There's trouble lurking in China’s offshore loan market
International loans from Chinese borrowers have gained pace, with a number of deals being launched into syndication recently. Liquidity is ample and bankers are confident of deal success — but some caution is essential.
A combination of repeat borrowers and new names from Mainland China and Hong Kong have been tapping the loan market in recent weeks, both to meet their refinancing needs and for capital expenditure. They are being met by banks eager to book assets, given slow deal flow in the past year and a liquid market.
Loans bankers are optimistic. Many cite the example of UK investment firm Permira-backed Tricor Holding’s HK$5.5bn deal. The loan, which is set to close next week, has already been oversubscribed with a strong response, from Chinese, international and Taiwanese banks.
There is another reason for the positivity. Taiwanese lenders are steadily returning to Chinese borrowers, having taken a big step back from the market in 2020.
Sentiment has been boosted but bankers need to look more closely at the fine print.
For all the pick-up in action, the market is losing its diversity in lenders amid growing reliance on a handful of large Chinese banks. Since the start of last year, a total of 138 different lenders joined syndicated deals from Mainland China and Hong Kong companies — a fall from the 150 for the full-year 2019, shows Dealogic data.
Perhaps more importantly, among the 138 banks, the top 10 lenders by market share provided 50% of the total liquidity; seven were Chinese banks, taking a 33% market share. By comparison, in 2019, five out of the top 10 banks were Chinese, which together accounted for only 20% of the market share.
Lenders that had shown ambition to grow their presence in the Greater China syndicated loan market all but disappeared last year amid the pandemic.
That is not entirely surprising. The pandemic forced firms to tighten their belts, be picky about the credits they work with and to retreat, to some extent, to their home markets. That has offered Chinese companies limited opportunities to grow their relationships with international banks or funds.
But even among Chinese lenders, some smaller financial institutions appear to have steered clear of the loan market last year. For instance, CGN Industrial Investment Fund and Dongxing Securities, both of which made appearances in the loan market in 2019, have stepped away since, shows Dealogic.
Although these smaller financial institutions don’t move the needle much for Asia’s loan market, their balance sheets and aggressiveness were sought-after by riskier Chinese credits that may not be welcomed as openly by traditional bank lenders.
Even the return of Taiwanese liquidity comes with caveats. While they are keener to participate in deals from Greater Chinese borrowers, bankers say that for every deal that gets internal approval, more are turned down by the risk committees. Deals that do get the go-ahead are either for Hong Kong local borrowers or involve transactions for refinancing, requiring no further boost in the bank’s exposure to the client.
Chinese bank liquidity remains strong — but it’s mainly for well-known clients with a good credit story.
A combination of these factors doesn’t bode well for the region’s syndicated loan market in the longer run.
One of the consequences will be that companies will turn to club loans en masse. Many mainland borrowers come to the offshore loan market to build relationships with more banks, especially non-Chinese lenders. However, as the total pool of banks shrinks, syndicated loans are losing some of their advantage. Top-notch names and SOEs already have a strong relationship with Chinese banks; if there is no benefit from a wide syndication, club loans will be cheaper, require less disclosure and be quicker to execute.
The market will also lose its ability to attract riskier Chinese credits despite their willingness to pay up. Chinese banks have liquidity, but their conservative lending strategy holds them back, meaning they are unlikely to provide enough support for riskier credits or deals with more complicated structures.
That will leave the market to focus mainly on investment grade, safer credits but which are willing to pay 150bp to 200bp in margins, or borrowers tapping the offshore market for the first time. Banks may also have to compete with a liquid onshore loan market if pricing dynamics turn in favour of borrowers domestically.
Signs of a loan market revival are certainly positive. Banks would be wise to position themselves to take advantage of the deal flow but they should beware of getting complacent.