Borrower's market as margins tighten

  • 21 Jan 2005
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For issuers looking to raise funds in the Asian syndicated loan market of 2004, conditions could not have got much better. Banks were flush with cash and borrowers were able to get deals done at rock bottom prices with lengthy tenors and looser covenants. But despite healthy volumes in the market, banks found it hard to make money as margins plummeted. Nick Parsons reports.

2004 was the busiest year for Asian syndicated lending since 1997, the year the Asian financial crisis began. But greater demand for loans did not make them more expensive ? banks have so much cash to lend that pricing fell to its lowest levels since the same year.

The weakness of the dollar must be borne in mind, but in dollar terms the Japanese market shrank slightly in 2004, Australia grew by more than 50% and the rest of Asia expanded from $63bn from 418 transactions in 2003 to $98bn from 522 deals in 2004, according to Dealogic.

Yet syndicating deals remained relatively easy for arrangers throughout 2004, as demand to lend consistently outplayed demand to borrow.

?One of the most surprising things about 2004 was that so few deals failed and even if they were mispriced ? by being priced too low ? they still got away because there was so much liquidity,? says Phil Lipton, head of loan distribution, Asia Pacific, at HSBC in Hong Kong. ?To fail, a deal must have been really badly priced ? a couple struggled but most tended to get away.?

Banks in Asia have by and large completed their recapitalisations and are awash with cash, ensuring that they are keener to lend than at any time since the Asian crisis.

Borrowers cashed in. ?Margins have been steadily coming down since 1998,? says Philip Cracknell, chairman of the Asia Pacific Loan Market Association (APLMA) and global head of syndications at Standard Chartered in Hong Kong. ?Excessive liquidity in the bank sector, margin compression and self-arranged deals are a feature of the syndicated loan markets today.

?Most countries in Asia have benefited from stronger economic growth and certainly business and consumer sentiment has improved. We are seeing increased investment and capital expenditure and this is reflected in the increased volumes of syndicated lending.?

This trend could and should have been even stronger. Continues Cracknell: ?Of course there is a lot of uncertainty for markets to contend with, concern about oil prices, weakness of the US dollar, excessive liquidity in financial markets, the war in Iraq and the threat of global terrorism. These worries will no doubt continue to slow economic growth which otherwise would have been faster in Asia.?

?2004 was a lot more upbeat than 2003,? says Mohsin Nathani, co-head of Asian debt markets at Citigroup in Hong Kong. ?Although 2004 was a good year, 2005 promises to be even better ? with volumes up possibly 10%-15%.

?Volumes are likely to continue to grow and pricing has clearly gone down ? partly because of strong liquidity but also because credit quality at both sovereign and corporate levels has improved ? so we have a very issuer friendly market.?

Loan division
The region's loan market is becoming bifurcated ? divided between the low margin vanilla sector, which dominated in 2004, and the more exotic areas where banks can extract juicy fees. That is the idea, at least.

?I regard 2004 as a fairly average year,? says John Corrin, head of loan syndication, Asia Pacific, at Calyon in Hong Kong. ?Volumes were high in the corporate market but in the structured finance areas, including project finance, volumes were very low.

?Certainly for 2005, I expect the corporate market to be active but in particular I expect to see a pick-up in structured financings like project finance and corporate acquisition financing.?

Still, there was growth in lending across the region. Taiwan overtook Hong Kong for the first time to be the biggest market in Asia (ex-Japan and Australia) after companies there signed $27bn of syndicated loans last year, up from $10.1bn in 2003.

The bulk of that was hefty loans taken out by flat screen display manufacturers such as AU Optronics, Chi Mei Optoelectronics and Chungwha Picture Tubes. Most were in Taiwanese dollars.

Taiwan's China Trust Bank took on Citigroup, becoming the premier arranger domestically, and attempted to establish itself as an international arranger by beefing up its presence in Hong Kong.

Taiwan's banks in general proved to huge lenders in the Asia non-Japan region last year, showing a particular appetite for India.

Hong Kong hub
Hong Kong has long been not only the regional hub for syndicated lending but also one of the major market segments, especially when China's Hong Kong-listed red chips are included.

