Asian lending: still regaining its balance
It was a patchy 2003 for the syndicated loan markets across Asia. The first few months started promisingly enough but the Sars health scare, the war in Iraq and nuclear threat from North Korea shut the market down until the summer. But once the path was clear, the market roared on all cylinders until the end of the year, reports Peter McMillan .
It was an on-off year for syndicated lending in the Asia Pacific region. The promising start to 2003 — with over $50bn of syndicated lending in the first quarter — was marred by the arrival of the Sars health threat, the war in Iraq and the nuclear threat from North Korea.
Monthly syndicated loan volume in non-Japan Asia sank to a low of $3bn in April — a level not seen since the depths of the financial crisis in 1998.
Yet the few borrowers that could raise funds were able to do so at ultra-low pricing, taking advantage of banks’ desperation for high quality credits.
Many banks were keen to maintain their market share, in the hope that conditions would improve once the Sars threat diminished. That recovery began in June, when borrowers began to seek new facilities and complete deals held up in April and May.
The market was filled with an enthusiasm that continued throughout the rest of the year across the region, although loan volumes for most countries were unable to catch up with the totals reached in 2002.
The outlook for 2004 is encouraging. Credit sentiment is improving globally and that could help the Asian market enjoy a record year. Lower rated credits are likely to come to market, which should provide loan syndicators with better fee income.
Yet bankers are still wary of another outbreak of Sars in the region, as well as any knock-on effect from the trade wranglings between China and the US.
There have been several false dawns in the Asian syndicated loan market since the region’s financial crisis in 1997 and 1998, and any prospect of an upturn should be viewed with cautious optimism.
Japan and China dominate
Japanese banks maintained their dominance of the league tables — the top three banks accounted for 40% of all Asian lending. Almost all of this, however, was domestic — Japanese borrowers accounted for almost 50% of Asian loans.
Outside Japan, Greater China absorbed over $32bn of lending. This was less than 2002’s figure, but market observers said the market rebounded impressively after the depressed second quarter.
Arrangers in this region began to bring mid-cap borrowers to the market regularly for the first time since the financial crisis. Banks welcomed these financings for the yield pick-up they provided. The volume of such deals was not large, but bankers said the appearance of mid-cap companies would open up opportunities for a large number of potential borrowers.
The local banks also began to make their presence felt, as deals were finally being priced above their funding costs.
China increased its use of the syndicated loan market, raising $8bn in 2003 — $2bn more than the previous year — although the number of deals fell from 25 to 19. The domestic market, however, is still closed to international banks. Local lenders provide funds at cut-throat levels, even though non-performing loans are still clogging the country’s banking system.
One of the success stories of the year was the re-appearance of Indian borrowers. In 1997 Indian companies raised almost $7.5bn from 85 deals, but the market has been dormant since then. In 2003 higher local funding costs resulted in over $2.5bn of international loans being signed, mostly for banks and financial institutions.
The Asian market that really struggled in 2003 was South Korea. After three years with more than $8bn of lending, only $5bn was raised in 2003, in 43 transactions.
Banks were dissatisfied with the fees available on Korean bank credits and, with other markets opening up, they were able to achieve better yields elsewhere. Towards the end of 2003 Korean borrowers revised their pricing policies and banks and companies returned in force, so that several successful deals were completed in the second half.
Activity in southeast Asia was thin again in 2003, with only Malaysia providing any meaningful volume of business. There, syndicated lending is still dominated by government linked entities. But Indonesia and Thailand could hardly produce any deals at all.
An outstanding year for Hong Kong
Hong Kong’s economy was hit hard by the Sars crisis, and the special administrative region’s loan market suffered disastrously in the second quarter.
But considering that, the market had a remarkable year. A bumper third quarter made up for the second, and total lending for the year was nearly $15bn in 72 deals — not far behind 2002’s $16.5bn in 82 loans.
The trend of mid-cap companies coming to the loan market, which had started in the second half of 2002, consolidated in 2003.
Banks received these deals with great gusto — possibly the most successful was HSBC’s HK$500m fundraising for China Pharmaceutical. One banker called the result “outstanding” — the loan attracted 24 banks and was oversubscribed by 300%.
Mid-caps raised over $1.6bn from 41 deals in 2003 — but that was still only about 10% of the Hong Kong loan market.
Heavyweight borrowers such as Cheung Kong (Holdings) Ltd, Hutchison Whampoa and Sun Hung Kai Properties all returned, and Hutchison also raised funds through some of its subsidiaries, including a well received HK$5bn loan for Hongkong International Terminals at the end of the year.
Red chips also featured prominently — and bankers say they could become a growing sector of the market. The largest deal was China Resources’ HK$3.95bn credit; Tianjin Development and Beijing Holdings also completed smaller facilities.
China Unicom raised a $700m financing over three, five and seven years. The pricing caused many banks to steer clear of the facility, although those that did participate were willing to hold on to large tickets — $84.3m for the mandated arrangers.
Bankers that turned the transaction down said the borrower had shot itself in the foot by only paying 45bp for top tier commitments. This, they said, may cause it to struggle when it returns to the loan market in the future.
Pricing is likely to remain under pressure in 2004, as there is plenty of cash available to lend.
Fast forward for India
Bankers have been forecasting for some time that syndicated lending in India was about to explode into life. In 2003 it happened.
