Asias loan bankers rediscovered their bargaining chips in 2008. Gone are the days where borrowers wielded power and lenders scrambled to accommodate their every desire. The razor-thin margins that dominated the market in 2006 and 2007 were already falling from favour before the collapse of Lehman Brothers in September put paid to them, perhaps for good. Instead it is the borrowers that are scrambling over each other to find institutions that are prepared to lend, and that is no bad thing for banks that are looking to get the most return from precious capital.
All that, however, has come at a price, and few bankers or borrowers will look back on 2008 with any satisfaction. Even though the year opened with some encouraging signs of life, with big acquisition loans still being underwritten, the spectacular Lehmans bankruptcy threw the market into disarray.
The large acquisition-related loans that stood out at the beginning of the year include the $3bn bridge loan backing Tata Motors acquisition of Jaguar and Land Rover, and the $500m financing behind Tata Chemicals takeover of General Chemicals. Although both facilities took time to gain momentum, the two eventually closed successfully.
The Tata Motors $3bn bridge attracted fifteen participants while Tata Chemicals managed to fight off pressure for a price hike, drawing in three banks.
Even in May, Asias syndicated loan market still looked rather healthy, with reports that Goldman Sachs and Standard Chartered were prepared to provide Bharti Airtel with somewhere between $12bn and $21bn of debt to support its bid for a controlling stake in South African mobile phone company MTN. Those commitments, however, were never tested as the acquisition negotiations collapsed before a deal was put in place.
Aside from these landmark loans, however, the first half of last year was peppered with deals that struggled in syndication. Margins had to be dramatically hiked, deals slashed, and some loans were even abandoned altogether. Banks that had pushed pricing wider to compensate for dwindling risk appetite in the wake of Bear Stearns collapse in March found it was still not enough to ensure a successful syndication.
"Quite a few banks made mistakes and misjudged the magnitude of the margin rise that was needed to clear the market and to cover their cost of funds," says Phil Lipton, HSBCs head of Asia Pacific corporate loan syndications, based in Hong Kong.
By the end of May around fifteen loans had needed to be repriced including the $245m leveraged loan that refinanced the buy-out of Singapores Amtek Engineering, the $100m loan for Bank of Investment and Development of Vietnam where the margin was doubled and the Rmb1.06bn loan for Taiwan-owned TCC Guigang Cement.
The torrent of bad news did not stop there. After Septembers crisis period, loan markets around the world came to a standstill. Finding banks with dollars to lend became impossible as the supply of the currency dwindled.
"There were two fundamental issues foreign banks had capital problems while regional banks had no substantial capital problems but relatively significant dollar liquidity concerns," says Anup Kuruvilla, head of corporate syndication in Asia for Royal Bank of Scotland. "This took the steam out of the market."
Even the long-standing convention of pricing loans relative to Libor was called into question, as banks pleaded that they were no longer able to access funding at anywhere near the official Libor rates. Market disruption clauses, buried in legal documents to protect lenders in times of severe market stress, were triggered, giving banks the chance to increase margins on deals signed months, or even years before. Asias local banks, struggling to find dollar funding, were among the first to invoke the clause but they were far from the only ones to do so, as European lenders quickly followed suit.
"The fall-out from the market disruption clause was like a bad dream, a short-term aberration," says Atul Sodhi, Calyons head of global loan syndication group for Asia Pacific.
But even after the funding crisis began to ease and talk of market disruption subsided, activity in the syndicated loan market stubbornly refused to pick up. Only a handful of deals were launched into syndication in the fourth quarter. They included a $668.7m loan for Filipinos First Gas, which closed without a single commitment.
Market participants are hoping that the painful end to 2008, too, proves to be no more than a short-term aberration. Loans worth $107bn are scheduled to mature in Asia ex-Japan and Australia in 2009, according to Dealogic, and many will need to be refinanced. With the bond markets effectively shut to all but a handful of top tier corporate names, and equity markets still volatile, borrowers will have little choice but to at least try to turn to the loan market. How successful they will be in refinancing existing loans remains to be seen, and the terms and pricing are impossible to predict, but there are some encouraging signs.
"This year will present a clean slate and banks will have new budgets to consider," says Lipton. "This will help with re-opening the market."
The $1bn best-efforts loan for Singapore port operator PSA, announced in November, is a positive sign that the loan market will remain open for well-known and reputable borrowers. The loan is expected to go to the wider market at the beginning of this year. Although the deal has not been completed, many bankers believe that PSA will attain its desired amount.
