Abundant liquidity is likely to spur Asian syndicated loan activity in the second half of the 2013, growing at a much faster rate club deals which have been a more prominent feature of activity this year.
Club loans account for 34% of Asia ex-Japan loan volume of US$147.5 billion year-to-date, according to Dealogic data. This is up from 29% during the same period last year and is the highest proportion on record.
There is a combination of factors that has led to the prevalence of club loans, including faltering global economic conditions and rising market volatility, note experts.
“Club loans are more prevalent when market liquidity is not strong,” said Ashish Sharma, head of loan syndication for Asia Pacific at Credit Suisse to Asiamoney PLUS on July 23.
Another Hong Kong-based head of Asia ex-Japan loan syndication agrees: “In the past year or so, markets have not been too comfortable with bearing the underwriting risks.”
Some of the more notable club loan deals in Asia include China National Offshore Oil Corp’s (Cnooc) US$6 billion one-year loan signed in February and Thailand-based CP All’s US$6 billion one-year loan signed in June. These are two of the biggest club facilities signed in Asia ex-Japan region year-to-date, notes Dealogic.
However, experts believe that club loans – which tend to attract a smaller group of banks and are not publicly syndicated – is unlikely to grow extensively in the second half and will be a declining trend.
“It’s just a temporary phenomenon because of the lack of the marketable transactions,” said a Hong Kong-based executive director syndicated loans. “There are more gigantic projects that need huge financing, which one, two or three banks cannot do on their own.”
As a result, the growing demand, improving market conditions supported by ample liquidity will lead to the increase in loan activity that involves underwriting, note bankers.
For example, syndicated loan markets saw substantial demand from large-sized, creditworthy corporates such as Alibaba, which embarked on its mammoth US$8 billion deal in the beginning of the year.
By July 3, as many as 22 banks were participating in the loan, well above the average number of 10 financial institutions on loans of more than US$5 billion, according to syndication loan bankers. Evidently there is continued high interest in the company, which is expected to raise tens of billions of dollars for its initial public offering (IPO).
“This year we have seen more deals being underwritten and more banks feeling more comfortable underwriting deals without charging too much,” said the Hong Kong-based head. “Banks are still hungry for assets and with the overall macro environment improving, there could be some downward pressure on margins and pricing.”
Credit Suisse’s Sharma agrees: “We are now in a market where there is ample liquidity and most of the banks are open for business and willing to write new cheques.”
Additionally, syndicate deal volumes have been relatively quiet in the first half of the year, suggesting that a flurry of deals could come in the last six months of 2013.
“If you look at the first half, deal volume has been subdued with large proportion of club loans and bilateral loans being executed,” said Sharma. “From a demand-supply dynamic, there has been an undersupply of syndicated loans in the market. I expect proportion of syndicated loans to increase in the second half.”
Bond markets shut
Subdued bond market activity in the second half as a result of market uncertainty could be a driving factor as well. A bulk of corporate fundraising plans for refinancing purposes could potentially shift to the syndicated loan market, believe bankers.
“There is a lot of volatility in the bond markets which can result in borrowers moving away from the bond market into the loan market,” said the Hong Kong-based head of syndicate. “The supply of deals will hopefully increase alleviating the pressure of banks to compete with one another.”
He adds that syndicated deals in the five-year space have also started to become the norm, compared to a year ago when three-year tenors were common, indicating that there are cases where borrowers can stretch their tenors.
In addition to refinancing needs, increasing mergers and acquisitions (M&A) activity could lead to the rise in syndicated loans.
In the first half alone, US$26.5 billion of such deals were acquisition-related, up 27% from a similar period in 2012 and is also the higher semi-annual volume since the second half of 2007, which accounted for US$53.4 billion, according to Dealogic.
“You have a combination of refinancing and new money requirements,” said the head of syndicate. “Corporate acquisition will continue to become an important factor for the market.”