Thirty deals were completed, raising $2.5bn, compared with 16 transactions totalling $1.5bn in 2002. Almost $1bn of loans were for financial institutions, up from $300m the year before.
Housing and Development Finance Corp was the most frequent borrower, tapping the market three times for a total of $275m. On the corporate side Tata Tea raised the largest credit with a £194m financing arranged by a quartet of foreign banks.
The promise of leveraged buy-outs
After many stop-start years and unfulfilled promises of overflowing pipelines, several high profile structured leveraged buy-outs made it to the loan market in 2003. Many banks do not have teams that can arrange these deals so those that did were able to take full advantage.
JP Morgan has long been a pioneer in this field. It arranged the first deal in 2000 for Wong’s Circuits in Hong Kong, and followed it with other landmark deals such as Mercury Information & Communication in Korea and Tower Records in Japan.
In 2003, JP Morgan was bookrunner with Citigroup on the ¥224bn transaction for Japan Telecom with Citibank, as well as playing a prominent role in the NT$10.57bn Taiwan Broadband and $600m equivalent Hanaro Telecom financings.
DBS Bank grabbed leading roles in both those deals, as well as combining with Standard Chartered in the S$150m Yellow Pages deal in Singapore. That deal was highly regarded by banks and attracted nine banks, despite the facility’s small size.
A handful of smaller deals emerged, but bankers urge caution over these structured facilities and point to HSBC’s struggles in syndicating the $104m deal for Boto International that was closed late last year.
Bankers say that, despite the undoubted successes in 2003, it may be some time before LBO lending takes off in Asia.
The principal driving force for this resurgence was that higher interest rates at home meant it became cheaper to borrow in dollars and swap the funds back into rupees.
Lending in rupees is still active, however. Seventeen banks joined ABN Amro’s Rp10bn facility for Bharat Aluminium Co in September. The deal put ABN top arranger in the Indian league tables, with $313m from four deals. State Bank of India was second with $306m from six fundraisings. All the other top 10 slots were taken by European or US banks.
Pricing has declined rapidly in India as banks have rushed to take advantage of the yield pick-up over other Asian credits.
Lending in 2004 may be dampened by some analysts’ fears that Indian borrowers might over-extend themselves and may not be hedged sufficiently if the dollar strengthens against the rupee.
Encouraging signs for South Korea
Korean borrowers began 2003 struggling to raise funds — just $767m of deals were completed in the first quarter.
Volumes began to pick up in the second quarter with a shade under $2.5bn being signed — nearly $500m of which was the Pusan Newport project financing. Most of the rest was for banks, although many deals were conducted on a club basis or struggled in general syndication.
But a handful of well priced loans did receive encouraging responses and Korean banks and companies began to widen their pricing to achieve their funding targets.
By the third quarter, pricing widened further. Hana Bank offered all-ins of 36bp and 47bp for one and two year money on its transaction signed on November 28. The equivalent facility signed on the same day in 2002 paid just 21bp and 30bp.
Last year’s deal received commitments from 25 international banks and was 65% oversubscribed, an excellent result when compared to the handful of banks that joined the 2002 transaction.
Towards the end of 2003 corporates returned — $1.4bn of the $1.9bn of corporate loans came in the second half. Samsung SDI and S-Oil Corp each completed $100m loans in late November, adding to the $400m refinancing for LG Philips LCD in October.
Bankers say lending volume is likely to increase in 2004, as borrowers realise they have to price their deals at market levels.
Taiwan goes from strength to strength
Taiwan’s syndicated loan market is thriving — over 80 deals worth almost $10bn were completed in 2003, against $9.75bn in 2002.
As in previous years, over 80% of the loans were made in Taiwanese dollars, many of them arranged by domestic banks. Most of these facilities were small, but a notable exception was the NT$10.57bn structured transaction for Taiwan Broadband.
This deal was hugely successful — 12 banks joined mandated arrangers Crédit Lyonnais, Chinatrust Commercial Bank, DBS Bank and JP Morgan. Many observers warned it would struggle, but the result was a huge boost for the structured teams operating on the island.
One of the reasons for the encouraging reception was the pricing. Many Taiwanese dollar deals carry low yields. Local banks are awash with liquidity and, like their Hong Kong counterparts, are desperate to improve their fee income.
Bankers attributed the absence of Citigroup, a longstanding player in the Taiwanese loan market, to the defection of many of its loan team to Chinatrust Commercial Bank, which is seeking a larger role in the market.
This did not prevent Citigroup — with ABN Amro, ICBC, Chiao Tung Bank, Taipei Bank, Land Bank of Taiwan, First Commercial Bank, Bank of Taiwan and Hua Nan Commercial Bank — from landing the largest mandate of the year. The NT$35.24bn fundraising for AU Optronics was signed in November after an unprecedented 26 banks joined in general syndication. The deal was increased from NT$25bn.
“In all the years I have been working in the Taiwan syndicated loan market I have never seen anything like it,” applauded one banker.
Banks are all but assured of plenty of business in 2004, as Taiwan’s thin film transistor liquid crystal display manufacturers are ini constant need of investment capital. But the already tight pricing may be squeezed — Chinatrust Commercial Bank has secured several mandates at cut-throat levels.