Asias loan market still has plenty of ground to make up if it is to match the pace of the recovery in the regions other financial markets, but it is on the right track.
After beginning 2009 virtually at a standstill, loan bankers in the region are finally back to doing what they were hired to do. The international banks that reacted so badly to Lehman Brothers collapse in 2008 have finally relaxed their grips on their balance sheets, and competition is as intense as ever. But the paralysis of the first quarter kept deal volumes for the full year of 2009 at a disappointing $428bn, a four year low for Asia.
That is unlikely to be repeated in 2010, however, as confidence has returned and business is picking up quickly. The high margins and hefty fees on offer in 2009 are already a thing of the past, and bankers are confident that the recovery will continue.
"We will see increasing volumes and lower yields as market conditions will continue to ameliorate," says Philip Cracknell, global head of loan syndications at Standard Chartered in Hong Kong. "Its a natural phenomenon that pricing comes down quickly."
Australia sets the pace
The beginning of 2009 was a very different situation, when recapitalisations and refinancings were the order of the day. One of the largest deals that greeted loan bankers at the start of 2009 was the A$3.82bn forward start facility for Australian retailer Wesfarmers, which was launched in mid-January. With looming refinancing deadlines hanging over companies heads, the forward start facility was regarded by some as a necessary band-aid.
Forward starts allow a borrower to refinance its loans well ahead of their original maturities by offering an immediately higher margin to persuade lenders to commit to a refinancing in the future. While popular in Europe, the FSF fad did not catch on as quickly in Asia, with only a handful of Australian borrowers using the refinancing tool through the year including shopping centre owner Westfield, food manufacturer Goodman Fielder and pipeline operator APA Group.
Instead, what really woke up the hibernating loan market were the new money deals for Australian retailer Woolworths and Woodside Petrochemical, which raised a combined $1.8bn in deals driven by Asian lenders.
"The success of the two deals considering the timing and the market environment at the time, make the deals especially impressive," says Siong Ooi, global head of debt syndicate at ANZ in Hong Kong.
Banks were allowed to commit to the new money deals in different currencies such as Japanese yen, US dollar and euro, in a bid to attract as much liquidity as possible in syndication. The decision to target Asian investors, rather than the much narrower base of Australian lenders that typically supports domestic deals, was also something of a departure for the bookrunners.
"The Asian market used to be an afterthought, but the idea of tapping Asian liquidity has become compelling after those deals," continues Ooi.
Rival bankers point out that Australian borrowers have been syndicating loans in Asia for years, noting that the fall in margins during the second half of the year made the deals look rather expensive for the companies involved. But the two Australian deals reopened the Asian loan market, and that gave Asian lenders a much needed confidence boost.
"Those deals helped to reinforce the notion that liquidity exists notwithstanding the terrible environment during those early months of 2009," said Boey Yin Chong, managing director in DBSs syndicated finance team.
Woolworths through its bookrunners ANZ and Citi increased its loans from $300m to $700m when it was signed in May and Woodside more than tripled its deal from $300m to $1.1bn via ANZ and Bank of Tokyo-Mitsubishi UFJ.
Commodities draw crowds
By the time the two deals were signed, the Asian market was starting to thaw perhaps as a result of the Australians success and banks were beginning to wake from their slumber.
"The market definitely turned more positive in May, stability in the loan markets was coming back and more banks were becoming engaged in doing deals in a bigger way," says Boey.
This is not to say that normality had returned volumes were still muted and banks were still cautious but the number of deals picked up rapidly in certain sectors and countries, and both Indonesia and Vietnam had quite strong years compared with their neighbours.
On a macro level, Indonesia showed the resilience of its economy to the global slowdown, shrugging off early concerns of a repeat of the Asian financial crisis of 1998. Moodys upgraded Indonesias sovereign rating from Ba3 to Ba2 on September 16 last year, and one month later Standard & Poors revised the countrys rating outlook to positive.
While other borrowers in Hong Kong and Singapore had started to push down pricing on their deals, the top tier Indonesia credits were able to rope in lenders with the promise of lucrative margins.
"The volume raised in Indonesia has been phenomenal. This was mainly because the strong credits in Indonesia represent good relative value," says Ooi.
Examples of loans for Indonesian borrowers include the $290m buy-out loan for Bukit Makmur Mandiri Utama, co-ordinated by Barclays Capital; the $275m facility for Perusahaan Gas Negara, solely underwritten by Standard Chartered and a $700m facility for Pertamina via ANZ, BNP Paribas, HSBC and Standard Chartered.
Vietnam, meanwhile, posted an increase in US dollar loan volumes from $2.24bn in 2008 to $2.96bn last year, according to Dealogic, with several loans waiting to be signed as this article was going to press. Electricity of Vietnam was putting the finishing touches to a $400m deal, while Vietnam National Coal Minerals Group (Vinacomin) was in the market with a $300m five year facility.
Sector-wise, commodity traders emerged as the shining stars of the year. Four commodity traders hit the market almost simultaneously from September, but the glut of deals had little impact on demand and all were easily absorbed by a recovering market. Not only was this an example of how liquidity had returned in the latter part of the year but also of the appeal of the sector.
