It is boom time for South Korea. Loans bankers expect at least seven US dollar deals to be launched there soon. There are two reasons for the deal rush: the easing of tensions between the North and the South after April’s flare-up over North Korea’s threat to test a nuclear missile, and the fall in borrowing costs across Asia.
Korean companies will hit the market soon but they should be prepared for scant support from domestic syndicate desks. Korean loans bankers are cautious after being forced to write off huge debts during the financial crisis, a problem they put down to the high exposure they had to lower-rated Korean firms.
However, the next key source of funding is not hard to find. Taiwanese banks have always been a big source of funds for Korean borrowers and now they will be even more important. They have already stepped up this year, making bigger commitments than ever before to deals across Asia — and even joining at the top level. That is a marked change from the days when they would take up whole junior levels of a loan.
But new Korean borrowers considering liaisons with Taiwan should take a quick history lesson. A little more than a year ago, Taiwanese banks were pushing to trigger market disruption clauses after their own funding costs shot up. These clauses force borrowers to either increase interest payments or pay back their loans early.
The blame was put on TaiFX, the rate at which Taiwanese banks fund themselves in dollars, and the way in which it had diverged from dollar Libor, the usual reference point for international loans.
Taiwanese lenders were not always successful in getting clients to compensate them: the likes of Export-Import Bank of Korea, Korea Development Bank and Korea Finance Corp managed to avoid paying additional fees. But Korean companies looking to borrow now should learn from this episode and take measures to protect themselves.
One way would be to scrutinise their loan agreements and insist on covenants to defend themselves against rises in costs caused by a market disruption.
This will be well worth their while, as a glance at current Libor and TaiFX rates ought to give cause for concern. Three month Libor is at 28bp but three month TaiFX is at 73bp. Bankers in Taiwan say a difference of more than 35bp would typically trigger clauses aimed at making borrowers pay up.
Taiwanese banks are also already suffering from incredibly thin net interest margins. So if funding costs go up even a little, they may well want borrowers to absorb additional costs.
For Korean names, now is a good time to tap the loan market to take advantage of low margins. But they should use every mechanism possible to guard against getting their fingers burnt again.