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Asia’s loan market: reality should trump recovery

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By Pan Yue
02 Mar 2021

Chinese companies mulling new loans are taking inspiration from the recent thinly priced deals from technology giants Tencent Holdings and Baidu to push pricing down on their own transactions. This is a risky proposition.

A pick-up in deal flow in Asia’s loan market appears to be on the way. After the Chinese New Year holidays in mid-February, syndication bankers — particularly from Chinese state-owned lenders — say they have been inundated with enquiries from companies for new offshore loans.

While this is good news for the market, it comes with a catch. The potential borrowers are hoping to use this year’s deals from Tencent and Baidu as a pricing benchmark.

Tencent offered a margin of 80bp for an $8.3bn club deal closed last month. Baidu is paying a margin of 85bp with a top-level all-in of 96bp for a $3bn loan, which is currently open in the market. Both facilities have a tenor of five years.

Their pricing levels have driven China Inc — irrespective of their sector or ownership — to demand similar margins for their loans as they view such pricing as a sign of market recovery, say bankers. The move, however, has a risk of backfiring.

There are a number of reasons Chinese corporations should temper their expectations.

For starters, Baidu’s cut in pricing is likely to be a one-off. Its deal offers banks a unique chance to lend to a Chinese IT company that is not a frequent borrower like Alibaba Group Holding or Tencent. This is only Baidu’s second ever dollar syndicated loan — following its debut in 2016 — making it appealing to smaller Chinese and European banks that are only now starting to understand asset-light firms and are willing to lend to them despite little return. Add to this the company’s strong credentials and its investment grade rating and the attraction only grows.

Other borrowers may not be as lucky, even if they are from the technology sector, among the most resilient during the Covid-19 crisis. This is because once banks familiarise themselves with the industry through the likes of Baidu and Tencent, they may no longer accept similarly low pricing from other credits.

Second, banks are still conservative this year. This means smaller and relatively unknown tech names that are unrated, and which are in early-stage loan discussions, may struggle to attract lenders.

State-owned names benchmarking themselves against Baidu and Tencent also face an uphill challenge. While one or two of the big state-owned banks may be willing to use their balance sheet for such deals at low pricing levels, they will face a tough time paring down their positions in syndication.

A handful of bankers at the large Chinese state-owned lenders told GlobalCapital Asia this week that if they turn down bookrunner positions during early-stage loan discussions, they are unlikely to join during syndication. Smaller Chinese lenders will be equally apprehensive, given their higher funding costs compared with state banks. It’s the same case for Taiwanese banks, which are increasingly shying away from mainland borrowers. International banks, meanwhile, will continue lending only selectively to Chinese companies.

This means Chinese borrowers need to be realistic about the pricing they can achieve in syndication, and not push the envelope too much.

Wanting tight pricing is only natural for corporate treasurers, but they will be better off paying more attention to balancing the risk and reward for banks.

By Pan Yue
02 Mar 2021