Loans: to have and not to hold?
Recent allegations against Nomura about a syndicated loan that went bad has re-opened the debate on investment banks’ practice of minimal or zero holds versus commercial banks’ take-and-hold strategy. And the legal action initiated by Taiwanese banks shows there is a need for more transparency — even in secondary sell-downs.
It’s been an interesting period for loans bankers. On June 6, a group of six Taiwanese banks that participated in a $60m loan for Chinese shoemaker Ultrasonic, filed a lawsuit against arranger Nomura for alleged misrepresentation and fraud.
They levelled serious accusations against the bank, including one that Nomura told the other lenders in the syndicate that it had approval to participate in the loan with a $9m commitment. But after participants submitted commitments, the Japanese bank allegedly told the borrower during the signing stage that it would not be able to participate, according to a statement by Cathay Financial Holdings, which is leading the legal action.
Nomura asked the company to raise the $9m shortfall itself or risk the loan not going through, the statement added. Nomura says is it aware of the Cathay statement but has not received formal notice of the litigation and so is unable to comment.
The bust-up between Nomura and the Taiwanese banks has brought to the fore the gap in mind-set between commercial banks and investment banks when arranging a loan.
For most commercial banks the decision to introduce a firm to the market is based on their desire to have a mid-to-long term view on the company. For investment banks, however, the rationale could be different, say market observers. A loan is usually a forerunner to other, higher fee-generating ancillary business rather than a primary source of income. So much so that, they tend to view a syndicated loan on a transactional rather than a relationship basis.
This divergence means there is no hard and fast rule on how much of the loan banks should or should not finally hold on their books. But the situation between Ultrasonic, Nomura and the Taiwanese lenders shows there is a need for more transparency among the banking community.
The Asia Pacific Loan Market Association recommends arrangers to inform banks at the time of inviting them for a deal, if they plan to allocate themselves zero, or substantially zero at the primary syndication level. Alternatively, they are also recommended to inform banks if they intend to hold a “disproportionately large final take”.
There is no such guideline for the secondary market, but it would be in the interest of all parties that arranging banks disclose to others in the syndicate if they intend to sell down to zero or near-zero in secondary.
And a certain amount of self-policing among lenders is no bad thing, especially in cases where banks arrange a loan for a debutante and where, post sub-participation, they have little or no exposure to the company.
This is especially important for Taiwanese lenders, a key source of retail liquidity in Asia, which are still licking their wounds from a few loans to mainland Chinese firms that went sour in the past. It would restore their confidence if lead banks, if only as a matter of practice, are transparent about any secondary market sell-downs.
Having a well-developed secondary market benefits lenders as they can adjust portfolios and extract efficiency. Against this backdrop, restrictions on transferability would be a step backwards but the need is for better monitoring of the counterparties in sub-participation.
There is no one size fits all but more information sharing and transparency will help, not hinder the Asian loan market.