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.
“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.”
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.
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.
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.
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”.
“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.
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.
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.
The loan and bond markets, says HSBC’s Lipton, can be “complementary” but are not always.
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.
Ultimately, though, what’s most likely to return the loan market to its former glory is events beyond its control.