And even for other, lower-rated, borrowers that are considered lesser credits, the refinancing options are still available.
"There is clearly a refinancing risk but companies will always have the option of going to the local currency markets and to alternative banks," says Sodhi. "My advice to them would be to plan their refis well in time and give banks adequate time to revert back to them."
Every new successful deal will lead to greater confidence. And as more club deals close successfully, banks will probably start to take heart and begin underwriting small amounts.
Syndicated finance desks will be encouraged by the climb in margins which rose steeply last year and are likely to continue to do so. For example, the $1bn five year facility launched in May for Indias Vedanta Resources paid an initial margin of 200bp over Libor, stepping up to 300bp after a year, compared to the companys one year loan in 2007 that carried a margin of 30bp, stepping up to 65bp after six months. But it may still not be enough.
"Margins still have a way to go," says Lipton. "In all sectors and countries, I expect pricing to continue to rise."
Margin hikes are a blessing for bankers on the syndicated finance desks who participate in loans, and last year many teams met their budgets as a result. But fee-dependent corporate financiers are suffering as credit committees shun underwriting commitments.
Back to basicsWhile dealflow will inevitably return to Asia as the region continues to grow albeit at a slower pace it would be naïve to assume that the global financial meltdown will not have a knock-on effect on the Asian syndicated loan market. The trend for club deals done on a best-efforts basis will continue well into the year. And while banks continue to limit their risks, they will demand shorter tenors with higher pricing.
At the end of last year banks were putting together a $70m three year club loan for Philippiness Globe Telecom with seven banks leading the deal. Such a top-heavy arranger group for the small deal demonstrates just how far the market has turned especially when compared to the colossal £3.95bn loan supporting Tata Steels acquisition of its Anglo-Dutch rival Corus in 2007. That loan was underwritten by only three banks ABN Amro, Citigroup and Standard Chartered.
But the non-recourse structure of the Tata Steel loan is one that is likely not be repeated this year. Plain vanilla structures will return with tighter terms and covenants.
The lack of underwriting will also mean that the importance of a volume-led strategy has diminished. One loans banker described the loan market as the "most congenial" he had ever seen. "Everyone is just focused on helping each other to get the deals done," he said.
Others warned that such a strategy would also be self-defeating.
"Banks that continue to target league tables will be putting themselves in danger of arranging failed deals," says Lipton.
Lenders competed aggressively to win market share in the aftermath of the Asian financial crisis 10 years ago, with the result that fees and margins quickly returned to normal. But the banks that hoped their commitments would lead to future rewards ended up disappointed.
"The reality is that even if you help a borrower now it might not build into a loyal, long-term relationship," says John Corrin, head of Asia Pacific capital markets at GE Capital. "Further down the road when another bank offers a cheaper solution, the companies will conveniently forget your support."
The banks that are able to stay committed to Asian lending may find they have to compete with fewer rivals. As banks in Europe and the US continue to receive government bail-outs their business focus may increasingly turn towards their home countries, leaving more spacious room for regional Asian lenders.
"International banks will certainly lose market share in the Asian loan market to regional and domestic players," says Sodhi.
Lessons learnedBy the end of 2008, sentiment had already improved markedly from the dark days of October, and bankers expect a steady flow of deals in 2009. It was a lack of US dollar liquidity that paralysed the loan market after Lehman Brothers collapsed, but with Asian governments pumping cash into their money markets and bank funding pressure easing, lenders can be confident that appetite for new loans will gradually return and Asia is likely to be in better shape than much of the western world.
"Globally, banks have lost a total of $970bn since the beginning of the subprime crisis, but out of that, Asian banks account for less than $30bn, half of which is accounted for by Japanese banks," says Sodhi.
Not only have Asian banks suffered less at the hands of the credit crunch but the regions governments still have trillions of dollars of foreign exchange reserves that they can use to bolster economic growth.
The next 12 months will be far from plain sailing, as Asia and its borrowers feel the full force of the economic slowdown in the US and Europe. More international lenders will pull back from the region to conserve their capital for home-grown markets, but this will provide greater opportunities for those that stay. Now that the balance of power has shifted firmly back in favour of the lender, the loan market has the chance to emerge from the crisis stronger than ever. How banks use their new bargaining chips, however, is up to them.