Evidence of the loan markets return was everywhere in 2010. Lenders were liquid enough to support big deals. Indian borrowers Bharti and Vedanta launched multi-billion acquisition financings, projects by Singapore Sports Hub and Jurong Aromatics attracted more than $1bn from lenders and companies such as Noble Group and Tata Steel easily refinanced substantial cross-currency facilities.
Credit approval was again available for longer dated loans. Lenders would happily hold five year, seven year, and even the odd 10 year deal, rather than restricting borrowers to three year loans or shorter. Chinese borrowers such as Lenovo, Shanghai Industrial and Citic Pacific successfully syndicated five year term loans, as did several Indian and Australian companies. And this was small fry compared with the 17 year tenor of Paiton Energys dollar and yen denominated loan in March to fund the expansion of a power plant in Indonesia.
Borrowers could get more for less. Pricing fell dramatically over the course of the year. When Hutchison tapped the market for HK$3.8bn in March 2010 it paid a margin of 73bp over Hibor. By contrast, Towngas, the Hong Kong utilities company, is now preparing a HK$3bn loan which will pay between 50bp-60bp over Hibor, according to bankers.
But tighter pricing is not just the result of increased competition between lenders. Many borrowers have opted to forgo syndication and rely on club loans or club-like syndicated loans from relationship banks, as they did in the crisis. This has hit banks profits and limited the volume of syndicated loans, suggesting the financial crisis continues to affect how borrowers and banks approach loans.
"We re-educated our clients to do without underwriting and do best-efforts transactions during the financial crisis and we havent yet talked them out of that," says Mark Garrick, global head of syndications and agency, wholesale banking, at National Australia Bank. "As a consequence theres been an increasing trend towards clubs and bilateral loans."
Australias biggest deals of the year A$3bn refinancings for Vodafone Hutchison Australia and QR National in June and October were, for example, agreed between 12 and 11 mandated lead arrangers respectively, rather than approaching wider bank groups.
Asian borrowers have also preferred club deals for refinancings. "There have been a lot of top heavy transactions this year due to a lack of retail or smaller investors," says Phil Lipton, head of syndicated finance for Asia Pacific at HSBC. "Banks are quite sensitive on titles and status so sometimes its better to have them all in at the top and then do a limited sell-down."
Citic Pacific for example mandated three bookrunners and nine mandated lead arrangers to underwrite a HK$4.83bn refinancing in September. When the deal attracted a further five banks on small commitments of HK$200m or less in syndication, it was increased to HK$5.73bn to accommodate new interest rather than decrease the holds of the leads.
But club deals can cause problems if a company fails to hit its financial targets. A syndicate of banks is keen to find a solution that benefits them all; a smaller club is less able to take a hit and more likely to demand repayment. Bilateral loans create similar problems with lenders vying with one another to be repaid on schedule.
Australias Nufarm experienced this first-hand when it breached an interest cover covenant and a debt-to-Editda ratio that applied to A$701m of bilateral loans agreed with multiple banks under one document. Nufarm was forced to negotiate separate waivers with each of its creditors, rather than with a single bank group. The company eventually agreed a club bridge loan to replace its bilaterals while it considered longer funding sources.
Bankers predict that refinancings will continue with small bank groups. Some A$65.5bn of Australian dollar denominated loans are due to mature in 2011, according to Dealogic, many of which could be refinanced. But a number of new loans to finance acquisitions and projects are coming down the pipe which could encourage borrowers to pay up for underwriting and syndication.
Asian banks might however be the ones to benefit from Australian syndicated deals. Asian banks are liquid and able to commit to deals at lower fees than is economic for Australian banks.
"[Australian banks] are constrained by our cost of funds as we are reliant on wholesale funding in addition to deposit based funding," says Garrick at NAB. "We need to make a certain amount on top of our cost of funding for loans to be worth our while, but clients are fully aware that pricing in the northern hemisphere is lower so they are looking to tap Asian liquidity."
