The primary market in Asian syndicated loans has been virtually wiped out by the region's economic crisis, with banks reluctant to lend more money (let alone underwrite new deals) until the economic situation in various countries is clearer and debt restructuring deals have been worked out. Although there have been glimmers of light - in Taiwan, China and, to a lesser extent, Hong Kong and Singapore - raising new funds is hazardous and expensive for any borrower in Asia at the moment. But bankers say some good may come from the crisis. A more mature and professional market is emerging, as witnessed by the growth of the secondary market, the arrival of new investors (such as US institutional funds) and the establishment of an Asia Pacific Loan Market Association. Nick Parsons reports.
Asia's syndicated loan market has spluttered feebly in the first
half of the year - unsurprisingly, in the context of the region's
overall economic turmoil.
The total volume of signed loans has fallen by more than two thirds - down from $60bn in the first half of 1997 to just $16bn in the same period this year (with Australia accounting for $6bn of that figure).
At the end of last year, many loan bankers were predicting that their market would be the only debt market left operating in 1998, as lenders stood by their top borrowers for relationship reasons.
In relative terms that may be the case - international bond issues have been much rarer still and top borrowers can get loans from relationship banks at pricing below where their paper trades in the secondary market - but the support of the Asian bank market for the region's beleaguered borrowers has not been resounding.
Relationships are one thing but still the price must be right; and many borrowers are finding it hard to realign themselves to the new financing realities, especially in terms of the spreads the market is demanding.
It has been an odd assortment of transactions that make up this year's loan market.
Club deals, private placements, the odd sovereign or quasi-sovereign loan (possibly with the backing of a multilateral agency), protracted discussions over debt restructurings and the secondary market trading of assets - that is what has occupied Asia's syndicated loan bankers so far this year.
And it is an agenda that is likely to continue for some time to come.
Loan activity has also been geographically varied. "Taiwan has been active and we are beginning to see activity in Hong Kong, to some extent the Philippines and Singapore, and we anticipate in the fourth quarter some deals trickling in from Thailand," says Avinder Bindra, managing director at Citicorp International in Hong Kong.
Indonesia, traditionally the source of most of the region's high yielding corporate loans, is a no-go zone.
Indonesia has produced a mere five issues worth just $53m so far this year; in contrast bankers involved in a steering committee of 13 banks led by Chase Manhattan and Tokyo-Mitsubishi have been negotiating with Indonesian private sector borrowers over a debt restructuring programme to the tune of $80bn.
Korea, in contrast, may be beginning to come out of the cold. Bindra estimates that Citicorp has done $400m worth of Korean private placements in the last few months - with non-bank investors invariably the buyers.
"The market is not completely dead although investors are much more selective," he says. "Funds - 80%-90% of which are pure funds like pension funds or insurance companies - are looking at markets like Korea now that conditions have changed.
"A lot of hedge funds looking for distressed assets, particularly from the US, are either visiting Asia or in the process of setting up here."
This secondary market loan-buying activity coincided with a first wave of selling by Japanese banks before the end of their fiscal year on March 31.
Indeed the withdrawal from the market of these institutions has been perhaps the main reason for the moribund state of the loan market in recent months, bankers believe.
None have been hit harder than Hong Kong borrowers, which last year were undoubtedly the region's most prolific fundraisers. In the first six months this year, Hong Kong borrowers raised $2.052bn in 26 issues - a fraction of their rampant fundraising a year earlier.
"The big problem with Hong Kong is not so much the credit itself but the fact that the Japanese banks have been the main lenders, previously providing at least 30% of the funding," says Peter Chan, head of syndications at BA Asia in Hong Kong.
He cites two reasons why they are no longer in the market: first, in seeking to cut down their portfolios, they are concentrating on sound places like Hong Kong where they can get their money back; second, Japanese banks got into trouble with their own property investments and have reasons to shy away from the sector (unfortunately property is invariably at the core of most Hong Kong companies' interests).
Another banker agrees: "Sales of Hong Kong loans can still be carried out at par as opposed to being treated as distressed debt, so there are trading opportunities for Japanese banks to reorganise their portfolios, while some European banks see opportunities to get good assets at increased yield."
It is not just the absence of the Japanese banks that has stalled things: European banks have become more selective and price conscious. Even top tier borrowers are not getting it so easy. Whereas last year they were stretching tenors to seven years or paying 55bp-65bp for five years, these days they face paying 250bp-300bp for three-year deals, according to one banker in Hong Kong.
Perhaps a watershed in the market came with the Cheung Kong three-year revolving credit, which was signed in June having raised HK$2.15bn.
Arranged by BA Asia, BNP, China Construction Bank, CIBC-CEF, Citicorp and Bank of Nova Scotia - and priced at 100bp over Hibor - the deal was an achievement in the context of a dire market. However, it did not get the reception that Cheung Kong expected and the company's officials were said to have exerted extra pressure on a number of banks to join the syndicate which they had hoped would raise nearer HK$4bn.
