When GlobalCapital Asia asked a senior loans origination banker in Hong Kong this month about innovation in the syndications market, his immediate reaction was a laugh, describing it as “zilch”.
“One can always bullshit you, but the reality is the market is very limited in terms of innovation,” he says.
He may be exaggerating, but he’s not that far away from the truth. There are many positives in the loan market, but they come more from looking at the numbers rather than the details. In 1980, the earliest year tracked by data provider Dealogic, loan volumes in Asia including Japan totalled $9.6bn. In 2017, loan volumes stood at around $658bn.
“I have worked in banking for 25 years now, so I’ve seen most of the past 30 years,” says loan market veteran Atul Sodhi, who has been with Crédit Agricole since 1997.
He recently took over as global head of debt capital markets for corporates, based in Paris, after having been the bank’s Hong Kong-based head of debt origination and advisory, Asia.
“From a loan syndications point of view, the market has gone from being absent 30 years ago to now being worth around $500bn in volume,” he says. “The headline numbers are huge compared to before.”
Loans bankers in the region have seen some big changes over the years even beyond this rise in volumes. The first is a sharp shift in the banking landscape.
Gone are the days when international banks could expect to always feature heavily on transactions. Now, regional lenders are giving them a run for their money.
“Clearly, the regional banks have really stepped up,” says Singapore-based Andrew Ashman, head of Asia Pacific loan syndicate at Barclays. “A few years ago, the league tables were dominated by international banks, but now banks from China, India and Taiwan are regularly featuring in the top positions.”
Musical chairs
In 2017, the top five bookrunners in the Asia including Japan region were Mizuho, Sumitomo Mitsui Banking Corp, Mitsubishi UFJ Financial Group, Bank of China and Bank of Taiwan. Standard Chartered ranked sixth, following by State Bank of India, HSBC, Crédit Agricole and Industrial and Commercial Bank of China, shows Dealogic.
Excluding Japan, domestic lenders still dominated the league tables. Bank of China and Bank of Taiwan led the way last year, following by Standard Chartered, SBI and HSBC. Mizuho, ICBC, Korea Development Bank, DBS and ANZ rounded off the top 10.
A quick look at just dollar deals presents a similar picture. Bank of China was top last year on the bookrunner tables, followed by Mizuho, Standard Chartered, HSBC and ANZ.
Ten years ago, Citi, Barclays and Credit Suisse were among the top five banks. Crédit Agricole, BNP Paribas, SMBC, ING and Bank of America Merrill Lynch featured within the top 10.
This shift is driven by two opposing factors, reckons Ashman. International banks have increased their focus on balance sheet management and returns, which has concentrated their lending activities on core relationships. Asian banks, on the other hand, have increasing levels of liquidity and are in client acquisition mode.
The rising competition has meant more pressure on underwriting fees as an increasing number of firms jostle for mandates.
Falling margins have been a constant complaint among syndicate bankers at least for the past five years. Pricing has compressed across the board, as the combination of weaker dealflow and flush bank liquidity makes it a borrower’s market. But while bankers like to grumble about margins, they also admit pricing is juicier now than around 15 years ago.
Back then, firms in Hong Kong and Singapore could get away with selling loans at razor-thin levels.
Bankers point to Hong Kong’s railway operator MTR Corp as an example.
When the company raised a Hong Kong-dollar denominated seven year loan in 2001, it offered a margin of 31bp over Hibor. Its last deal from 2016, in comparison, paid 54bp over Hibor for three year money and 64bp for five years.
China’s rise
The second big change has been the way Chinese bank lenders are eating into the pie of their
Bank of China ranked first in the Asia ex-Japan dollar loan bookrunner league table last year, with credit for $8.2bn through 19 transactions, giving it a 8.19 % market share, shows Dealogic. In total, three mainland lenders were among the top 20 bookrunners .
In 2016, BOC ranked much lower in ninth place with $3.4bn in credits for a 3.09% market share.
Chinese banks’ rising presence at the table has made the market take notice, especially as volumes from the country also continue to increase.
“China is such a big market at the moment that there’s plenty of business for everybody,” says Hong Kong-based John Corrin, global head of loan syndications at ANZ, who has been working in the city since 2001. “It will be tougher for foreign banks to compete with Chinese banks as they become more organised and sophisticated, and the Chinese banks are uniquely positioned for their renminbi capabilities.
“The question now is: how will the investment banking and securities development in China play out and will [international banks] get a meaningful share of the market? That’s the key.”
Crédit Agricole’s Sodhi adds: “China is the second largest economy in the world. No way can you have a business strategy that doesn’t tackle it. What it’s meant is that the Chinese component of our business has grown and the focus on growing the China business has become important. But given the competition, at the end of the day it goes back to the theory of evolution, and the survival of fittest. Banks that find the right niches and adapt will do well. Others will fall by the way side .”
