The bond and loan markets in Asia ex-Japan have endured vastly different years. Loans bankers have managed to close just $58.87bn of G3 deals this year, down more than 40% from the same period last year, according to Dealogic. Loans data always misses some bilateral and club deals, but it is clear that the trend has been disastrous.
The bond market has gone in the other direction entirely: the $107.2bn of deals sold so far is more than 54% above the same time in 2011.
Some loans bankers try to put a brave face on the numbers, but most acknowledge that they have lost plenty of business to their counterparts on bond desks. The size of the shift has perhaps been exaggerated this year, but senior bankers think that over the next decade the move from loan to bond funding will continue — and a recent deal from Korea Exchange Bank showed that the move could happen ever quicker than some predict.
KEB sold a $300m three year bond at the end of last week, paving the way for more deals from Korean lenders, who complain that international dollar bonds are typically too long in tenor to match their assets. The deal priced at 1.804%, which is the lowest-ever coupon paid by a Korean borrower for an international bond in the public market.
The coupon is equivalent to almost 144bp over three month dollar Libor at present rates. The deal was marketed on a Treasury spread basis, so this figure will change as the difference between Libor and Treasury rates fluctuates. But it is clear that the bond offered a level that was, at the very least, competitive to where KEB could fund in the loan market.
KEB closed a $110m one year loan in March that paid an all-in of around 150bp, based on a margin of 90bp over Libor, according to Dealogic data. Funding officials at other banks in Seoul argue the loan market is still the cheaper option, but as the dollar market enjoys a surge of interest, the difference between the two is fast eroding.
The crossover solution
The loan market is the default option for banks that want short-term financing, since bond investors are typically reluctant to take exposure to deals with maturities below five years. But the KEB deal showed this can be avoided — and that typical investors in loans and bonds can actually be combined in a public issue.
The deal revealed one of the neat benefits of turning to the bond market: you can bring some of your bank lenders with you. One funding official described Korea Exchange Bank’s deal as a "crossover" issue. With bank treasuries being allocated a quarter of the bond, it is easy to see why.
The allocation of short-term deals to banks only adds salt to loans bankers’ already deep wounds. It means that not only are they losing a potential source of supply, they are also losing demand. The more bank treasuries fill their short-term investment buckets with deals like KEB’s, the less they will have to lend in the future.
The deal was a proof of concept, and it remains to be seen how many other borrowers will follow suit with their own short tenor bonds in the next few months. But the option is clearly there, and while this might be good news for borrowers — and certainly good news for bond bankers — it is not a welcome development for an Asian loans market that has already had more than enough bad news to swallow.