The transaction certainly paled beside the triumphant HK$3.9bn five year loan which the blue chip conglomerate secured last year - just before the handover - which at just 45bp over Hibor still attracted record commitments of over HK$6bn at the underwriting stage. However the recent deal has opened up the market for other borrowers and other deals have followed. Wharf is in the market seeking at least HK$1bn for three years, with pricing set at around 200bp-250bp all-in.
That is steep, say some bankers, when you consider that existing two year Wharf paper can be picked up in the secondary market for about 300bp.
This latest Wharf fundraising is a refinancing of a 1992 deal which was originally priced at 75bp all-in; in addition, Wharf is providing its Gateway project in Tsim Sha Tsui as collateral - a condition which was previously rare, but which is expected to become a common feature of future deals for Hong Kong's property-centred conglomerates.
"Various transactions which banks have tried to bring to market have stumbled on the issue of pricing," says one Hong Kong banker.
"Some borrowers are not prepared to pay the price demanded and prefer to do transactions on a bilateral basis rather than set a benchmark for the market. If they are prepared to pay the market price a successful deal can be closed."
Some banks prefer the diversification in business focus and intimate connections that Red Chips offer. Beijing Enterprises raised $150m in three year funds via Chase Manhattan, Standard Chartered and Sumitomo in June.
It followed a transaction from China Resources, which arranged its own two year deal and raised $200m at 150bp all-in at the top level earlier in the month.
However, bankers are not expecting much more fundraising from this direction, not least because most Red Chips have prodigious cash piles thanks to prolific fundraising in the last two years.
The bulk of mainland Chinese funding has been in infrastructure projects which have been given priority over other borrowers and which can call on an export credit agency element, or they have been smallish deals (about $30m has been typical) for the regional financing windows (the ITICs).
The final component of Chinese borrowing is the occasional state-owned issuers which usually attract banks for relationship reasons. Bank of China is currently seeking five year funds at around 75bp-80bp, but bankers warn that the margin may be too tight for the market.
In the first six months of the year, Chinese borrowers raised $2.387bn. That is second only to Taiwan - which only a few years ago was almost totally absent from the loan market due to its own strong banking liquidity and prohibitive regulations against offshore borrowing.
In contrast, up to the end of June this year Taiwanese borrowers signed loans of $3.826bn; they also secured the most attractive spreads on offer in Asia.
Whereas Taiwanese offshore borrowers used to be mainly those companies investing in China or elsewhere overseas, this year they have been mainly telecommunications or power projects.
Malaysia is another country which used to finance most of its needs either in the domestic banking market or via international bond issues.
But its flirtation with economic trouble in the last year has seen some of its top issuers return to the international loan market. Tenaga signed a $300m five year loan at 150bp over Libor in June, while Telekom Malaysia completed a $350m five year deal at 175bp over Libor a month earlier.
Such deals would seem to confirm the belief of commercial bankers that the loan market offers a quicker and more reliable option than the bond markets.
On the other hand, however, the US bond market has much greater depth than the relatively illiquid Asian bank market in its present state.
The only problem is that investors would demand richer pricing than these top tier issuers can squeeze out of their relationship banks - often regardless of where other existing debt paper is trading.
For the right borrower and for the right structure, banks are willing to lend - even the top Japanese institutions (although the Japanese regional banks are out for the count for the foreseeable future).
"We are not overly active in the loan market," says Karen Mak, senior manager, primary department at Tokyo-Mitsubishi International (Hong Kong).
"Being an Asian or Japanese bank we have a lot of exposure so we cannot increase it much in the region, but we are not reducing much of our assets either."
As regards new activity the bank, like many of its Japanese counterparts, is limited to certain deals - for example those where a multilateral agency is involved or a project financing with ECA backing or a syndication with an important relationship at stake.
Mak points to the Thai Eximbank $1bn co-financing with the Asian Development Bank - which attracted the participation of more than 60 banks - as the type of deal which most banks can join.
On the whole, though, she concedes that "most regional players are more busy tackling problem transactions than getting into new transactions. Many have guidelines from head office that over the next nine to 12 months they can take on no new transactions."
If participating in syndicated loans arouses caution in bankers, the idea of arranging or underwriting them to any great extent may trigger off panic.
"Deals are being done but people are very nervous about underwriting them, so banks are coming in for the amount they are going to hold," comments BA Asia's Chan. "As a result most deals are being done on a kind of bookbuilding basis."
Bilateral loans and club deals are also popular since borrowers are increasingly reluctant to disclose the spread they are paying.
However among all the doom and gloom, some good may come out of the unexpected impasse into which the Asian loan market has run.
"The market had a pretty good over for the last few years and was getting fairly aggressive," states Citicorp's Bindra. "In some ways the pain some countries are going through has had a sobering effect and has enabled the market to become more professional and mature." He points to the setting up of an Asia Pacific Loan Market Association, which was due to become an official entity this week before a formal committee is set up next month.
It has been originated by 15 top banks in Hong Kong and Singapore in an attempt to standardise documentation and trading practices, in much the way that similar associations exist in New York and London.
Bankers hope it will prove a timely response to the development of a secondary market in loans which has sprung up in recent months, introducing new non-bank investors to the opportunities available in the Asian loan market.