The deterioration in loan volumes due to tightened bank liquidity and the conservative nature of Asian banks in general will cause the trading of syndicated loans in secondary market to shift from mildly active to dormant.
This ‘buy-and-hold’ mentality continues to influence the way financial institutions in the region operate and is not going to change for the foreseeable future, note syndicate loan bankers located in Asia. This is opposite to how banks in the West do business where there is much more of a culture of portfolio management.
“We need a more modern attitude towards portfolio management where assets are sold down or recycled,” said a regional head of loan distribution for Northeast Asia at a British bank to Asiamoney PLUS in a telephone interview on December 3. “We see strong demand from buyers and we get calls on a daily basis about secondary interest to buy, but there are just not that many sellers in Asia.”
While syndicated loan bankers at global banks want to see a change – and one that would happen in the short-term – they believe Asian banks are unlikely to change their approach towards the trading of syndicated loans in secondary markets.
“There is no desire for many banks to sell loans. It’s just as fundamental as that,” said John Corrin, global head of loan syndications at ANZ to Asiamoney PLUS. “I don’t see any immediate change.”
Also, syndicated loans primary volumes have tapered off this year, leading to the decline in activity in the secondary market. Experts add that the loan market will continue to remain lacklustre in 2013, especially as corporates turn to more liquid and flexible bond markets as a financing alternative.
“If the primary market is slow, you would want to be keeping your assets for that carry income. I think volumes will remain flat in primary and secondary next year,” said the head of loan distribution. “The bond market, especially the local currency market is very strong.”
Benjamin Ng, head of debt syndicate and acquisition finance group for Asia Pacific at Citi agrees: “Asian banks have lots of liquidity and prefer to lend and earn the interest. If they want to tap into that area where they can sell one asset to another bank, they might as well issue a bond.”
Loan volumes in Asia ex-Japan have declined 17.5% to US$229 billion with 839 deals year-to-date versus US$303 billion with 1,017 deals during the similar period last year, according to Dealogic data. Bond volumes, on the other hand, have surged 44.1% to US$780 billion with 3,645 deals year-to-date from US$541 billion with 3,063 deals during the same period last year.
The trading of secondary loans is also impaired by the conservative nature of corporates that stipulate terms and conditions which prohibits their bankers from reselling their debt.
“A lot of Asian corporates prefer the loans to be held by their relationship banks and prefer not to be held or sold to a non-relationship banks or non-bank investor which they have no relationship with,” said Ng.
As a result, the secondary market only sees one-way flows. For example, big banks wanting to selling down their assets to smaller financial institutions. A loan syndicate banker estimated that at least 75% of transactions in the secondary market are one-way flows whereas a very small percentage would involve a broker or trader.
Additionally, the secondary market in loans tends to have more activity from sub-investment grade or the more leverage type of debt like gaming credits for example, note experts. The secondary trading or selling of distressed loans has also been active post-financial crisis.
“For investment grade loans, you tend to see more limited activity mainly because banks are buying and holding on the whole,” said a head of Asia Pacific loan syndicate at an American bank to Asiamoney PLUS. “Most of the syndicate view it as a relationship lend.”
In the medium-term, the presence of more non-bank investors in Asia can potentially spur secondary market loan activity, note market experts.
“Most people would agree that non-bank investors will become more important, especially when Basel III begins to take effect some year or two down the line,” said ANZ’s Corrin.