Asian borrowers have never had it so good. The fall in loan margins that began in the second half of 2012 is still going strong. Bankers were optimistic at the start of this year that it would only be a matter of time before pricing stabilised and they could get on with winning deals. But if recent loans are anything to go by, they may have a long wait.
Take, for example, Regal Real Estate Investment Trust, a Hong Kong property developer that has just priced its self-arranged HK$4.8bn ($619m) five year loan with an all-in of 190bp over Hibor — some 60bp less than it paid in March last year for a similarly sized loan.
But if bankers are shaking their heads at that, it seems almost reasonable when compared with Sunlight Reit’s recently closed bilateral loan by Bank of China. The dual-tranche HK$2bn deal was split into two chunks of HK$1bn each. The five year portion was pitched with a margin of 120bp over Hibor.
But it was the seven year tranche that caused consternation: it was priced at 155bp over Hibor. Rival bankers labelled the terms as nonsensical, particularly for a credit that is not exactly seen as stellar.
There are a number of reasons for plummeting prices. Chief among these is the scarcity of companies tapping the loan market. Borrowers are well aware that banks are flush with liquidity and desperate to lend. Given that recent deals have been closing with commitments from more than 20 lenders, borrowers are confident that they can squeeze pricing.
Bankers also appear to have misjudged the outlook for the dollar bond market. Last year the bond market in Asia ex-Japan grew faster than the loan market, with G3 loan volumes falling by more than 25%. That was a big blow, but bankers were certain it could not be repeated.
Not so. G3 bond volume in Asia ex Japan is already at $72.4bn year-to-date, according to Dealogic, and it shows no signs of slowing. Borrowers are still considering bond issues to take advantage not just of the low pricing available, but also the kinds of tenors that are not always possible with loans.
All this means that loan syndication bankers have plenty more to worry about. With the imbalance between demand and supply set to run on, prices could yet drop even further. The few deals in the market will force the hand of lenders vying to get them. Banks will be tempted to settle for lower pricing than ever just to get hold of a mandate — any mandate.
This is unsustainable. At some point lenders will have to change their strategies and push back on pricing — and borrowers will have to accept this. It will take nerves of steel, but loans bankers are going to need them if they want to make any money this year.