Lipton: Borrowers had to pay up to capture the liquidity

The loan syndication market in Asia-Pacific, outside of Japan, is currently in robust shape, making this a good time for corporates to borrow. As such, they have to take a stand on whether pricing is going to come down further or decide to secure their funding as conditions may not be as favourable in 2015.

Phil Lipton, managing director and head of syndicated finance for Asia-Pacific at HSBC, notes that pricing went up for most of the Greater China credit in the first six months of the year, but was stable to trending downward elsewhere in the region.

This was being driven by a number of issues, one of which was the big volume of supply coming through, so borrowers had to pay up to capture the liquidity amid the competitive deal flows in the market. The impact was not so much on the blue chip names, but more visible on the second tier and smaller borrowers.

In Taiwan, banks saw their dollar funding costs go up in the early part of 2014, making them push up their loan pricing. The three-month TaiFX, the interbank US dollar funding rate in the country, rose from 80bp to 160bp by the end of the first quarter of the year, though it has fallen recently to below 100bp.

For the first half of 2014, Thomson Reuters’ figures showed that the loan syndication volume in Asia-Pacific, outside of Japan, amounted to US$206.6 billion, down 2.4% from US$211.6 billion in the same period last year.

The Hong Kong loan market was the largest contributor with a record volume of US$44.8 billion, up 48% from the year-ago level. This was fuelled partly by Chinese offshore borrowings, representing 22% of the overall Asia-Pacific loan market.

The higher volume was also underpinned by a few large facilities raised by blue chip and top-tier borrowers, including the HK$37 billion (US$4.77 billion) financing for Power Assets Holdings’ spin-off of Hongkong Electric Company, a US$2.42 billion acquisition club deal for telecom service provider HKT and two US$2 billion refinancing loans for Nexen Energy and Noble Group.

On the other hand, the volume of loans in China was only US$30.9 billion by the end of June 2014, or a drop of 40.1% from US$51.6 billion in the corresponding period last year. But although the loan activity slowed in the first half, about 45% of China-based volume was used to support the continuous funding requirements in project financing and infrastructure projects.

John Corrin, global head of loan syndications at ANZ, says the trend of Chinese borrowers tapping the offshore market, mainly Hong Kong, to raise funds will continue. The onshore loan market is expensive, and repatriating offshore borrowings to onshore is an attractive option for many companies.

While the Hong Kong Monetary Authority has previously expressed concern on the growth of Chinese borrowings in Hong Kong, this has quieted down at the moment. “We will continue to see plenty of Chinese borrowers, both from the private sector and state-owned enterprises (SOEs), accessing the offshore loan market via Hong Kong, which remains the window to the outside world for these Chinese debt issuers,” Corrin adds. “The SOEs, whether these are in oil and gas, mining, food and agriculture, are still looking for offshore acquisitions and they will continue to drive reasonable amounts of loan syndication transactions.”

M&A, key growth driver

Mergers and acquisitions (M&A) activity accounted for 12.5% of the loan volume in the first half this year at US$25.7 billion involving 21 transactions. More than half of those issuances were for the large deals backing Power Assets’ spinoff of Hongkong Electric, the purchase of the Malaysian oil and gas assets of Newfield Exploration Company by SapuraKencana and the takeover of Hong Kong-based Wing Hang Bank by Oversea-Chinese Banking Corporation of Singapore.

Atul Sodhi, managing director and head of loan syndication, debt optimization and distribution for Asia-Pacific at Credit Agricole Corporate and Investment Bank, expects the overall 2014 loan volume to be in line with last year or marginally lower. “We saw a huge growth of more than 50% in 2013, so the volume will stabilize this year,” he states.

According to Thomson Reuters, the 2013 loan volume of Asia-Pacific, outside of Japan, reached an all-time high of US$461.9 billion, up 50.6% from US$306.6 billion in the previous year.

Corrin: The US term B loan market is not for everybody

Sodhi, who is also chairman of the Asia-Pacific Loan Market Association, says cross-border M&A will remain the key growth driver of the loan syndication market in the region this year. “This is what we are watching closely and the deals have the potential to provide the market with some big upside in terms of well-structured transactions and contribute to the market volume,” he adds.

China and India are the two major markets for cross-border M&A deals, although the activity in the mainland, especially for bigger transactions, has slackened a bit due to economic slowdown. In India, the economic environment has improved substantially from where it was before the national election in May this year, making it more conducive to do deals.

“I see a renewed interest from some of the corporates to start looking at cross-border M&A,” Sodhi remarks. “The loan market is a reflection of the economy and the corporate world. If the corporates are doing well and are expanding, the loan market would expand as well.”

Corrin says that it would be good to see more offshore investments by Indian corporates. “Sentiments are favourable in India and that will open up opportunities,” he points out. “We will see more issuers, but what we are hoping for is a broader range of issuers. If you compare the big markets in the region, there is a lot more diversification in terms of issuers in China than in India.”

One of the trends in the loan syndication market this year is often linked to M&A deals and that involved corporate transactions with a slight structure and a degree of complexity around them. Corrin sees it as a positive development for the loan market, noting that most of the leveraged loan teams in Asia are increasingly focusing on these types of opportunities, instead of the traditional private equity type of deals. The latter is important, but there are not enough of such transactions in most markets in the region to keep bankers fully occupied.

Leveraged buyout deals are still few and far between in Asia, although there are interesting transactions such as that for Giant Interactive, a US-listed Chinese online gaming company. Most of these deals are done in the term B loan market – a high yield loan sold in the US with investors comprising a mix of traditional bank lenders and institutional investors.

Softer mortgage books

As Corrin explains, not all companies can access this market – they should have decent name recognition. This space is attractive for companies that want to have covenant-lite packages. There have been transactions with such packages in Asia, but they are few compared with those in the US.

In terms of pricing, it is gradually tightening in many of the markets in the region as funding costs are decreasing. In some cases, banks have surplus capital. It varies between countries, but mortgage books have been softer so banks have plenty of liquidity for lending.

Sodhi: Renewed corporate interest for cross-border M&A

In China, Corrin observes that the borrowers are becoming more sophisticated and so increasingly, they are driving hard for the best terms and conditions. “They know they can get the money, so they focus on pricing.”

In India, the loan margins have not really compressed even as several Indian issuers are raising funds from the bond market, instead of the loan market. “If you look at the state-owned companies, pricing has been relatively stable,” notes Lipton. “They’ve been raising money at around Libor + 2% level and that has not changed significantly. The bond market has had an effect in terms of competition, but we have not seen a collapse in loan pricing that some may have predicted.”

Indeed, the robust bond market continues to cast a shadow on the loan syndication market, as the current interest rate remains at a historic low and hence, favourable for the bond market. But as Corrin shares, the dynamics have slightly changed – it’s much more balanced between the two markets. “There is obviously a growing bond market in Asia and in my view, the loan market and the bond market can grow together.”

Adds Sodhi: “The bond market continues to provide the liquidity and the kind of pricing, which are unprecedented. This is a fact of life and we at the loan market has to accept that. And if I were a corporate treasurer, I would tap the bond market to the extent possible simply because the current low rates would not be there forever.”

Many borrowers still prefer to raise money of up to five years in the loan market because of the flexibility that the loan structure tends to give them. The loan market, Corrin argues, is competitive for raising funds up to five years, but when the issuers/borrowers want seven-year tenor or longer, the bond market is a favourable option.