Property names have been the flavour of the week in the Hong Kong loan market. New World Development, Wheelock Properties and Henderson Land Development have all made headlines for their self-arranged club loans.
Take Henderson, for example. The blue-chip company is tapping loans bankers for HK$5bn ($645m) and has sent out invitations to prospective lenders. Not only is it self-arranging the loan, but it is also keen to have onboard just its closest relationship banks.
So far, so typical for a Hong Kong real estate developer. And the margin on offer is not something that will have banks falling over each other to lend — even if it is to a reputed and top-tier borrower. Henderson has split the financing between a HK$2.5bn four year tranche, which pays a paltry 97.5bp over Hibor, and a HK$2.5bn five year portion, with a margin of 105bp over Hibor.
There is certainly no denying that the reputation of the company will help it pull off the refinancing successfully, despite the less-than-appetising margins. But this success is likely to come at a price. The borrower has called on its old lenders — some 15 banks that chipped in for its 2011 loan — to supply the funds. And although the majority are likely to join the deal and cover the whole amount, some bankers reckon at least four or five of them will wave it goodbye.
This is why Hong Kong property companies should begin to look further afield for their funding. If banks have their way, subpar margins are unlikely to be welcome in the long run. Many have already started to see their funding costs rise and will soon seek ways to pass on these costs to borrowers. And if corporates are unwilling to lift margins, banks will begin to drop such deals from their portfolios.
It is also in the interest of property developers to keep their ears close to the ground to find a larger investor circle. Bankers speculate that between 40%-45% of Hong Kong dollar loans go to the real estate sector.
This, in turn, means that the exposure levels of some of the regular lenders to property companies will already be fairly high. When hit by a spike in funding costs they will doubtless be more eager to hedge their losses, and less eager to lend.
Borrowers can overcome this by not only reaching out to the smaller market players but by also being willing to spruce up their margins. Taiwanese lenders are still in full throttle and keen to lend. Liquidity has not yet dried up and there are plenty of banks willing to do more deals to meet their budgets.
Issuers should start to sweeten them up now to broaden their banking circle. If their funding needs get bigger, they may find themselves in trouble if their circle of lenders has not.