Industry Q&A: Myo Capital

Q: How do you define special situations in terms of your strategy?

JF: Special situations are private debt transactions that are downside protected by valuable assets and underlying cash flows.  They can generate anywhere between 20-25% all-in returns. In that area, we are going to target both primary lending deals – new lending deals – in Asia ex-Japan, and secondary deals as well. We are looking for potential forced sellers of secondary special situations,where we get a discount to par to get us to our required return.

Q: So this area is looking at fundamentally sound underlying businesses?

GL: Yes. We don’t take the capital structure right at the bottom. We structure deals to ensure there is downside protection.

JF: We like secured lending, but with equity-like returns.

Q: And what about distressed opportunities?

JF: That’s the other half of the strategy. These may not necessarily be distressed companies. They might be stressed, but more often than not, the sellers might be more stressed than the companies.

We divide the distressed strategy into three areas. One is traded USD credit, second is leverage loans, and the third area is the more traditional local currency NPLs.

We think there’s going to be about $200 billion of opportunity over the next two to three years. This is primarily being driven by people exiting the market, and the maturities of deals that were written in 2006-07. Most of the principal is going to be due over the next two to three years, and there are going to be refinancing pressures on companies to finance those deals.

Q: And some of this will be related to deals that were done around the private equity space?

GL: Yes, in Australia, probably more than anywhere else.

JF: In terms of geographic focus, Australia, Indonesia and China will be the three largest markets. We’re also targeting what we call alpha-rich marktes, where there is much less competition: Thailand, Malaysia and the Philippines.

It is really led deal by deal. There are some very attractive opportunities in Australia, which does not mean that all are. And there are some very attractive opportunities in China.

GL: Our market focus is driven by the opportunity set. Generally, leverage loans come out of Australia. If you do Australia, most likely it’s distressed leverage loans and not growth capital. And in China, it’s vice versa.

Q: In cases where the seller is not the underlying company, who typically would be the sellers?

JF: You’ve seen a lot of people enter the leverage loan and private lending market when there was a lot of capital around. You saw international investment banks and international hedge funds participating in these sorts of loans, and some international commercial banks. Each of these three international participants are really winding back their capital allocations to Asia, and repatriating a lot of that capital to the US, Europe or their home market because of government funding pressures. You’ve seen international investment banks that had three, four, five prop desks, going after these sorts of leverage deals. All of these prop desks have generally been merged into one. And the amount of capital that has been allocated to Asian special situations and loans has gone from billions to maybe hundreds of millions in trading capital.

You’re also seeing enormous regulatory pressures around banks, and investment banks in particulary, betting their own capital. That’s going to result in far less competition.

GL: There was some expectation that capital would come back after the investment banks’ balance sheets were repaired. After the Obama speech a couple of months ago, everyone’s holding back. Everyone’s going to take a long, deep breath before jumping back in, and that is good for us.

Q: What are the key areas of value creation for the strategy?

JF:  Our top three are sourcing, research and analysis, and restructuring. Sourcing we run as a business and we take very seriously. We have a large sourcing network built over a period of 10 years and we will also tap into the DBS network. DBS has a tremendous origination networkand sourcing platform, with a focus on mid-market companies.

Research and analysis involves gathering information that might be difficult to obtain and interpret. It’s not necessarily getting inside information, it’s about pricing the information that is publicly available properly.

Capital restructuring involves working with management teams we know and trust. We often add value by improving the budgeting and forecasting process, and freeing up and recommending lower-cost working capital providers.

Q: In Asia, is there fundamentally more to be gained in tapping the network of an institution like DBS?

JF: Absolutely. I have already mentioned DBS’s sourcing and origination network. We will also use this network to obtain real-time information about situations we are looking at. Also, DBS is known for its expertise in mid-market companies and this is where we think the best returns can be found. 

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