with Maia Financial, an Australian structured finance firm backed by KKR and Highbridge Principal Strategies.
“This [fund] structure gives flexibility to the type of assets it can fund, the term and the ability to structure repayment to the required cashflows or repayment structures,” Maia Financial’s chief executive, Daniel Blizzard, tells PDI.
OCP Asia, a credit investment firm based in Hong Kong and Singapore, has said it made a $70 million-sized loan to Welsh Group to fund a new house-and-land project in Melbourne. OCP Asia previously made a $105 million loan to finance another development project for the same borrower.
PDI understands OCP Asia’s typical borrowers are SMEs with EBITDA sizes ranging from $25 million to $125 million. The firm also make loans to companies backed by sponsor groups or families. It is understood its loan tenors average three years, contractually, with an average holding period of two years.
In the Asia-Pacific region, small businesses are seen as the backbone of the economy, but they are the most vulnerable when that economy faces slow or negative growth and are left exposed when banks retreat from what they see as riskier loans.
“They [SMEs] need to go for a little bit of a non-conventional channel,” Dong Tao, a vice-chairman of greater China at Credit Suisse Private Banking Asia Pacific, told PDI at a media briefing in March.
SMEs have also faced rising capital costs in the greater China region this year, meaning even non-bank debt has become difficult for borrowers, according to Tao.
However, the survey results from the ACC show more private credit managers plan to increase their allocations across all segments of the private credit market, including SME lending. For instance, 34 percent of total committed capital was used for SME and mid-market lending, while large business loans accounted for 22 percent, or around a fifth of all lending.
Alongside this generally growing reach of private credit into the SME and midmarket space, Asia-Pacific is increasingly on the radar.