Syndicated loans bankers in Asia got some welcome relief last week when China Petrochemical Corp (Sinopec) opted for a general syndication phase for its new $2.5bn loan rather than sticking with a club like so many of its Greater China peers have done.
In September, for example, Hutchison Whampoa signed a $3.6bn club and China National Offshore Oil Corp a $3bn club. Hutchison subsidiary Power Assets Holdings is set to wrap a HK$37.5bn ($4.8bn) club loan soon.
Deals like these form a worrying trend. Sure, smaller deals are finding their way onto syndicate desks, but these large borrowings are bypassing all syndication. If the syndicated market is to survive, momentum must shift back to best market practice. Borrowers need to stop playing favourites, and advisers need to stop indulging them.
It’s easy to see why this matters. Syndication is the only process that provides a true picture of how liquid the market is. If companies limit their financing to their relationship banks, they are missing out on opportunities available further down the chain. Taiwanese banks, for example, have been a key source of liquidity this year.
The preference for club loans also shows how short memories are in the capital market. If there is one thing the 2008-2009 financial crisis ought to have taught people, it is that the good times don’t last forever. In a period of strong liquidity and falling pricing it may appear sensible for a borrower to do a club loan at cheaper pricing. But when times get tougher, banks can quickly face limits on how much they can lend to a particular credit and at what margin.
If that happens, borrowers will be forced to look further afield for their funding needs. And if they have relied on club loans, failing to build relationships with a wider investor base, they could find themselves in trouble.
It’s not like club loans are particularly great for the banks taking them on, either. They cannot sell down their holdings in the secondary market and so end up with the whole amount stuck on their balance sheets, crimping their ability to lend to other clients.
This is all the more disappointing given that there is more than enough interest around to cater for these borrowers. Anecdotal evidence suggests banks repeatedly have to turn down reverse enquiries from lenders outside the club group — something bankers admit does not bode well for the spirit of the syndicated loan market.
Borrowers and banks need to rethink their cosy acceptance of club loans. Syndication is not only an obvious solution, but also one that is stable, flexible and efficient — in terms of sourcing funds and obtaining pricing that is reasonable for both parties.
So it’s time to jog some memories of tougher times. For now, clubs may provide a quick solution to meet fundraising needs. But being at the mercy of a handful of banks is sure to hurt in the long run.