Asia’s loan market: overbanked but innovation is stirring

The Asian loan market hasn’t exactly been a hotbed of inventiveness, but it’s still seen some changes. Domestic markets, particularly China, have become vastly more active, while the balance of power has shifted towards local lenders. All, however, are struggling in a world of low margins and low volumes

  • By Adrian Murdoch
  • 16 Jun 2017
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Yellin 100pxNothing in this world is certain, the old saw goes, apart from death and taxes. To that short list can be added the Asian loan market, which retains an old-fashioned, almost gentlemanly nature, which has changed very little over the last 30 years. 

The market remains dominated, as it always has been, by cross-border lending in dollars. The only real change, joke regional bankers, is that rather than communicating by fax, they now do everything by email. 

But of course there have been very significant changes. “The banks that were active in the Asian loan market have changed,” explains Phil Lipton, head of loan syndications, Asia Pacific, at HSBC in Hong Kong.

“It used to be US and European banks mostly leading the deals. That changed in 2008 with a number of mergers, as well as some banks leaving the region. Now the market has shifted to local and regional Asian banks.”

New kids on the block like the highly ambitious Chinese banks are happy to compress spreads. Non-bank investors also keep nipping at margins on the sidelines.

With more lenders chasing fewer deals, the traditional loan market has a gloomy feel, and plenty of its veteran participants now regard it as overbanked.

OVERBANKED AND UNDER-MARGINED

Last year, loan volumes dropped 9% year-on-year while the number of deals in the market fell 11%, according to Standard Chartered. That followed an already depressed 2015. 

But obituaries for the loan market have been written far too often before. This time, too, will not be the end.

For a start, the market is not as resistant to change or innovation as critics make out.

In an echo of the way domestic bond markets took off in the aftermath of the Asian crisis in the late 1990s, domestic loan markets are now being widely acknowledged as a powerhouse.

Over the last couple of years, local currency lending has accounted for around 60% of regional loan volumes, according to Standard Chartered. The apparent speed of growth may be faster than reality, as renminbi activity in the 1990s, for example, must have been much higher than recorded, but the markets’ importance now is not in doubt.

THE RISE OF CHINA

As Foster Lee, head of syndicated finance at China Minsheng Banking in Hong Kong, points out: “Renminbi loan demand is much bigger than it was before”, because “the dynamic has changed”.

Business in the region has become more China-related. When a European company is buying a Chinese company or a Chinese company is buying a European one, there is, invariably, a Chinese bank and loan involved.

“If you are doing a deal in London then you call Lloyds, if you are doing one in New York then you call JP Morgan, so of course if you are doing a deal in Shenzhen, you call a Chinese bank,” explains one banker.

Several bankers complain that the pack of cards is stacked against Western banks. Chinese lenders have different credit requirements and are not regulated by Basel III requirements, which helps them compete. That will change sooner or later — over the next five to 10 years is the generally accepted assumption — and Chinese banks will have to recycle their balance sheets… but not yet.

TOUGHER AT THE TOP
If the market is indeed overbanked, then it is most overbanked at the top end of the market.

Canny lenders have moved down the credit curve to the next level of companies, which still have funding needs, but might have difficulties accessing the high yield bond market.

But what has changed most of all in the loan market over the last couple of years is innovation in loan products.

To take just two examples, it is worth having a look at United Asia Loan Funding, the region’s first fully backed, actively managed cashflow CLO, marketed by SC Lowy and UOB Asset Management, as well as the emergence in the Australian market of term loan ‘B’ (TLB) deals for speculative grade borrowers.

The $400m United Asia Loan Funding was launched last year, intending to buy loans paying margins of 300bp and above. It has struggled to close, but is clearly a step along the right path.

Further back, Leighton and Apollo Global Management priced a A$359m ($265m) seven year covenant-lite TLB in May 2015, funded primarily by private debt funds and pension funds, which avoided exposure to volatile exchange rates. Until then, Australian borrowers had had to look to the dollar TLB market for longer term loan funding.

Neither product has exactly been a runaway success, but both are steps in the right direction and should help to deepen and broaden Asian loan markets.

BACKING BONDS
While there have been definite moves to integrate loan and bond markets in Europe and the US, as companies seek all their debt funding from a single desk, the integration process is at a much earlier stage in Asia.

The loan and bond markets, says HSBC’s Lipton, can be “complementary” but are not always.

“When you have financial or political events in the region there is often a quick reaction in the bond and equity markets, but there can be a lag in the loan markets,” he says.

This is not to say that convergence is not happening — it is just occurring at a slower rate.

“The movement is still in its infancy, but in the long term I would expect to see more integration in the two markets,” says Andrew Ashman, head of loan syndicate for APAC at Barclays in Singapore.

What is holding back integration at the moment is fragmentation, geographies and currencies.

Ultimately, though, what’s most likely to return the loan market to its former glory is events beyond its control.

As the Federal Reserve continues to raise interest rates, regional loan bankers will start to make something approaching decent returns again.
Then it could be back to business as usual.
  • By Adrian Murdoch
  • 16 Jun 2017

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 390,564.78 1474 8.99%
2 JPMorgan 358,442.23 1626 8.25%
3 Bank of America Merrill Lynch 344,395.33 1215 7.93%
4 Goldman Sachs 257,185.44 862 5.92%
5 Barclays 252,851.12 991 5.82%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 36,645.46 176 6.31%
2 Deutsche Bank 36,386.11 128 6.26%
3 Bank of America Merrill Lynch 30,712.91 97 5.28%
4 BNP Paribas 30,600.75 184 5.27%
5 Barclays 30,394.96 86 5.23%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 21,398.51 94 8.81%
2 Morgan Stanley 17,334.42 90 7.14%
3 Citi 16,974.50 104 6.99%
4 UBS 16,643.68 66 6.85%
5 Goldman Sachs 16,184.72 87 6.66%