Q&A: Why SSG shuns China NPLs for India

A pioneer of distressed debt investing in Asia, SSG CIO Edwin Wong says he has turned cautious on China amid rising competition, but sees promise elsewhere in the region.

Edwin Wong is chief investment officer at SSG Capital Management, a $4.5 billion Asia-focused private equity fund. In an interview with FinanceAsia, he shared his views on distressed-debt investing across the region.

Wong worked his way up the ranks at Lehman Brothers in the 1990s, becoming a senior managing director and helped found its Asian special situations group. After Lehman collapsed, he and other members of the group branched out to set up SSG.

SSG operates two main strategies: special situations and private credit. For the most part, SSG originates or finds deals itself, through its own team and an extensive list of key contacts that includes some of the region's top tycoons. It sometimes works with local partners. In the past, it has been known for doing deals in the resources, retail and shipping sectors.

Wong runs SSG alongside partners Shyam Haheshwari and Andreas Vourloumis.

Last year, the Hong Kong-based fund raised $2.5 billion to focus on an area it sees as a major opportunity: India. The country's distressed debt market is firmly on the radar of global distressed debt investors after the government of Prime Minister Narenda Modi introduced its first modern bankruptcy law in 2016.

FA: Where do you see the investment opportunities in Asia?

Wong: First of all, we are a pan-Asian fund. Our core geographies are India, China and Southeast Asia. We are very local by design and have significant teams on the ground originating, structuring and managing the assets we invest in. We are seeing good opportunities across, and are active, in all these markets.

In contrast to a number of market participants, we are not active in China’s non-performing loans market, although I was one of the first investors into China’s non-performing loans over 15 years ago when I was with Lehman Brothers. We are taking a relatively more cautious view on the NPL market in China today.

However, we are active in single-name investments in China’s distressed asset class, rather than buying portfolios. With single-name investments, while it is more labour-intensive in originating and structuring, the outcome is more visible.

FA: You mention China’s NPLs are not attractive. Could you elaborate?

Wong: The pricing in general is not very attractive. There is quite a bit of demand from domestic Chinese investors. In the past few years, local players have dominated the market and their return expectations are generally lower than what we require.

FA: What sort of returns are Chinese NPL investors looking for?

Wong: Many Chinese investors are happy to take an annualised internal rate of return around 15% or lower. Besides different risk appetites, they have a natural advantage because their capital is in renminbi and they don’t have to deal with offshore remittances and withholding taxes

The return in China’s NPL market has been falling in the past few years, in part because too much capital has entered the asset class.

FA: How do you hedge against foreign-currency volatility?

Wong: We do hedge but it’s often not a perfect hedge. We could hedge through forwards and options. More importantly, currency depreciation is baked into our underwriting.

FA: Do you see any systematic meltdown in China? Some recent evidences suggest China’s debt problem is understated. Inner Mongolia and Shangdong province admitted they have understated the debt levels at government level, while a Yunnan local government financing vehicle failed to repay its trust loans.

Wong: First of all, a lot of what we do in China is asset backed. There is no doubt the default rate in China has gone up but we don’t see any systemic problem at this stage.

We spend a lot of time on individual companies. The key question for us is whether a particular company can survive, even in a downturn.

FA: Do you have any sector preference in China and India?

Wong: We are sector agnostic. As part of our fund mandate, we can invest in a wide range of businesses. It doesn’t have to be real estate.

FA: How about India?

Wong: India is a core market for us. There is a great opportunity to invest in India right now.

The whole investment landscape in India has changed in the last couple years. With the new bankruptcy law coming into effect, there is more of a balance of rights between borrowers and creditors. The bankruptcy process has specific timelines, which ultimately leads to change, and change usually throws up opportunities.

Many special situation firms, including ourselves, are trying to be helpful in the process. For some of the country’s largest enterprises, there will be M&A and debt restructurings where these companies need to find new investors to recapitalise and reengineer themselves.

FA: What’s the exit route for your investments in India?

Wong: We generally look at underlying cash flows and refinancings once the capital structure has been stabilised.  We also look at asset sales to bring the debt levels down.

FA: How about your preferred investment instruments?

Wong: It is very situation specific. There is no cookie-cutter solution in our business.

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