While US bankers were securitising everything in sight, their Asian peers were busy stitching together financing for unlisted mid-cap companies. These deals ticked all the right boxes: fat income streams for bankers, cash for riskier borrowers who lacked track records, and high-yielding assets for hedge funds to snaffle up. As importantly for Asia’s privacy-fixated tycoons, the deals flew below the public radar. Bankers’ guestimates of the dealflow are around the $10-20bn mark.
Yet, as with subprime, these structured loans no longer look so smart. Many of the biggest users of these pre-IPO convertibles were in sectors that are now reeling, particularly Asian real estate. Essentially debt with equity upside, they were predicated on initial public offerings at bloated 2007-style multiples, upwards of 30 times projected earnings. Many deals were written at the top of the market when participation was more important than analysis. In the worst cases, term sheets barely covered an A4 sheet of paper and due diligence was often cursory. Now that the IPO exit is effectively shuttered, hedge funds and other investors find themselves loaded up with illiquid paper they have no way of marking to market. Sound familiar?
When we add this to the widespread appreciation of risky assets it is becoming more clear that this less a problem of regulation (though regulations can limit the greatest excess) or bad people, but more an issue of too much money. It had to go somewhere.