Singapore-listed Noble Group increased its loan from an initial target of $1.2bn to $2.4bn, while Olam grew its deal from $540m to $850m. Borrowers from outside the region also got in on the act: Trafigura received commitments worth around $700m for its $505m loan and Mercuria Energy, a debutant in the Asian market, was on track to being oversubscribed at the time of writing.
Refinancing fears ease
A list of successful refinancings and restructurings also lifted lenders confidence in 2009, dispelling fears of the wave of defaults that followed the Asian financial crisis 10 years earlier. Some of Asias biggest borrowers, however, kept the tension on until the very last minute.
Although Tata Motors managed to steer itself around a refinancing crunch in the nick of time, there was a point when the financial health of the company was in serious doubt.
One of Indias star names found itself in a difficult position after having borrowed heavily to finance its 2008 acquisition of Jaguar Land Rover, being left with a $3bn bridge loan to refinance just as the credit markets seized up.
A rights issue at the end of 2008 and the sale of some assets helped Tata pay down $1bn ahead of time, meaning it still needed to roll over $2bn of the original loan.
After months of brainstorming, the plan that Citigroup, the informal co-ordinator, and Tata Motors devised was a split between a three to five year rupee bond, fully covered by a guarantee from State Bank of India, and an 18 month dollar loan.
But loan bankers were not in the mood to be accommodating. There were complaints about the low fees on offer, uncertainty of repayment, and a lack of any guarantee from the parent company, Tata Sons. With only two months to go before its loans were due to expire, Tata Motors bowed to pressure from its banks and raised both the margin and the fee.
The local bond set a new record in the Indian market as the biggest bond issue from any private sector borrower. Barely a week after the rupee bond was launched, and just a day before the $3bn bridge loan expired, Tata Motors lenders agreed to extend the remaining issue.
Even that was not the end of the saga, as Indias central bank threatened to derail the whole process, warning the company that commercial banks were not allowed to guarantee corporate bonds, saying such structures were only allowed in the loan market. Thankfully for Tata, the Reserve Bank of India relented three days later and allowed the deal to stand despite the breach of regulations.
The affair highlights the difficulties in rolling over existing credit lines, even for the best known borrowers, as well as the dangers of waiting too long before refinancing maturing debt.
Tata Motors was only one example of a company under pressure to refinance its loans, and there were many more, including Australian miner Oz Minerals and Graeme Harts Rank Group. Funding conditions have since eased, but there is plenty more to come. According to a report by Standard & Poors last year, Asia Pacific borrowers needed to refinance up to $368bn of corporate debt due to mature in 2009-2011, with 94% of that total concentrated in Australia and Japan.
Return of underwritten deals
Although refinancing woes were a concern for many months, by the end of the year the loan market had bounced back with liquidity flowing again and pricing falling fast. After months where banks shied away from deals, many were desperate to put their money to work in the second half, meaning that almost every deal was a success.
"Pricing has moved in more sharply than banks anticipated for several reasons," said Phil Lipton, HSBCs head of syndicated finance, Asia Pacific in Hong Kong. "Firstly, the lack of supply; secondly, club deals do not encourage pricing discipline; and lastly there are few benchmarks to gauge what the market clearing price is. Only when underwriting returns will proper pricing discipline stage a comeback as the risk of failure will lead to a more market driven approach."
Some bankers think that pricing will continue to fall for the first quarter of next year, while others say the pace will slow. There are strong signs, however, that underwritten deals will play a bigger role in 2010.
Certain deals including the loans for Olam and PGN were underwritten, but these were the exceptions rather than the norm. Bharti Airtel also managed to get an underwritten $4bn-$5bn facility to support its proposed acquisition of South Aricas MTN, but the loan was not used as the acquisition fell away.
"Some level of underwriting has already come back for example in Bharti and Olam deals. But instead of selling down to at least 15%, now banks may only be able to sell down 10%-20% of what they have underwritten," says Boey.
Along with the confidence to underwrite, some expect mergers and acquisition activity to heat up too. "Valuations are back to a point where buyers and sellers can converge. Also bank credit is more readily available to support deals for acquisition and some form of leverage buy-out," says Boey.
Reliance Industries made a $12bn bid for bankrupt US chemicals maker LyondellBasell at the end of November; Indonesian investment firm Recapital Advisors is preparing a $300m loan with Credit Suisse to support its takeover of Berau Coal, Indonesias fifth largest coal producer; Asia Pacific Brewery, the maker of Tiger Beer, said at the end of last year that it would use a combination of cash, bank debt and bonds to fund two overseas purchases.
The turnaround has been so strong that it is hard to imagine that the collapse of Lehman Brothers was less than 15 months ago. Liquidity is back, pricing has started to plummet and underwriting is beginning to return. But bankers are sounding a note of caution over the quality of the deals that are coming to market.
"Banks have lost the opportunity to reverse many of the more onerous clauses within borrower-friendly documentation transacted before the global financial crisis," says Lipton.That is sure to raise concerns among lenders, especially in the wake of Dubai World asking creditors for a standstill on debts of around $26bn at the end of November. But for now, most loan bankers are just glad to have more mandates in the pipeline, even if they come with low margins and weak covenants.