It is boom time for South Korean borrowers
A flurry of activity is expected by loans bankers from South Korea in the next two months as tensions with the North have eased
With Korean banks pulling back from domestic lending, borrowers may have to turn to Taiwan. The likelihood is that Taiwanese banks will be ready to support them but borrowers would be wise to be wary.
It is boom time for South Korea. Loans bankers expect at least seven US dollar deals to be launched there soon. There are two reasons for the deal rush: the easing of tensions between the North and the South after Aprils flare-up over North Koreas threat to test a nuclear missile, and the fall in borrowing costs across Asia.
Korean companies will hit the market soon but they should be prepared for scant support from domestic syndicate desks.
Korean loans bankers are cautious after being forced to write off huge debts during the financial crisis, a problem they put down to the high exposure they had to lower-rated Korean firms.
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However, the next key source of funding is not hard to find. Taiwanese banks have always been a big source of funds for Korean borrowers and now they will be even more important.
They have already stepped up this year, making bigger commitments than ever before to deals across Asia and even joining at the top level. That is a marked change from the days when they would take up whole junior levels of a loan.
But new Korean borrowers considering liaisons with Taiwan should take a quick history lesson. A little more than a year ago, Taiwanese banks were pushing to trigger market disruption clauses after their own funding costs shot up. These clauses force borrowers to either increase interest payments or pay back their loans early.
The blame was put on TaiFX, the rate at which Taiwanese banks fund themselves in dollars, and the way in which it had diverged from dollar Libor, the usual reference point for international loans.
Taiwanese lenders were not always successful in getting clients to compensate them: the likes of Export-Import Bank of Korea, Korea Development Bank and Korea Finance Corp managed to avoid paying additional fees.
But Korean companies looking to borrow now should learn from this episode and take measures to protect themselves.