Tor Trivers, md and head of the structured credit group at CDIB Capital, answers SCI's questions

Q: How and when did CDIB Capital become involved in the structured credit market?
A: CDIB Capital was established in 2006, as the private equity arm of China Development Financial, with the objective of deploying and diversifying the group’s proprietary capital outside of Taiwan. The firm has historically managed outside funds, but no credit-related assets until I joined in February (SCI 29 April).

Based in Hong Kong, my team has been tasked with expanding into additional strategies for both outside investors and the CDIB balance sheet. Credit provides a different risk/reward profile for the firm and the aim is to start the strategy on balance sheet in advance of raising a fund. We believe a good way of gaining traction is to develop a core of five to seven deals, build the portfolio up from there and then bring large external commitments onboard.

For a strategy like ours, US$500m-US$1bn is the right sort of size for a fund, depending on a number of factors.

If markets normalise relatively quickly following the coronavirus pandemic, we could start assembling a fund by early 2021. While we can diligence investments in Hong Kong at the moment, it’s more difficult to diligence them elsewhere in the region due to travel restrictions.

Q: What are your key areas of focus today?
A: Our focus is on direct lending via securitisation or other secured bond formats, in order to create consistent returns with strong downside protection. Our sweet spot is private credit and specialty finance, including consumer finance, trade finance, property and infrastructure assets.

We have already closed one financing, which involved a Korean consumer finance company, whose business is in high-coupon personal loans. The deal wasn’t a securitisation, but the collateral package was bankruptcy remote.

Q: How do you differentiate yourself from your competitors?
A: Asia is fragmented and behind the rest of the world in terms of the investment landscape. Although a few performing credit funds have emerged in recent years, funds in the region tend to be smaller and the structures tend to be simpler.

The region lacks the broad spectrum of structured finance buyers seen in Europe and the US. The real money investor base is growing, but it is a fraction of the size relative to other regions, and there is not the same indigenous asset management industry or expertise in these assets, so the private credit asset class has been slower to emerge.

Five years ago, it was rare for a fund to make credit investments in companies. If a company needed capital, historically, they typically would either ask their bank or raise equity.

Our investments are in the range of US$15m-US$50m each and involve companies that are underserved by the typical providers of financing. As financing options are limited in the region, there isn’t a large amount of competition for our strategy.

Q: What is your strategy going forward?
A: Our investments will typically have securitisation-like features; there is always collateral and the financings are bankruptcy-remote where possible. For some assets and jurisdictions, it’s not always possible to be bankruptcy-remote, but we’ll always be well protected.

For our prior fund, for example, 20% of our investments were real securitisations, 40% had securitisation-like features (so roughly 60% were bankruptcy-remote) and 100% had a first-lien perfected priority on the assets. The aim is to create defensively structured transactions, featuring collateral test triggers, jurisdictional diversification, eligibility criteria, concentration limits and strong security packages.

Q: Which challenges/opportunities do you anticipate in the future?
A: Asia is receiving more attention from some large global players, which has spurred some local advisors - who had never previously focused on private credit – to begin thinking about it. Asia represents two-thirds of the world’s population and more than one-third of the global economy. Private credit represents a long-term persistent opportunity in the region because convergence with the scale of real money and private capital in the rest of the world is moving at a measured pace.

With the outbreak of Covid-19, the opportunity has expanded in terms of availability of investments and the returns on offer. Markets were pricing a continuation of perfect scenarios last summer and it made sense to have downside protection in such an environment.

Given the unexpected dislocation we’re experiencing now, it seems like opportune timing to be launching a credit fund. Many companies are experiencing difficulties due to the coronavirus fallout and they will need financing to get through the crisis.

Corinne Smith