Several Australian companies have targeted Asia this year, primarily with dollar denominated deals. Woodside Petroleum, for example, secured just one commitment from the four big Australian banks to a $1.1bn loan that closed in December. The deal however received 33 commitments from non-Australian banks, including 13 Taiwanese banks.
Asias pricing has tracked tighter margins in Europe. As Roland Boehm, Commerzbanks global head for debt capital markets, loans, says: "Europe and Asia are both seeing tightening fees and margins on the back of market recovery. This shows that both markets are competitive and that the relationship angle is a crucial element to transaction success."
Margins tightened in the first quarter before market jitters over sovereign debt in Europe slowed price erosion in May. Pricing stabilised, briefly, but downwards pressure from borrowers led to tightening prices again.
Noble Group, for example, refinanced part of a $2.4bn loan that it agreed in October 2009 with a $2.54bn loan in December 2010. A three year tranche of the most recent deal paid a margin of 195bp over Libor, compared to a three year tranche on 2009s deal which paid a margin of 240bp, stepping up to 260bp over three years. And while a one year tranche of the more recent deal pays the same margin as a year earlier, fees dropped 5bp. Noble still attracted 76 banks in syndication and some regarded pricing as generous.
Pricing for Hong Kong is particularly tight. "There is a lot of liquidity in Hong Kong," says Lipton, "and borrowers are very savvy, tapping the market when conditions are favourable."
Several local banks have the capacity to hold large commitments on balance sheet, limiting their need for attractive margins to facilitate syndication. "The banks that have abundant Hong Kong dollar deposits can afford to do these deals for very little remuneration," says Jose-Antonio Olano, head of loan syndication, Asia Pacific, at Société Générale.
But other bankers argue a reduction in European involvement in Asian deals driven by turbulence in Europe last year that has restricted balance sheets will push pricing wider this year.
"Some European banks have come back into the market but theres a lot of concern about how much they will be able to underwrite and what type of balance sheet capacity they have," says Philip Cracknell, global head of syndications at Standard Chartered. "This could push pricing up."
With markets volatile, lenders have stuck to slashing fees rather than covenants in the quest for business.
"Were not seeing any loosening of covenants," says Christine Chan, head of loan capital markets Asia at Commerzbank. "Even though pricing has come down, banks are still quite risk averse and important covenants have been kept." Other bankers counter that some are being relaxed, but argue that this is a return to normality after the "overprudent" terms imposed immediately following the financial crisis.
Asian covenants remained relatively strict, compared to deals done in Europe and the US. Asias first covenant-lite loan was completed by United Test & Assembly Center in October 2007 just after the subprime crisis broke in the US. Unsurprisingly, it was the first and last covlite for Asia to date.
But Asian bankers are worried about weakening documents in Europe. One banker at a European headquartered bank reports lenders promising carve-outs from the increased cost provision of a loan agreement as a sweetener to win business. Increased cost provisions allow banks to alter the terms of the loan if their cost of funding shoots up. Some banks are promising to carve out Basel III from the terms despite not knowing how Basel III will affect them.
"Theres a danger that banks forget the lessons of the crisis and dont put in place appropriate covenants and other terms to protect themselves," says Lipton. "We saw what happens when things get very loose during the last up cycle. Hopefully banks learn and apply the lessons, and dont revert to bad habits."
Borrowers want to take advantage of narrow margins and less rigid covenants. The pipeline for 2011 looks busy, with more deals expected from the commodities sector, Indian and Korean banks, and southeast Asian project companies. But bankers big hope for the year ahead is acquisition finance.Companies in Asia are cash rich and debt poor and looking to expand their businesses as the financial climate stabilises. Acquisition financing requires underwriters and syndication, wider pricing and higher fees. But banks would do well to remember the lessons of the crisis. Documentation standards must be maintained in the rush to lend if another crisis is to be avoided.