Taiwan: banks don’t need lending guidelines
Taiwan’s Ministry of Finance has reportedly asked state-owned banks to take six steps to avoid lending to companies that will end up defaulting. Some of these steps are obvious, others are impractical — and all of them are unnecessary.
Taiwan’s finance ministry, according to local media reports, has instructed banks to do the following when considering whether or not to participate in a loan: evaluate the borrower’s business, leverage ratio and debt level; check if the company has any investments outside of its core business; notify bookrunners and agent banks when companies’ business performance deteriorates; make sure a deal’s bookrunners have a final hold and a large enough exposure to the borrower; double check the information of the borrowers, guarantors and related companies; and keep track of negative news around the borrowers.
This might seem like a fairly innocuous list of bullet points. How many bank lenders would not look at a borrower’s leverage ratio before considering a deal? How often do banks fail to do the most rudimentary due diligence on companies they’re about to lend to? It appears the finance ministry has little faith in the ability of Taiwan's banks.
The problem with this guidance is not so much the content but the fact that the finance ministry decided to say anything at all. Not only are Taiwanese lenders active, experienced players in the international loan market, they are also considered too cautious by many international bankers.
Taiwanese bankers are left scratching their heads at what the new guideline is supposed to mean. Several told GlobalCapitalAsia that their teams have not been told to take any action, saying the discussions with the MoF are only limited to the management level at the moment. Leaving loans bankers out of discussions on the loan market doesn’t seem the wisest choice, for either banks or the finance ministry.
It is not even clear how binding the advice is intended to be. Will there be penalties for banks who ignore this advice? Is this intended to be a regulatory minimum credit analysis process that banks will need to document thoroughly? It appears too early to tell.
At least one of the conditions will be hard for banks to meet: the ‘skin in the game’ guideline that asks Taiwanese lenders to ensure bookrunners have a final hold and a ‘large enough’ exposure to the borrower.
This is sensible in theory and is already something bankers try to do in practice. Bookrunners and facility agents with skin in the game are generally expected to be more responsible and engaged in the negotiation if there is an event of default or missed payment. But how do banks know the likely final hold of bookrunners?
They can usually figure this out through informal promises made by bookrunners. Is that enough to meet the criteria set out by the MoF? Since banks place their orders before the final hold is announced, at least in cases where bookrunners aren’t crystal clear during syndication, there is no certainty that bookrunners’ final holds will be enough.
Leaving aside the practical question: what is the right amount of final hold to expect bookrunners to have? Is there a specific percentage or is this just a vague target? What should Taiwanese banks do if the bookrunners sell part of their exposure in the secondary market?
The guidelines are a mix of the obvious and the impractical. But worse: they are unnecessary.
The ideal financing market should bring together a huge range of views on credit quality, the direction of currencies or interest rates, the growth potential of particular businesses, even the necessity of different covenants or support mechanisms. The more diverse the views that can be reflected through the market, the more efficient it will be. A diversity of opinion ensures that not all market transactions need to be zero-sum: one man’s risk asset is another man’s hedge.
Taiwan’s banks are smart, experienced and perfectly capable of making their own lending decisions. Their main weakness when it comes to potential defaults is their lack of ability to call the shots when a company hits trouble, a result of their relatively limited commitments to most deals. That problem is hardly going to be helped by vague, alarmist guidelines from the MoF.