What happens when a motley crew of ex-loan bankers gather together and apply their grey matter to the state of secondary loan trading in Asia? Well, they lament first about the cumbersome process to get loans off the books. And then they launch a digital exchange for secondary loans.
That sums up what the backers of PrivEx (Private Exchange Group) were thinking when they launched this online portal, which they described as the “world’s 1st licensed online digital exchange for trading of corporate loans”. Six months since it went live, PrivEx has attracted US$1.2 billion of listings and printed around US$100 million of trades.
“This is very encouraging for a market in Asia where secondary loan trading is a balance-sheet activity,” gushes P-Wah Tang, CEO and co-founder of PrivEx, an ex-Citi banker with more than 20 years covering the region in various roles within loan sales and syndication, debt capital markets, special situations, and distressed trading and derivatives.
Tang and his co-founder, Eugene Lim, a former partner at Baker & McKenzie, have since been joined by ex-loan bankers who have worked for the biggest loan houses in Asia such as Kate Kwan (ex-SG Asia, HSBC, Citi, JPMorgan, and Banco Santander); Monica Chang (ex-Taipei Fubon Bank, ANZ Bank, Citi, CTBC, and HSBC); and Simon Burdett (ex-Scotia Capital, MUFG, Guy Butler, and Unicredit Bank). They also formed an advisory council consisting of Clarence T’ao (ex-BNP Paribas, Citi, Chase Manhattan) and Julian van Kan (ex-BNP Paribas, and MUFG).
To be sure, secondary loan trading in Asia exists and loan bankers who are in regular conversations with The Asset over the past two decades have shared their institutions’ approach – such as to recycle risk (loan houses with an investment banking tilt) or as a balance-sheet exercise (as is the case for domestic banks).
As Tang describes the process in a chat with The Asset recently, secondary loan trading in Asia is like “calling your 10 best friends” and striking a deal. Nothing wrong with that and it continues to work today. But it has drawbacks such as poor price discovery and limited liquidity pools.
In Asia too, unlike in the developed markets of Europe and North America where it has become a part of a bank’s profit-and-loss activity, secondary loan trading is to meet liquidity and/or risk management considerations. As it does not impact their bonus at the end of the year, loan sales desks are not incentivized to grow the activity.
Time to take off
The time has come, however, in Tang’s view that this will change and for an online secondary loan digital platform to take off. Tougher capital rules under the Basel III framework are driving banks’ need to recycle and optimize their portfolio according to returns and capital weightage. That also coincides with the emergence of private credit funds such as the likes of Blackstone, Apollo, PAG, BlackRock, and KKR, among others, which have launched Asia-dedicated or Asia-specific tranches, looking to generate returns from a new asset class.
By having a centralized exchange for loans, besides the efficiency and the productivity, he reckons transparency and price discovery features of the exchange will attract participants. “Sellers will list what they want to sell, and buyers will initiate negotiation on what they want to buy,” he adds.
Late last year, following an email blast, a trade was completed within a week. “This would never have happened in the current practice because to sell this loan, the salesperson will have to call up so many buying centres in Singapore, Hong Kong, Taiwan, the Middle East, and Australia,” Tang points out.
T’ao, who advises PrivEx, says the platform overcomes the issues around know-your-customer (KYC) considerations and standardization. “Members who sign on to the platform are in effect also agreeing to the terms and conditions required by the Monetary Authority of Singapore (MAS),” he elaborates. This means that members who join would have already completed a KYC on PrivEx and likewise the exchange also would have completed the same with each institution that joins. By signing a master confidentiality undertaking, banks in a trade do not have to sign individual non-disclosure agreements for each transaction.
For enquiries, information is available in a data room hosted by Intralinks, which is already being used by banks to negotiate financing terms. Once a bid goes in and if there is a match, all the documents required for transfer will be populated and will be shown to both parties. Documents follow the Asia Pacific Loan Market Association standards. The seller of a loan is only revealed following the completion of a sale.
Types of loans listed on the exchange include syndicated, bilateral and accordion loans. There is also a function for reverse enquiries. The bulk of the loans listed on the exchange at the moment consists of Chinese real estate companies. In addition, there is a sprinkling of loans of borrowers from Vietnam, the Philippines, and also a Hong Kong private loan.
So far, PrivEx has signed up 41 institutions, mostly banks – such as Bank of China, DBS, Standard Chartered, and ICBC, but also funds such as Cinda, Ping An and Temasek. “The number of credit banks in Asia is about 65 to 70. We probably have half of them in our system already. And by the end of this year, we'll probably have more,” Tang predicts.
While Tang is excited that the transformation of loan trading into a digital format in a centralized exchange is taking shape in Asia, the region is actually the smallest piece in global secondary loan trading with a market size of US$10 billion, versus Europe’s US$70 billion. The largest and most liquid market is in the US, estimated to be around US$700 billion.
Aware of the opportunity beyond Asia, PrivEx intends to launch its service in the UK in the first quarter this year to cover Europe, the Middle East, and Africa. This early, the response also has been encouraging. The composition of the European business includes collateralized loan obligations (CLOs). Those that trade CLOs, Tang says, are the exchange’s biggest fans. According to him, one player in the market has asked his team to “hurry up, and come. My job is not to talk to banks; my job is just to buy loans, put into a vehicle and securitize them”.
T’ao says PrivEx built a Rolls Royce although it is now driven like a Toyota. “We also have an escrow bank whereby money will go through it and not through the exchange. That takes away a lot of the risk element.” UOB Kay Hian is the exchange’s escrow bank.
What about borrowers’ attitude when a bank sells the loan, which can be an issue among Asian borrowers? T’ao agrees that although it continues to be a sensitive topic, it is less so. Asian borrowers also now realize, he continues, that banks don’t have infinite balance sheets especially with capital constraints. “I’ve been in front of some large corporates in Hong Kong and told them that it is not because I don’t like your credit, I just need to make room for my next deal.”
Beyond its expansion into Europe, PrivEx is also working on the exchange’s data analytics and advanced search. It has partnered with Refinitiv, a data provider. When it is in place, the data analytics feature should give members additional data points from which to compare trades listed on the exchange. “Our end game is to have a graph where all the yield curves of a borrower are available across bonds, CDS (credit default swaps), and loans,” Tang expounds. “We become the data repository of secondary loan levels, which is not available in the market.”
Six months since PrivEx went live, Tang reflects that everyone recognizes the role of technology. “We have seen stock trading go from script to now online, so you can't go back to script today. With loan [trading], you have to call everybody. Technology is required. While there are some early adopters, there is a big bunch of banks that is sitting on the fence. We're starting to see them come off the fence given the adoption. What I've learned in the last six months is that we're not crazy. This works.”
PrivEx is a regulated entity operating as a market operator under the MAS, which licensed the platform following 18 months of review. It received MAS' Financial Sector Technology and Innovation grant to offset part of its operating expense.