Taiwanese banks have been trying their best to invoke market disruption clauses over the last few months, reacting to rising funding costs at home.
These attempts have not always worked. They have failed to convince Korean policy banks to increase their interest rates, for instance. But Xinyi Glass, which borrowed HK$1.1bn in the loan market earlier this year, did agree to boost its payments — and Taiwanese banks should expect more successes before the year is over.
But they should not just use their bargaining power during a disruption: they should use it all the time. And aggressively.
Taiwan banks stand out among lenders in Asia’s offshore loan market because of their approach to deals. They have had some success arranging dollar loans for companies outside Taiwan, but have a much more prominent role as investors during syndication. They come into these transactions not as relationship lenders, but as true investors. That makes them an important source of liquidity for deals during syndication — and gives them more bargaining power than they tend to use.
Taiwanese banks move in packs: this is the view of many syndicate officials in the loan market. This was true earlier this year during syndications, and has been true over the last few months as these banks have tried to invoke market disruption clauses. So why do they not use their bargaining power more, pushing borrowers to accept wider pricing and definitions of market disruption clauses that, to Taiwanese lenders at least, offer more guaranteed protection?
There are some obvious answers to this question. Some bankers argue that if Taiwanese banks were more aggressive, arranging banks would find a way to close deals without Taiwanese participation. This argument assumes that lenders should take it or leave it, and there is some truth to this. (After all, it is not easy to force borrowers to boost pricing after a deal hits syndication.)
But that does not mean that they cannot use their bargaining power more, and convince borrowers to drive up pricing before a deal hits syndication.
The DIY approach
The most obvious way to do this would be for more Taiwanese banks to take an active role in the origination and syndication of loans, sharing MLA status amongst themselves, and with some foreign banks alongside them, and being able to convince borrowers that they need to pay up if they want to find real demand.
But this will not happen on any large scale. Taiwanese banks are not going to compete with the big boys soon. The strongest foreign banks have huge deposit bases and a capacity to lend that no Taiwanese syndicate official could hope to match.
This seems also to rule out a greater move to bilateral loans, which would allow Taiwanese banks a lot more say in pricing, structures and the conditions of market disruption clauses. They cannot compete in this area in any size, at least not outside their domestic market.
They could be much more vocal about their pricing objectives, and let lenders know before deals are launched that a company with a certain rating would not be accepted at any price less than a certain level. But this is too inflexible, failing to take into account the big differences between some equally-rated companies (as well as making the faulty assumption that rating agencies know all).
The real answer to Taiwanese lenders may be the most boring, and frustrating: they should wait. The huge pressure on the bank lending markets (detailed here) will make real investors in syndication ever more important over the next few years, when "take it or leave it" will become an increasingly hollow argument.
Taiwanese lenders — and all lenders who care more about pricing than relationships — should use their collective strength to force borrowers to accept increased pricing. Relationships cannot keep the loan market afloat forever.