The market grew to $22bn last year, from $16bn in 2003. With the banking sector awash with both Hong Kong dollars and US dollars, pricing continued to contract.

However, there was relatively little fresh capital expenditure by the blue chips in 2004, and most deals were refinancings, as borrowers took new loans at lower costs, and with longer tenors and looser covenants.

Pricing in the low 30bps for five years became the norm, when two years ago 85bp-100bp would have been an achievement. Even in early 2004, blue chips would have been happy with pricing in the 40bp-45bp area.

In addition, blue chips invariably mandated swathes of banks. BBB- rated Kerry Properties, for example, came to the market in June with a HK$7bn five year revolving credit. As sole arranger, Kerry managed to rope in 16 underwriters ? with Bank of China, Bank of Communications, Citigroup, HSBC and Mizuho acting as bookrunners ? in a deal that offered a margin of just 35bp and was still more than twice oversubscribed.

The year 2004 was clearly a borrower's market, with blue chips able to exact tighter pricing by self-arranging than a sole arranger could. After all, with such tight pricing how could an arranger expect its rivals to support the deal?

Borrowers were also able to secure deals with longer tenors. Kowloon-Canton Railway Corp, for example, managed to secure funding of HK$8bn in a self-arranged multi-tranche facility that attracted 18 banks. It included maturities at five, seven and 10 years ? the latter extremely rare in the Asian syndicated loan market.

Japanese market gathers pace
The Japanese syndicated loan market of 2004 accounted for just over half the volumes in the whole of Asia (including Australia). It is a young market but one that is gathering pace as banks seek out fee income and diversification of their portfolios and risk.

But is it really part of the Asian market? Not yet ? in the sense that most Japanese loans are yen denominated and syndicated between local banks with few foreign participants ?but its domestic practitioners, dominated by Mizuho, BTM, Sumitomo Mitsui Banking Corporation (SMBC) and UFJ, believe that it has the potential to overtake the entire European market within a few years. Increasingly foreign banks too are looking at the opportunities presented, particularly in event driven transactions.

?The Japanese market is set to grow very significantly over the next few years as more bilateral loans are refinanced through the syndicated loan market,? says Philip Cracknell, chairman of the Asia Pacific Loan Market Association (APLMA) and also global head of syndications at Standard Chartered in Hong Kong

Citigroup is one of the few international players to have got a foothold in a Japanese syndicated loan market that is only just emerging from the cosy tradition of bilateral corporate bank lending.

Although it is the largest foreign player it only bids for 20% or less of the deals available, says Mohsin Nathani at Citicorp in Hong Kong. ?So far foreign banks' focus on Japan has been very limited, but increasingly the market is offering some attractions for foreign banks.?

LBOs ? with acquisitions a growing theme in Japan's economy ? are the key area where foreigners might be needed. Last year Citigroup, Mizuho and SMBC arranged a $1.5bn loan for Softbank to acquire Ripplewood Holdings' ownership of Japan Telecom. That deal itself followed Ripplewood's own acquisition only nine months before.

JP Morgan has also carved a niche in the Japan LBO market with a couple of deals and other banks are eyeing up the opportunities too.

Could 2005 be the year when Japan merges into the overall Asian syndicated loan market?  

Hong Kong deals in 2004 were by and large relationship driven. The largest deal was the HK$10bn five and seven year revolving credit for Henderson Land, signed in September. Bank of China, BNP Paribas, Citigroup and HSBC were the bookrunners.

In late December, a deal for Sun Hung Kai Properties was in the market that was expected to raise HK$12bn.

?These are significant facilities but in the main part they are refinancings rather than raising new money,? says Corrin. ?They tend to be very tightly priced and done on a club basis with very few junior participants.?

As in 2003, there was an increase in lending to mid-caps last year, which is most often associated with investment and capital expenditure. In this sector, sell-downs average over 70% and yields, although also reducing, are generally much higher than those for the top tier companies.

For example, in December HSBC closed a deal for Victory City, the textile company, that raised HK$688m from a syndicate of 27 banks.

