Syndicated loan funding for emerging market issuers could dry up as inflated costs of funds for Western banks make loans more expensive for EM borrowers. Many believe that as that door closes, the bond market hatch might spring open.
But the syndicated loan market is in large part a relationship business, often done by banks on the implicit understanding that issuers repay the favour by granting lenders the profitable bond mandates at a later date. If the syndicated loans business falls away, that link will be broken. Issuers will lose an important guide as to which firms to pick for their bonds.
That could lead to big changes in the way EM issuers and their capital markets banks deal with each other. Without the funding advantage of cheap loan pricing, issuers may start slashing fees for bond deals. And banks may be more tempted to take those lower fees, if they can no longer offer the sort of cheap lending they have traditionally used to curry favour with an issuer.
Borrowers may also start looking more closely at the reputation and league table prowess of banks, more eager in a tricky market to choose those with experience and a proven track record in the asset class. If that is the case, then the zero fee bond deals done by some banks over the last year to boost league table rankings may begin to pay off at last.
The most likely outcome is the increasing importance of a combination of the two approaches. And those in a good position to win bond mandates on these terms may reap good profits as bond volumes could remain fairly resilient.
At the start of 2009, loan volumes for EM issuers were very low. But in the second half of that year, the EM bond market became busy. Even though banks balked at taking on sizeable risk themselves, other investors were keen to get involved in a liquid asset class as activity plummeted elsewhere.
The same could happen again. Although risk aversion drove two weeks of net outflows from EM bond funds in August, a small net inflow to those funds was reported this week — indicating that the impact of prolonged eurozone worries on the EM bond market may be reaching a limit.
Concerns about the eurozone and the US economy are likely to continue to put pressure on the cost of funds for western banks for some time to come. And even if those pressures ease, capital regulations only look set to become more onerous, not less. Either way, the CEEMEA bond league table may look very different this time next year.