Asia’s loan market: testing times ahead
Volumes in Asia’s loan market have slumped in recent years, with the pandemic only adding to the pressure. However, the biggest challenges for banks and borrowers are only just starting to emerge and they will test the industry's resilience.
Deal flow in Asia’s syndicated loan market has started slowly in 2021, with many bankers telling GlobalCapital Asia that their pipelines are emptier than in past years. Companies battling Covid-related pressures have put capital raising on the backburner, while origination hurdles posed by travel restrictions have left many loans desks with little visibility on deal mandates.
This would be challenging enough for the loan market but the worst is likely not over. Banks will face numerous tests to their lending business this year — tests that will show their commitment to clients, and throw light on the strength of the region’s syndication market.
Take pricing: strong investment grade credits that have long enjoyed razor-thin pricing on their deals are continuing to keep margins tight, forcing banks to reconsider their relationships with certain clients versus the returns on offer. Chinese technology group Tencent Holdings, for one, is offering 80bp over Libor for margin and 85bp as all-in for a $6bn five year club loan it is seeking.
Although the pricing is in line with the firm’s last borrowing sealed in 2019, the circumstances are dramatically different this time, amid a global pandemic and a more conservative lending strategy at many banks. A handful of relationship banks invited for Tencent’s deal have already told GlobalCapital Asia they are likely to give it a miss as the economics simply do not make sense.
Chinese conglomerate Fosun International also sliced pricing on a $560m loan launched to the market last week.
The general consensus is that top-tier borrowers will continue to keep their funding costs low this year, as they look to take advantage of lenders hungry for assets in a low deal-flow environment.
How many banks will join these deals? That remains to be seen but there are sure to be intense negotiations internally about prioritising returns over clients or vice versa, especially in cases where there is limited scope for ancillary business.
Chinese banks will face an additional obstacle too, owing to new regulations over lending to the country’s real estate sector. China's government, which last August tightened funding conditions for property developers with its "three red lines" policy, recently imposed a cap on banks’ lending to property names.
The regulation, implemented on January 1, requires the big six state-owned commercial banks — Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, Industrial and Commercial Bank and Postal Savings Bank of China — as well as China Development Bank, to keep their ratio of outstanding property loans to total loans at 40% or less.
The level has been tightened for other banks as well, depending on their size. While the rules appear to be only for renminbi-denominated loans, some bankers said their offshore lending to the real estate industry is also coming under scrutiny.
This means Chinese banks, which have long been a main liquidity source for mainland property developers seeking dollar loans, will either have to step back from new deals, or sell down their exposures in the secondary market. They will have to decide which companies to hold on to, and which to drop to meet the new regime.
Banks are not the only ones likely to face big decisions about their loan books this year. Borrowers and their relationships with lenders will come under pressure too.
Since last year, there has been an increasing demand for club loans, which help borrowers avoid the extra fees from underwritten commitments or syndication, and have a shorter timeline to complete than full syndications.
Bankers expect this borrower preference for club loans to continue in 2021. But while that makes sense in the short term, it won’t be a sustainable fundraising avenue for companies in the longer run. By frequently opting for club loans with relationship banks, firms risk losing the wider pool of liquidity that comes from smaller lenders, and in turn their support for bigger fundraising exercises in the future when their businesses bounce back.
It’s likely to be a year of big tests for bank lenders. Their responses will provide guidance about the trajectory of the loan market. They will also throw light on the market’s long-term survival and resilience.