Another sector that is usually busy is Korean banks borrowing in dollars, but it was quiet in 2004 as many Korean banks have adequate dollar liquidity. The deals that did come to market came at very skinny pricing levels.

The last two, signed in December for Hana Bank and Kookmin Bank, were sold to the market at 17bp.

Ironically, bankers had claimed in April that a Kookmin deal paying 26bp and 34bp all-in for one and two year funds was too tightly priced.

How low can you go?
However, Lipton at HSBC believes that pricing is starting to flatten out and the ranges for pricing syndications are narrowing as yields contract across the board.

?Some banks have had enough and are starting to look at secondary or bonds or credit derivatives,? he says. ?They are looking for relative value rather than being the 32nd bank to have a relationship with a company.?

Plain vanilla corporate deals are done for general relationship reasons but to make money you have to do a lot of them, admit bankers. They will continue to be routine flow for syndication bankers but lenders are following the time-honoured route of seeking opportunities away from their core borrowers to get some yield ? by going down the credit curve to mid-tier companies, as well as searching for different structures and new markets.

One trend in 2004 was that banks began investing outside the region, notably in Russia and eastern European.

Impossible to ignore
The depth of cash in the Asian bank market is becoming too important for foreign borrowers to ignore, though that might not have appeared to be the case early in 2004.

The loan market began slowly in 2004 ? it has lagged behind the region's economic recovery since Sars and tensions in Iraq and the Korean peninsula caused a slowdown in early 2003.

Signs of the loan market's recovery came in April with the financing of a long-standing Thai/Malaysian gas pipeline project. Barclays Capital surprised many by attracting 14 banks into a $267.2m syndicated financing for the Trans Thai Malaysia project, sponsored by Petronas and Petroleum Authority of Thailand.

The deal was accompanied by another $257.1m 20 year facility which the arranger sold down to primarily non-bank investors.

It was done at a time of unrest in the south of Thailand and proved to many loan bankers that the right deals were financially viable again.

?This deal would not have been possible only a few months ago,? said Grace Tam, head of global loans, Asia Pacific, at Barclays Capital in Hong Kong, in May. ?It is only now that the big deals are being done.?

Other 2004 project financings included the $700m loan for Titan Petrochemicals in Malaysia and a $385m transaction for Kaltim Prima Coal in Indonesia.

The latter highlighted the extent to which Indonesia had made a comeback into the international syndicated loan market. The deal received an overwhelming response, with commitments of $686m. Twenty-four investors joined the arranger in syndication, including 12 banks.

More important for bankers, perhaps, arranger Credit Suisse First Boston made innovative use of credit default swaps to distribute part of the loan to hedge funds. This was one of the first signs of institutional participation in the bank-dominated Asian loan market.

This year bankers hope for more deals. A high profile project that will require several billion dollars of debt is BP's Tangguh liquefied natural gas project in Indonesia. And later in the year, banks will be asked to finance a huge oil and gas project in Sakhalin.

LBOs fall out of favour...
Even more of a damp squib last year was the much talked-up leveraged buy-out market.

Standard Chartered and DBS Bank arranged Hong Kong's sole LBO in 2004, a $109m medium term transaction for Sanda Kan Industrial, a Chinese manufacturer of model railways. The loan ? both senior and mezzanine ? financed a $200m acquisition by a consortium led by JP Morgan Partners.

The same private equity firm produced the only LBO loan in southeast Asia when it acquired a majority stake in hard disk manufacturer Metalform of Singapore. DBS arranged the transaction.

There were a few buy-outs in Korea, some of which were financed with syndications in Korean won. The largest Korean LBO in 2004 came at the very end of the year, when Citigroup closed the W500bn equivalent five and seven year financing for C&M Co, the country's largest cable TV company.

The loan attracted 12 participating banks and set a new benchmark in the local market with its is even year tenor.

In general though ? and certainly in contrast to bankers' previous expectations ? the LBO sector has not yet come to life. ?There should be some LBOs in 2005 ? there can hardly be any less than there were in 2004,? says Corrin at Calyon.

