Photo: Albert Chua/The Edge Singapore
Three years ago, former veteran banker P-Wa Tang was catching up with Eugene Lim, a long-time lawyer friend whom he had worked with on many occasions. They met at a cigar bar and reminisced about the good old days.
The conversation flowed and soon they found themselves discussing the current archaic method of syndicating loans. It dawned upon them that — given their background, experience and connections — they could do something to modernise the process of syndicating loans. The result was the founding of PrivEx, a digital exchange for secondary loan trading.
According to Tang, bankers typically call their “10 best friends” — meaning other bankers, fund managers and financiers they know — to gauge their interest in funding various portions of a loan. This usually involves having many one-to-one interactions, which is time-consuming and inefficient.
“It’s not like selling a bond. I have to start with small talk, before easing into it,” Tang, CEO and co-founder of PrivEx, tells The Edge Singapore in an interview.
Then, a non-disclosure agreement (NDA) needs to be signed to protect sensitive information related to the borrower. This is a tedious process because an NDA is required for each syndicated loan. “My pet peeve is when you get a new lawyer who wants to reinvent the NDA; that kills me because it takes up so much time,” Tang says.
More importantly, the current process does not facilitate price discovery, transparency and accountability. Tang says bankers do not usually make money from reselling existing loans as their bonuses are usually tied to structuring new ones. As such, it incentivises them to sell based on the most convenient way to close the deal.
“Obviously, the banker is not selling the loan at market price. He is selling the loan at a price where the selling banker can find a buyer. There’s limited liquidity because you can only call so many banks a day,” he reasons.
With PrivEx, those weaknesses are eliminated. Tang says the platform provides information on the loan and borrower, and it enables interested buyers to place their bids, thus allowing price discovery. Upon a price match, the platform automatically generates the relevant documentation to seal the deal.
Although the “10 best friends” method does work to a certain extent, to suss out the best deals for the clients, PrivEx wants to make better use of market data and insights via a tieup with global financial data provider Refinitiv. The company is currently in negotiations with the market data provider to provide the necessary insights, says Tang.
“With their data, we can take the past loan pricing and plot the yield curve for them to show what were the prices in the past,” he says. “We show comparisons of peers in the same industry across the world and who their creditors are.”
PrivEx is planning to soft-launch its platform in 2Q or 3Q this year. It has thus far onboarded 20 financial institutions, including banks, insurance companies, hedge funds and sovereign wealth funds across Asia, Europe and the Middle East. The company holds a recognised market operator (RMO) licence, which it secured from the Monetary Authority of Singapore (MAS) in 2019.
Avengers, assemble
According to Tang, PrivEx may be the first digital exchange for secondary loan trading in the world, though there are similar companies that operate in the trade finance space.
But the technology underlying digital exchanges is not new. Stock exchanges, for instance, have long gone digital, forsaking their open outcry days. Even currencies, bonds and derivatives have been trading on digital exchanges. So why haven’t loans started trading on digital exchanges yet?
Tang concedes that the technology facilitating digital exchanges has already existed for a long time. But the demand for secondary loans has not. He points out that secondary loan trading only took off in a big way after the global financial crisis (GFC) erupted in 2008.
Over the last decade or so, banks were required to maintain adequate capital requirements in accordance with Basel III. They had to allocate capital according to the riskiness of the loans, which inadvertently had an impact on their return on equity (ROE). To ensure that their ROE targets are met, the banks became active in buying and selling loans, he says. “So, it became a portfolio game for the banks,” he says.
Still, why has there not been a digital exchange for secondary loan trading since the GFC? Tang believes the barriers to entry are high. For one thing, not everyone can easily start such an exchange. It requires someone with deep banking experience and a willingness to leave a stable career in banking.
“The opportunity cost for a banker to come out to do this is high. They rather sit in banking, put on a shirt and tie, talk big macro interest rates. Why do they need to roll up the sleeves and take on entrepreneurship risks?” he says.
Establishing such an exchange also requires a strong team that is equipped with different capabilities and connections, says Tang. For instance, he has 20 years of experience in originating, structuring and distributing debt products and distressed credit derivatives at Citigroup across Singapore and Hong Kong.
Lim, who is co-founder and responsible for PrivEx’s legal and compliance affairs, was a partner at Baker & McKenzie. He was also the Asia Pacific chair of the law firm’s International Commercial and Trade practice. He has had stints in Singapore, Hong Kong and China.
Sean Liu, who is PrivEx’s head of Southeast Asia and South Asia, was previously involved in loan structuring and origination across the region at Taipei Fubon Commercial Bank, United Overseas Bank and Australia and New Zealand Banking Group. He was also a corporate finance manager at offshore service provider EMAS Offshore.
The other key members of PrivEx are Stephen Ching, managing director of sales (North Asia); Monica Chang, who heads Taiwan Sales; Veerabhimanyu K N, who is head of technology and operations; and Clarence T’ao who is an advisor. Most of them have an extensive banking career across Asia.
“We assembled this team of senior bankers because we can talk to other bankers. [The other party]’s going to see whether he knows you — if he doesn’t know you, he’s not going to give you the time of the day,” says Tang. “It also takes a loan banker to speak to another loan banker to understand why we’re doing this.”
A strong grasp of the regulatory requirements is also an important element when it comes to the banking world. Lim recalls that when they had approached MAS to obtain the RMO licence, the regulator had little to worry about the team, save for a tinge of amusement.
“They said FinTech founders are typically younger and have no clue about compliance. But looking at us, they figured we probably knew a thing or two about compliance. That helped us in the entire licensing process,” says the 48-year-old.
Liu, who was the last to be recruited to the team — which he jokingly likens to the Avengers, a team of superheroes in the Marvel comics — says he took a gamble to join PrivEx. “I want to make a change and solve a prominent in the banking system. It sounds really noble, but you know, I put my money where my mouth is,” he says. “I took that leap of faith knowing that I was drawing X dollars in the banking sector after 15 years.”
‘Near perfect conditions’
With the subsequent waves of the Covid-19 pandemic sweeping across the world, many countries are re-implementing restrictive measures to curb the spread of the coronavirus. In Singapore, a recent spike in cases has forced the city-state to initiate Phase Two (Heightened Alert). Will this delay the launch of PrivEx?
Tang alludes that when Singapore had implemented the “circuit breaker” last year to halt the spread of Covid-19, the onboarding of financial institutions was slower than what could have been without the pandemic. But he believes that a delay is unlikely as companies have now adapted to working remotely.
“People have got used to working via Zoom; people are getting comfortable working from home. So hopefully, the disruption isn’t that great,” he says.
Contrary to what some may think, Tang believes the resulting economic and financial impact from Covid-19 have created “near perfect conditions” for PrivEx to thrive. Banks, he says, do not want to be overexposed to lending to companies that operate in badly hit industries. As such, they may likely sell these loans to hedge funds specialising in distressed assets.
With the returned capital, the banks will redeploy them to buy safer secondary loans. “So, it creates this rebalancing act through the secondary market, which creates perfect drivers for us because we deal with secondary loans. And because of very muted economic growth, new loans are not being printed,” Tang says.
And if Tang is right, the impact of Covid-19 may not have bottomed just yet. Relief measures, such as the Jobs Support Scheme and tax waivers, have provided a lifeline to many companies. But when the relief measures dry out, many companies may emerge with distressed balance sheets.
Tang believes the real bottom will come in the next two-to-three years. All that means is that until then, Tang and his team had better get PrivEx up and running. “The pain hasn’t set in yet,” he says.
