Syndicated loans bankers in Asia have had a woeful first quarter. The number of deals they have worked on has plummeted. Their clients are opting for bilateral loans, club transactions, or nothing at all.
To make matters worse, the loans bankers are watching their colleagues on bond desks sweep up all the business. But despite this depressing backdrop, things are starting to steady. Bankers in the market should expect a better second quarter.
One of the problems facing lenders at the start of the year was a big discrepancy between their own pricing expectations and those of their clients.
Borrowers, perhaps unsurprisingly, were keen to ensure that pricing did not budge from its low levels last year. Banks, unsure about what their cost of funds would be in the weeks and months ahead, thought pricing should move up, big time.
Some borrowers have shown willingness to pay up. Indonesian communication mast provider Tower Bersama, for example, is paying a margin of around 400bp over Libor for its latest dollar loan, about 50bp more than last year. Commodity trader Noble Group is now in the market with a $1.5bn deal, offering lenders a boost over the return they got in 2011.
Bankers have also chilled out a bit. Improving sentiment about Europe and the success of the European Central Bank’s longer-term refinancing operation has given them more certainty about their funding costs and made them more willing to negotiate on pricing.
This leaves the main problem being, not funding deals, but finding them.
That will remain tough as long as the bond market continues its frenetic pace. But as EuroWeek argued in the middle of March, the bond market is likely soon to run out of steam, as investors get fed up with borrowers’ over-aggressive pricing. In fact, that may already have started.
Neptune Orient, the Singapore shipping line, has abandoned plans to issue a hybrid capital security after demand proved lacklustre in a widening market.
Borrowers are going to have to find somewhere to raise money if — or rather, when — the bond market hits a roadblock.
The slow start to the year in loans, which has eased the liquidity strain on banks; a more hopeful outlook in Europe; the LTRO; the return of appetite from Taiwanese investors; and the big liquidity available in Japan, should all ensure that lending banks will be able to step in when Asian corporations decide they need an alternative.
Some of these deals may be done in bilateral format, but the bigger the loan is, the more likely it is that bankers will be able to persuade the borrower to turn to the syndicated market. Volumes will rise as a result.
The outlook for the Asian loan market is by no means rosy, and any projections of a big growth in volumes start from a low base.
But the pessimism suffusing the market should now make way for guarded optimism. Bond bankers may be having all the fun for now, but given time, loans officials will get their turn to dance.