... while acquisitions find favour
If the long mooted rise of the Asian LBO market has failed to materialise, syndicated loan bankers are pinning their hopes on a new global phenomenon. That is acquisition finance for Asian companies ? particularly Indian and Chinese ? that are scouring the region and indeed the world in search of assets.

As they have become in many other business and economic areas this year, China and India are becoming a dominant theme in the Asian syndicated loan market.

India's loan volumes were up to $4.8bn last year ? nearly double 2003's $2.7bn. Much of the activity in the first half of 2004 was one year loan facilities for Indian banks, which were largely driven by the advantageous swap rate between the dollar and the rupee. The borrowing frenzy was also the result of the lifting of certain restrictions on overseas borrowings by the Reserve Bank of India.

But in the latter half of 2004, attention turned to Indian companies and their overseas investments. Tata Motors signed an $80m loan via arranger Citigroup to finance its acquisition of Daewoo Commercial Vehicles. And Tata Steel purchased the steel business of National Steel of Singapore in an example of the type of deal that will need to be financed in the Asian loan market.

The inward-outward story applies even more to China. Borrowing by Asian companies ? predominantly Taiwanese, Korean, Hong Kong and Japanese ? to finance investments in mainland China was one of the drivers of the Asian loan market in the first half of 2004.

Posco, Korea's steel producer, for example, signed a $400m three and five year loan for a joint venture in China in May. At about the same time, Taiwan's flagship Formosa group was syndicating a $285m loan to finance four subsidiaries in Ningbo.

China will continue to receive vast amounts of foreign direct investment but looking ahead loan bankers are excited about China more in its role as overseas acquirer.

Mandated Arrangers of Asia Pacific Syndicated Loans, excluding Japan ? 2004

Total ($ m)











4ANZ Investment Bank



5ABN Amro



6Standard Chartered Bank



7National Australia Bank



8Chiao Tung Bank



9Commonwealth Bank of Australia



10BNP Paribas






Source: Dealogic

?China will continue to be the biggest recipient of FDI in the world but what traditionally came from Europe and America has in recent years come mainly from multinational companies in Asia, as Japanese, Korean and Taiwanese companies are investing in factories in China,? says Standard Chartered's Cracknell. But going forward, he says, attention will turn to the Chinese companies that are coming out of China.

Lenovo (or Legend) is acquiring IBM's personal computer business in a landmark transaction that requires financing. In the resources area ? a core area of Chinese overseas interest ? MinMetals is buying Narando of Canada. In fact, Chinese resources companies look set to become the world's biggest corporate acquirers ? if Asian liquidity can fund their purchases.

Hong Kong-based Tetronic Industries has bought businesses in the US and is launching a US$200m syndicated loan ? in conjunction with a private placement and a bridge loan ? to finance them.

Although China and India have grabbed the headlines, the Asian corporate expansion story applies across the region. And, ironically, the Philippines ? one of the least significant markets for loans in the region due to credit concerns ? is providing the largest imminent acquisition financing.

San Miguel, the country's ubiquitous brewing and food company, has mandated ABN Amro, Barclays Capital, HSBC, Standard Chartered and SMBC to arrange a $1.85bn facility backing of its contested bid for National Foods of Australia.

All this acquisition action has got Hong Kong's syndicated loan bankers excited about the market's prospects for 2005.

?I feel that the last couple of months' activity indicates that this could be the year that the much-talked acquisition financing deals in Asia finally materialise in strength and numbers ? and that is where the money's going to be made,? says HSBC's Lipton.

If 2004 was a year driven by relationships ? where bankers feel their large underwriting risk in largely refinancing was not matched by reward ? then they are hoping that 2005 will be the year when Asian borrowers are willing to renumerate banks for funds that need to be borrowed quickly.

?There should be good demand for acquisition financing,? says Citigroup's Nathani. ?There will be a requirement for additional capital needs as economies grow; in addition credit quality is pretty sound so if you want to grow, you have the financial ability and balance sheet to be able to do it ? and without being stretched.?   

  • 21 Jan 2005

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