Time to give credit to high-yield loans: Highland

Mark Okada is co-founder and chief investment officer of Highland Capital Management, an alternative credit manager based in Dallas, with business development offices in New York, London, Singapore and Seoul.

Set up 1993, Highland is among the largest credit specialists in the alternatives space, with more than $18 billion in assets under management. Its product range includes hedge funds, alternative mutual funds, distressed private equity and long-only funds.  

Okada manages the firm’s Floating Rate Opportunities Fund, a $1.2 billion open-ended fixed income mutual fund launched in 2000 that invests in senior secured bank loans with variable interest rates and other floating-rate securities.  

Okada spoke to AsianInvestor during a recent visit to Asia.

From your viewpoint as a credit manager, what were the major market events in 2013, and how did they affect the high-yield loan market?
The most significant events affecting the credit markets were Japan’s decision to reflate its economy via Abenomics and the [US Federal Reserve’s] announcement that is was considering a potential tapering of its bond purchases.

What should the Fed do?
I would love to see Bernanke wind down the [quantitative easing] programme, as it has created artificial market pricing. It’s been five years since Lehman’s collapse, but the economy is still being propped up with excess reserves that are not being used efficiently. We’d rather see structural reform in fiscal, tax and growth policy.  

[US Fed Chairman Ben] Bernanke has effectively said he’s forced to do it because Washington has not been able to create pro-growth policies or reforms, which have been missing from the US post-crisis economic recovery. Without that, it's a very artificial recovery, so we don't put a lot of faith in QE3. Our stance is that the bank loan asset class is well positioned for such market uncertainty.

Emerging markets have had a volatile year, and China is expecting slower economic growth. As a result, the US and Europe are now regarded as more stable markets. What is behind this shift in mindset? 
Investors have been chasing growth through Asia, but right now – given all the market uncertainty and a lack of confidence in the system – investors are going to gravitate more towards developed markets to manage risk.

When you compare the fundamentals of developed markets to emerging economies, it seems the growth story is being won by developed economies: the US, Europe and Japan. They have better growth dynamics combined with free market economies.

Has this been reflected in investor allocations?
We are seeing growing demand for offshore investment into developed markets. There is a sense of anticipation that an inflection point is coming, which will change growth dynamics and stability. From a defensive standpoint, you would either want to get your money out of Asia into a safer spot or you feel the relative returns in the developed markets will pay back handsomely when compared to emerging markets.

Do your products have exposure to Asia?
No. Because we invest in high-yield loans and senior secured loans, we require bankruptcy protection and courts to protect debt investors. Sub-investment-grade credit in the Asian marketplace has no such available protections, with the exception of Australia.

Although the availability of debt protection isn’t growing in Asia, the size of the regional credit market is, as we’re seeing more bond issuance in the high-yield space. However, my view has always been that even though the arbitrage looks good, you need the right skills to capitalise on the opportunity. We would need to have people with the right skill sets on the ground to do that, and at this point in time we don’t.   

Is it something that will change in the near term?
If we ever decide to enter Asia as an investor, it would be because we hired some people locally to source and manage the investments. It’s not only the region’s bankruptcy regimes that are difficult to get comfortable with, it’s also the liquidity. You have to anticipate problems as a credit manager, and if your assets become illiquid, you’re locking in the downside risk for investors. We don’t yet see liquidity in the Asian markets at a level where it can add value to our portfolios.

Will Asia ever become an attractive market for high yield loan investment?
It’s developing, but Europe will progress faster, so it’s hard to see Asia catching up any time soon.

*A full version of this article will appear in the December edition of AsianInvestor magazine