The Firm expects Private Credit to become an important source of liquidity for Asia Pacific borrowers in the post Covid-19 economy
Baker McKenzie has released a new multijurisdictional guide to Private Credit in Asia Pacific, in anticipation that private credit will play a meaningful role in the recovery of the Asia Pacific economy.
The Guide focuses on key issues pertaining to planning for private credit transactions, such as local enforcement regime, taxation, fees and remuneration arrangement between lenders and borrowers, and credit support to companies. Baker McKenzie and its member firms in Indonesia, Malaysia, the Philippines and Singapore, in collaboration with leading law firms in India, New Zealand and South Korea, offer a detailed analysis of the local private credit market landscape.
"While private credit investment in the region has grown significantly, the private credit market in each economy varies at different stages of development due to local regulations. This presents investors and borrowers with a unique set of opportunities and challenges that vary from market to market," Alastair Gourlay, a Banking & Finance Partner in Baker McKenzie's Sydney office, said.
Emmanuel Hadjidakis, a principal in Baker McKenzie Wong & Leow's Finance & Projects Practice and Global Head of Acquisition Finance, added, "We are pleased to have been able to draw on our local insights and extensive experience across the region on private credit transactions, and produce a practical guide that can assist market players and new entrants alike to better understand and navigate the nuances of each market when undertaking private credit transactions."
The Guide covers 14 Asia Pacific jurisdictions: Australia, China, Hong Kong, India, Indonesia, Japan, New Zealand, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam. Some of the key observations include:
- Australia: Private Credit will likely play a key role in the recovery of the Australian economy as Australian borrowers find it harder to access bank-led financings, the equity capital markets or the debt capital markets. While the Australian secondary loan market remains relatively illiquid, a significant mitigant to that lack of liquidity is Australia’s creditor friendly enforcement regime.
- Mainland China: Mainland China's Private Credit market will likely continue to grow, driven by further opening up of the PRC financial markets, and the continuing deregulation on foreign debt control with a view to facilitating PRC companies in obtaining credit from international lenders.
- Hong Kong: The city has witnessed significant growth in the Private Credit market, with investment banks increasingly deploying their own capital to engage in special-situation financings and bespoke acquisition and real estate financing.
- India: Historically, banks and non-banking financial companies (NBFCs) have been the primary providers of debt to Indian borrowers. However, due to higher delinquencies faced by banks and the liquidity crunch being faced by NBFCs, providers of private credit have gained prominence. Assets under management for debt mutual funds have reduced due to increasing defaults coupled with the illiquidity in the secondary markets. This has provided a large opportunity for alternate investment funds providing structured credit. The uncertainty and weakening of credit quality due to COVID-19 is likely to increase the demand for private credit in India as Indian borrowers may find it harder to access loans from banks and NBFCs or raise funds through equity capital markets. The secondary loan market has not evolved in India and is fairly illiquid. (Source: JSA Advocates & Solicitors)
- Indonesia: The loan market is dominated by commercial banks, which primarily focus their lending activity on top-tier corporates in Indonesia and offer collateral-based loan products. The absence of a developed loan market has created a financing gap that has led to non-bank financial institutions in Indonesia and offshore regional banks and global banks stepping in to fill the gap in private credit.
- Japan: Private Credit remains limited in the Japan market due to the strict regulation of banking and corporate lending activities and the ready availability of senior debt at low cost from Japanese banks. Notwithstanding this, some alternative lenders do provide mezzanine tranches in special-situation financings, such as bespoke acquisition or real estate financings. The secondary loan market in Japan is not as active as in other jurisdictions, which can be a problem for alternative lenders that require liquidity.
- Malaysia: Malaysia does not have a large local Private Credit market as most commercial and corporate lending activities are dominated by licensed banking institutions. The legal Private Credit market is mainly restricted to local retail loans to individuals and the SME market by licensed moneylenders. Despite the regulatory constraints, Private Credit activities involving Malaysian entities can still be undertaken so long as the lending activities are not carried out within Malaysia. Offshore Private Credit transactions involving Malaysian entities secured against Malaysian assets are not uncommon and generally more active in times of economic crisis when local bank credits are tightened and risks appetite are reduced.
- New Zealand: There have been green shoots of growth for Private Capital participants, and this trend is likely to continue, particularly given the recently announced increased regulatory capital requirements for banks in New Zealand (noting that these have been put on hold as a result of COVID-19); the greater flexibility of terms and structure that Private Credit can offer; and that it will become harder for many borrowers in certain sectors post-COVID-19 to access traditional bank debt, the equity capital and debt capital markets. (Source: MinterEllisonRuddWatts)
- Philippines: The Philippines is still a developing market in terms of Private Credit transactions. Lending activities are highly regulated by the Philippine Securities and Exchange Commission. Notwithstanding the prevailing regulatory restrictions, security can be created over assets located in the Philippines. The recent passing of the Philippine Personal Property Security Act (PPSA) has paved the way for a more robust legal framework for secured transactions in the Philippines with the establishment of a centralized registry and improved enforcement of security interests in personal property in the Philippines.
- South Korea: The South Korean market appears to be generally resilient the COVID-19 crisis. Due to falling interest rates, there is still enough market appetite for refinancing existing financing deals. New transactions that were in the pipeline prior to the COVID-19 pandemic do not appear to have been affected and are being carried out, although we do not see as many “new transactions” originating given the current economic situation. Major Korean commercial banks are still playing a big role in the market. One major reversal in trend is that securities firms which were becoming major players as lenders in the finance market are not as active as before because of low liquidity caused by the COVID-19 pandemic. At the same time, there seems to be more projects in the market attracting Private Credit. (Source: Kim & Chang)
- Singapore: There is significant growth in the Singapore Private Credit market. A number of credit funds have their credit investment teams based in Singapore covering deals involving Asian owners, with a particular focus on India- and Indonesia-based sponsors, promoters and parent companies. It is expected that private debt will play a key role post COVID-19, particularly in special situations, as investors will want exposure to funds that can look to deploy capital and perform through a market event. Investors are likely to keep favoring direct lending funds going forward due to their ability to deliver a reliable cash flow and protect the downside.
- Taiwan: Private Credit remains very limited in the Taiwan market due to the strict regulation of banking and corporate lending activities and ready availability of loans at low cost from Taiwan banks. Taiwan insurers are increasingly pursuing lending opportunities as a further avenue to deploy their funds. In addition, special regulations provide an avenue for insurers to lend to infrastructure projects in support of Taiwan’s renewable energy development goals.
- Thailand: Licensed banking financial institutions dominate the lending market, with lending by offshore funds or non-bank entities being relatively uncommon. While lending by an offshore fund to a Thai borrower does not require a banking license, certain exchange controls may apply to loan and interest payments. An overseas lender can also take security over property situated in Thailand, but there are some limitations in holding certain types of collateral.
- Vietnam: Private Credit remains limited in Vietnam due to statutory and regulatory restrictions whereby only credit institutions licensed by the State Bank of Vietnam are permitted by law to conduct lending activity on a regular basis and for a profitable purpose. Consumer lending has grown significantly in Vietnam over recent years, with active participation from non-bank players such as finance companies (including foreign-invested companies or domestic companies, which are often wholly-owned subsidiaries of Vietnamese banks). Corporate bonds are a common capital source for enterprises. However, with cumbersome procedures currently in place for the issuance of foreign currency denominated bonds, foreign investors (including private funds and others) find Vietnam less attractive since the Dong is a non-convertible currency. The secondary loan market in Vietnam is still in its infancy and focuses on resolving bad debts of banks rather than on having a purely commercial debt trading market.