Nothing in this world can be said to be certain, the old saw goes, apart from death and taxes.
There is a good argument for saying that to that short list can be added the Asian loan market, which retains a distinctly old-fashioned, almost gentlemanly nature — one which has, to all intents and purposes, changed very little over the last 30 years.
The market remains dominated, as it always has been, by cross-border lending in dollars. The only real change, joke regional bankers, is that rather than communicating by fax, they now do everything by email.
But of course there have been very significant changes. Most obviously of all, the players in the market are no longer the same.
“The banks that were active in the Asian loan market have changed,” explains Phil Lipton, head of loan syndications, Asia Pacific, at HSBC in Hong Kong.
“It used to be US and European banks mostly leading the deals,” he adds. “That changed in 2008 with a number of mergers, as well as some banks leaving the region. Now the market has shifted to local and regional Asian banks.”
And then there are new kids on the block, like the highly ambitious Chinese banks, which are happy to compress spreads, as well as non-bank investors which keep nipping at margins on the sidelines.
With more lenders chasing fewer deals, the traditional loan market has a gloomy feel, and plenty of its veteran participants now regard it as overbanked.
Overbanked and under-margined
There is certainly some clear evidence to support this argument. For even as the number of competitors in the market grows, volumes are continuing to fall.
Last year, loan volumes dropped 9% year-on-year while the number of deals in the market fell 11%, according to Standard Chartered.
And this came on the back of an already depressed 2015. But the obituaries for the loan market have been written far too often before, and this time, too, will not be the end.
For a start, the market is not as resistant to change or innovation as many of its critics make out.
In an echo of the way that domestic bond markets took off in the aftermath of the Asian crisis in the late 1990s, so too the domestic loan markets are now being widely acknowledged as a powerhouse.
Over the last couple of years, local currency volumes have accounted for around 60% of total regional loan volumes, according to Standard Chartered. But the perceived growth in local currency lending needs to be put into perspective.
Several bankers point out that recorded loan volumes in renminbi in the 1990s, for example, are far too small to be true. But no one was paying attention to the market and few in the media were reporting on them.
The rise of China
Nonetheless, there is no doubt that as Foster Lee, head of syndicated finance at China Minsheng Banking in Hong Kong, points out: “Renminbi loan demand is much bigger than it was before” and that “the dynamic has changed”.
That’s because business in the region has become more China-related as well. When a European company is buying a Chinese company or a Chinese company is buying a European one, there is, invariably, a Chinese bank and loan involved.
“If you are doing a deal in London then you call Lloyds, if you are doing one in New York then you call JP Morgan, so of course if you are doing a deal in Shenzhen, you call a Chinese bank,” explains one banker.
Another force at play, say several bankers, is that the pack of cards is stacked against the Western banks.
Chinese banks have different credit requirements and are not regulated by Basel III requirements, which helps them compete. That will change sooner or later — over the next five to 10 years is the generally accepted assumption — and Chinese banks will have to recycle their balance sheets… but not yet.
Tougher at the top
If the market is indeed overbanked, then it is most overbanked at the top end of the market.
Canny operators have moved down the credit curve to the next level of companies, which still have funding needs, but might have difficulties accessing the high yield bond market.
But what has changed most of all in the loan market over the last couple of years is innovation in loan products.
To take just two examples, it is worth having a look at United Asia Loan Funding, the region’s first fully backed, actively managed cashflow CLO, marketed by SC Lowy and UOB Asset Management, as well as the emergence in the Australian market of term loan ‘B’ deals for sub-investment grade borrowers.
The $400m United Asia Loan Funding was launched last year, intending to buy loans offering 300bp and above. It has struggled to close, but is clearly a step along the right path.
Further back, Leighton and Apollo Global Management priced a A$359m ($265m) seven year covenant-lite TLB in May 2015, funded primarily by private debt funds and superannuation funds, which avoided exposure to volatile exchange rates. Until then, Australian borrowers had had to look to the dollar TLB market for longer term loan funding.
Neither product has exactly been a runaway success, but both are steps in the right direction and should help to deepen and broaden Asian loan markets.
Backing bonds
While there have been definite moves to integrate loan and bond markets in Europe and the US, as companies seek all their debt funding from a single desk, the integration process is at a much earlier stage in Asia.
The loan and bond markets, says HSBC’s Lipton, can be “complementary” but are not always.
“When you have financial or political events in the region there is often a quick reaction in the bond and equity markets, but there can be a lag in the loan markets,” he says.
This is not to say that convergence is not happening — it is just occurring at a slower rate.
“The movement is still in its infancy, but in the long term I would expect to see more integration in the two markets,” says Andrew Ashman, head of loan syndicate for APAC at Barclays in Singapore.
What is keeping this integration from taking off at the moment is fragmentation, geographies and currencies.
Ultimately, though, what’s most likely to return the loan market to its former glory is events beyond its control.
As the Federal Reserve continues to raise interest rates, regional loan bankers will start to make something approaching decent returns again.
Then it could be back to business as usual.