Liquidity from the mainland could also get a further boost if regulations ease up in the country. There are hundreds of Chinese city banks — like Bank of Beijing, Shanghai and Chongqing — which could go international in the future. If they venture offshore, it could unearth a whole host of completely new investors that have never been active before, say bankers.
Development of funds
It is not just Chinese and regional lenders that threaten to add pressure to an already over-banked loans market. Institutional liquidity could also be a game-changer.
At this point, that market has not developed much outside of Australia, the most advanced institutional market in the region. There have been Australian leveraged buy-out loans financed by term loan ‘Bs’, as well as by unitranche loans, which blend senior and subordinated risk. But there is growing interest now in Asia — mainly in Hong Kong and Singapore.
“Investors are seeking attractively priced credit in strong jurisdictions, while global sponsors are demanding the documentation flexibilities that are available in the US and European markets,” adds Barclays’ Ashman. “We expect to see a TLB distributed to the Asian market before long.”
Ashman says the emergence of institutional liquidity in the loan market has been the biggest change to come. Insurance companies, pension funds and asset managers have increased allocations to the loan product, seeking the diversification and yield benefits of leveraged loans, he says.
“This development is most advanced in Australia, but we are starting to see the same trend develop in Asia,” he says.
Corrin also reckons there is already some activity from Asian incorporated funds, as well as some Chinese and Indian funds, with the trend developing “slowly but surely”. But while he thinks the market will see more participation from non-banks, it will not be as active as the European model for many years.
In terms of pricing, loans provided by institutional liquidity are generally priced higher than bank financings. But issuers can reap many benefits that outweigh the costs involved — including doing deals with longer tenors, limited amortisation and more flexible documentation.
What innovation?
While this is certainly a step in the right direction for the Asian loan syndications market, and should help deepen the market, bankers say it is not nearly enough to give the asset class a jolt. One big absentee is innovation.
There are admittedly some green shoots. Aluminium company Novelis, part of India’s Aditya Birla Group, in 2017 sealed a $1.8bn refinancing of a US term loan ‘B’ in the Asian market, sticking with a similar structure despite shifting markets.
The deal was the first of its kind and reflected the ability of the region to support trades with thin pricing and US-style covenants.
Bankers also point to Indian data analytics firm Mu Sigma, which completed a $394.3m loan last year — a deal which had originated under unusual circumstances and was from a new sector. It won GlobalCapital Asia’s Best High Yield Syndicated Loan Award for 2017. But with only a handful of examples, there is clear frustration among bankers about the slow pace of growth.
“The whole idea is to distribute paper, so you need simple stuff everyone can understand,” says Sodhi. “It isn’t easy to innovate with the intention to distribute at the same time. There is room to improve, but I don’t see compelling drivers of innovation. If banks continue to become more sophisticated then we can see improvements or drive towards innovations.”
There are other reasons for the lack of improvements. Banks in the region are driven by completely different motivations as those in most countries, partly because so many of the banks are state-controlled. In India, as an example, State Bank of India will behave differently to ICICI as the latter is privately owned. In China, effectively all the big players are state backed and are, understandably, policy driven and not shareholder driven. In Taiwan, a big chunk of the market is state controlled , as is the case in Indonesia.
In comparison, in places like Hong Kong, Singapore and Australia, shareholder requirements are very significant. “In Europe, aside from the banks that were bailed out in western Europe and became state banks, most of the banks are in the private sector. Most of them have a focus on return on shareholder equity hence distribution, innovation and repackaging is much more important for them,” says ANZ’s Corrin.
It’s hard to say when the tide will turn for Asia but Corrin reckons innovation will come as local banks hire higher calibre international bankers and become more international in time.
“Chinese banks will take time to build out as they are still dominated by local hires which mirrors Japanese banks some 30 years ago where they started off by hiring Japanese bankers and gradually became more balanced in local and international recruitment,” he says.
Moving with the times
There is a good chance that even before that transition happens, loans bankers in Asia will have to tackle another new – and possibly worrying – change: the digitization of the financial industry.
Bankers have already gone through the full gamut of changes in three decades. As Corrin puts it, he was using telex when he first started in the loan syndications market. That quickly moved to fax before emails and transacting through websites emerged. “It has got more sophisticated and the pace of change is going to increase for sure and is going to have an impact on everybody,” he reckons.
The way business is done is certainly going to see an upheaval – all the way from the documentation process to the distribution of deals. Bankers say that lawyers in the loans market are starting to worry about their roles in the future around documentation. Loan sales people will also be in danger if the process can be done electronically.
As is usually the case, the impact on the loan market will be slower than the bond market as the latter is less bespoke and largely rated. On the loans front, improvements in settlement and the use of blockchain will be key.
There will also be a role for technology being used to streamline some of the standardised operational processes such as ‘know your customer’ rules and secondary trading, reckon bankers.
But loans syndications bankers are unlikely to lose their relevance. Ashman says: “The loan market remains a human capital intensive business. We provide advice to our clients; how to raise financing for a large acquisition or how to refinance an upcoming maturity.” z