During the 2008 global financial crisis, it was clear many financial institutions, notably US and European investment banks, had miscalculated the credit risk and ability to finance their own operations under market stress.
As such, the financial regulators and governments implemented the Basel regimes in 2009 and early 2010. And fortunately so. The regulatory framework strengthened the regulation, supervision and risk management of banks, forcing them to take less risk on their balance sheets.
A consequence of this has been a notable shift by banks away from investing in higher credit risk products that typically generate returns in the 10% to 18% IRR range. In turn, this has fueled the rise of private credit as an investing asset class, targeting high yielding corporate or financial asset risk in the form of structured debt, mezzanine and senior direct lending, distress debt and special credit opportunities.
The Hong Kong-based Huatai International’s Structured Finance & Principal Investment (SPFI) team has seized these private credit opportunities in the Asia region, providing risk capital to bridge the funding gap which traditional forms of capital are lacking, filling the space as a capital provider (sometimes called mezzanine) between the traditional senior lender/underwriter and the alternative investor, such as private equity – notably in large LBO transactions.
Private credit offers a high level of protection for the investment principal given its secured nature and an attractive relative value against assumed risks compared to other assets such as leveraged loans, real estate and private equity. And in terms of sustainability, it has proven to be more resilient to market-wide pressure given its non-public, fixed yielding return characteristics.
The SPFI team was launched in 2014. Its business covers three core sections: private credit investments, debt arranging and advisory services. Despite the diverse scope of work, the team predominantly focuses on utilising the firm’s balance sheet in private credit investments, targeting unlevered IRR between 12% and 18% with an average investment period of typically up to three years.
Its credit strategies cover direct lending, mezzanine, structured credit and special situations within the middle market segment across Asia-Pacific. Its debt positions take the form of loans, notes, loan-plus warrants, convertibles and preferred equity related to a host of financing scenarios, including pre-IPO, bridge, acquisition, privatisation and project financings, particularly taking educated risks in greenfield and brownfield projects.
YOU'RE ONLY AS GOOD AS THE TEAM
So far so good on paper, but in practice this highly specialised branch of finance requires the right talent and expertise to ensure both clients and investors’ expectations are met. On that front, Huatai International has put together a highly specialist team with an investment track record and technical ability that spans private credit, private equity, and structured debt financing across the Asia-Pacific region.
Ryan Chung is in charge of the SFPI team. A former civil engineer and UBS investment banker, Chung was also the founding member of an influential $1 billion private equity fund focused on infrastructure, energy, and natural resources within China and Southeast Asia. He was recognised as one of the few sizeable PE deal-makers focusing in Southeast Asia’s frontier and emerging countries in early 2010, deploying more than $700 million of risk capital over nine prominent investments and according to Chung, achieved a gross IRR of over 20%.
Complementing Chung is a tight three-person executive team with more than 30 years of investment experience across leverage and acquisition finance, private credit, private equity, distressed debt situation and debt restructuring. The team can draw upon its unique skillsets to tackle various financing situations.
This breadth of expertise is rivalled only by its culture of collaboration. Huatai International has built its reputation on working closely with clients, and is well-known for its ability to design innovative and flexible structures targeting each financing situation quickly, and being trusted to deliver.
“We have established a reputation for delivering on our promises with committed capital,” said Chung of Huatai’s SFPI. “[In doing so], we have been a preferred mezzanine provider in the market.”
He also added “Buyout sponsors are willing to pay a premium to ensure certainty of funding against a short timeframe. Our ability and flexibility to tailor a feasible financing solution across the capital spectrum, also separate us from our peers.”
PROVING YOUR VALUE
But, as the saying goes, the proof is in the pudding. And 2018 was a very good year in proving the point made by Chung.
SPFI acted as the joint investor in mezzanine financing for Evergrande Center Hong Kong that totalled approximately $500 million; it was a co-investor in the mezzanine term loan B refinancing of Goodpack; and it was the sole mandated lead arranger and co-investor in the mezzanine financing for Advent International’s add-on acquisition of China Best Learning via its investee company, The Learning Lab.
A truly standout transaction, and one that highlights Huatai International’s real asset credentials, is the co-investment role SPFI played in the HK$40.2 billion ($5.2 billion) acquisition of The Center (Holdings) from CK Asset Holdings to C.H.M.T Peaceful Development Asia Property. In what was a notably complex financing structure, Huatai International acted as a co-investor of $811 million of buyout junior debt.
Not all deals are easy to pick early on. In fact, few begin their life structured in a way amenable to all sides of the negotiating table. To
get a deal over the line requires sticking to your fundamental principles consistently and being prepared to push key stakeholders to adapt their strategies.
“We are willing to exhaust all options to look for a feasible solution that is acceptable to the client and us,” says Huatai’s Chung, “This will take enormous patience and creativity.”
Unlike many other financial and fund houses whose executives aim for low hanging fruit, the SPFI team is willing to run those extra miles, taking a more measured and involved approach to extract value from each situation.
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