Time for Asian loans to shine
The Asian loan market has had to battle a tough few years, with record volumes in 2014 tailed by four straight annual declines. But loans bankers in the region have a feeling their time may have come.
Loan market participants were unreservedly optimistic at a recent gathering in Hong Kong, marking a departure from the dreaded ‘cautious optimism’ that has been the mantra of bankers over the last three years.
If the size and scale of the deals seen so far this year are an indicator, 2018 could be the moment the tide turns. China National Chemical Corp kicked things off in style with a jumbo $5.5bn refinancing. The Hong Kong market was not far behind, as a HK$13bn loan to back Gaw Capital’s acquisition of a portfolio of malls in the city went into syndication soon after. Waiting in the wings is an up-to HK$16bn financing to support the sale of The Center in the Central business district in Hong Kong.
These examples are just a sliver of the various larger deals that have come to the market already this year. But they paint a much needed positive picture of the direction the loan market is headed.
For once, it is not just the wild cards of M&A that bankers expect will drive deal activity. The widespread expectation that the US Federal Reserve is only at the beginning of a rate hike cycle is the main factor driving optimism among loans bankers.
It is hard to fault this positive thinking. For starters, savvy borrowers will take pre-emptive action as rate increases loom, and refinance their existing debt before spreads start heading northward.
Secondly, lenders enjoy more leeway when it comes to passing on their higher funding costs to borrowers in an elevated interest rate environment. In contrast, the impact of higher rates is immediate for the bond market, which has been buoyant and giving stiff competition to its loans counterpart.
It’s understandable then that bankers reckon that as bonds become more expensive, borrowers will flock to the loan market for their foreign currency financing needs. The bond market will certainly not lose its appeal entirely, but bank lenders may at least have a bigger seat at the table.
The third reason for optimism is undeniable: the loans pipeline is already building. China has consistently been the biggest contributor of dollar loan volumes in the Asian market and the prospects for deal-flow look good this year. Management buyout-related fundraisings will also keep bankers busy, especially in the second half, when talks that have begun now will come to fruition.
Banks have been overflowing with liquidity even as deal numbers shrank over the last four years. That abundant liquidity will finally play to their advantage as it would propel opportunistic borrowings before a change in status quo and eventual tightening as a result of higher interest rates.
There is visibility on deals from outside of the mainland too. Southeast Asia, another important source of revenue for arranging banks, is back on the block, according to coverage bankers dealing with the region. Action from Malaysia, for example, which only saw a handful of deals last year, is already heating up.
In Indonesia, the reticence of state-owned firms in raising foreign currency loans could be a thing of the past. Alongside them, non-banking financing companies from the country will also frequent the market, as shown by the Indorent trade that opened in January.
There will be a pick-up in the Indian market too. Tata Steel has already livened things up with a transaction of up to $2.16bn through 21 mandated banks. The emergence of new foreign currency liquidity from Indian banks located in the country’s first financial services centre, GIFT Tec-City, is also good news.
With Indian banks slowly but steadily cleaning up their balance sheets following years of ballooning non-performing loans, the focus is back on origination — which will translate to more and newer borrowers from the country.
All the signs show the Asian loan market can fire on all cylinders this year. Here’s hoping that after a long bout of languishing and losing business to the bond market, loans bankers can finally breathe easy.