Banks are striving to win lucrative high yield loan mandates in order to increase their profitability as competition in the market heats up.
Financial institutions are more willing to look at lower-rated names as the credit environment improves and as the loan supply in Asia declines, meaning syndicate loan bankers will still have to compete aggressively for deals this year.
“As people generally get comfortable with credit and there is less supply plus more competition, the slightly riskier credits out there will be able to raise funding this year,” said Siong Ooi, head of Asia Pacific loan syndicate for Bank of America-Merrill Lynch (BoA-Merrill) to Asiamoney PLUS on January 25.
One of the more popular markets that syndicated loan bankers have been looking at this year is Indonesia due to the nation’s improving sovereign ratings, strong macroeconomic story and relative value, suggesting that loan mandates originating from the Southeast Asian country are expected to increase this year.
“People have either already increased the lines for Indonesian corporates or are taking a more positive view on Indonesia,” said Ali Abbas Alam, emerging markets financing head for Asia at Credit Suisse to Asiamoney PLUS. “You will see a lot more first-time issuers access the market [this year].”
In December 2011, Fitch raised the country’s sovereign ratings to ‘BBB-’, while Moody’s followed suit with a ‘Baa3’ a month later. Indonesia will benefit again if Standard & Poor’s (S&P) raises its sovereign rating to investment grade from the current ‘BB+’.
This year the Indonesian market witnessed a wave of borrowers that were keen to access the loan market in the first few weeks. For example, Tower Bersama Infrastructure returned to the loan market on January 16 by issuing a US$190 million three-year deal, according to Dealogic data. Other names include state-owned Pertamina and Astra Sedaya Finance.
Other emerging market syndicate bankers in which syndicate bankers are trying to win more business include China, Malaysia, and Philippines given these countries’ sound economic fundamentals.
Additionally, in an environment where there are minimal deals and as market sentiment gradually recovers, borrowers will look to capitalise on the given window of opportunity by lengthening their duration especially as spreads continue tighten this year.
“Spreads in 2012 were basically double what spreads were at the beginning of 2011,” said a Hong Kong-based head of loan syndicate at a US bank. “In terms of the order of magnitude, the first quarter of 2012 is a wide point and spreads could probably track back to 2011 levels – just under double.”
For example, Pertamina’s US$965 million five-year loan completed on January 24 was priced with a top-level all-in cost of 200 basis points (bp) – substantially lower than the 312.5bp top-level all-in on a US$700 million five-year loan that the state-owned Indonesian oil company signed in June 2010, according to Euroweek Asia.
Additionally, as a result of the better funding costs borrowers are now more able to secure five-year funding having been largely limited to three years due to pricing constraints.
“As borrowers and arrangers themselves become more comfortable towards deals with longer tenors, we will suggest to clients that it might make sense for them to raise longer-term financing to balance out their debt portfolios a bit more,” said Ooi. “If you only raise three-year money and everyone else is raising three-year money, then a lot of maturities come due in one-year.”
Given all these promising trends, Asia Pacific ex-Japan loan volume is expected to rebound from a three-year low. Last year, Asia Pacific ex-Japan syndicated loan volume reached US$363.4 billion down 19% from the year before which recorded a total US$447.6 billion, according to Dealogic data.