Secondary loan market: No more playing second fiddle

This year has seen loan desks adopt new strategies to cope with the marked decline in the number of invitations asking for participation in general syndication. One of the most important among these has driven smaller banks that depend on deal flow from their bigger counterparts to turn their attention to the secondary market.

With primary more competitive than ever thanks to abundant liquidity, large arrangers are writing bigger and bigger cheques to clinch deals. However this causes problems when they need to free up balance sheet to sell other services to a client to which they already have a huge exposure. In these cases, the banks often offload small portions of older borrowings in the secondary market.

This is a boon for smaller banks without the balance sheet prowess to get into these deals at the primary stage. Increasingly they are picking up deals in secondary, typically for amounts ranging from $5m-$20m. These transfers usually involve loans sold at par or close to par.

And while this is a welcome development, it is time Asia’s loan market took things up a notch. Instead of only using secondary when primary issuance tails off, banks — be it buyers or sellers — need to work towards creating a more consistent and organised secondary market for loans in the region.

Admittedly, it is easier said than done. For starters, clauses in club deals for premium grade borrowers frequently require lenders to hold the assets for a specific period of time after the deal is signed, complicating the process of re-selling the debt.

With a rise in the number of club loans, often arranged by the borrower directly, and fewer deals in primary overall, conditions are not ideal for the development of a secondary market for par loans, say market observers.

Then there is the issue of choice, or the lack thereof. Retail lenders report being approached for loans related to commodity traders, financial institutions and firms in the casino industry for purchase in secondary. But given banks’ increasing caution around some of those industries, there are few takers.

There is no quick and easy solution to develop the region’s secondary market but it’s worth noting that primary syndication has been experiencing declining volumes over the last couple of years. Between January and April, Asia ex-Japan dollar loan volumes were down 14% year-on-year, and there is no telling what the rest of 2017 may bring.

What is clear is that a pick-up in wider syndication may stifle the small progress the secondary market has made — a pitfall the market must avoid. Given the trend over the past few years, there is no guarantee that a recovery in primary issuance will be sustained, and the chances are that another slowdown would send smaller banks scrambling for deals in secondary again.

That is why there needs to be a concerted effort from both arrangers and smaller banks to continue to enhance Asia’s secondary market.

In doing so, retail banks can mitigate their dependence on deal flow from larger loan houses when times are tough. Arrangers, too, will benefit as a bigger and more liquid secondary market will help them be more efficient when deploying capital — and that’s worth giving a second thought to.