No return to normal for Asia’s loan market yet
Pressure on Asia’s loan market has eased recently as funding costs come under control and the Covid-19 spread in China slows down. But bankers hoping for a quick rebound in deal flow should keep their expectations in check.
Asia’s offshore loan market has finally had some good news. The Covid-19 outbreak in China appears to be under at least some control, with the country reporting just 11 new cases on Monday, and no new deaths. China has lifted internal travel bans gradually. Even those in Wuhan, where Covid-19 first broke out, are now allowed to travel. Schools in some provinces have also reopened.
The funding environment for Asian companies has also improved. Taiwanese banks’ funding costs, which rose significantly last month, have returned to normal. Three month TaiFX, the rate at which Taiwanese banks raise dollars in the domestic market, has stayed near 1.3% since last week, after reaching this year’s highest level of 2.6% in March.
These bits of good news have given bankers some hope that Asia’s loan market, which has been slow since the outbreak of the coronavirus, will rebound quickly.
But bankers in the region need to be realistic. The relatively positive market sentiment will offer little boost for loan syndications, in part because the economic impact is still being felt.
China reported a 6.8% year-on-year drop in its first quarter GDP growth last Friday — its first quarterly decline in nearly three decades. Bankers are preparing for an increase in covenant waiver requests from their hamstrung clients before half-year financial reports get filed in the summer.
This means credit departments at banks are unlikely to relax their strict approval processes for new deals anytime soon. Loans are more likely to get approved if they are to refinance an old deal, but if it is a new money borrowing, requiring banks to increase their exposure to a company, getting approvals will remain difficult.
It is also going to be hard for foreign banks to do their due diligence. Although Chinese citizens can travel more freely within the country, many foreign governments have imposed international travel bans. Banks have also put their own travel policies in place, attempting to protect their employees.
This is despite the fact that diligence has never been as important as now. Corporations struggling with the effects of the coronavirus need to be examined closely. A wave of fraud allegations among Chinese companies have further raised red flags.
Then there are the questions around China’s Covid-19 related data. While the country’s government claims the number of cases and deaths are dropping — despite it recently hiking the death toll in Wuhan by 50% — many observers are sceptical of the numbers.
Acquisition loans will also be hit badly. Increasingly, acquisitions are either being suspended or cancelled after the sellers and buyers fail to reach an agreement on the price.
A Hong Kong-based banker told GlobalCapital Asia that his firm had been working on an acquisition loan at the end of last year. The bank was initially aiming to launch the deal into syndication after Chinese New Year, but the deal ended up being cancelled because of disagreements over pricing after the breakout of the coronavirus.
Better market conditions notwithstanding, corporate loan flow will likely remain under pressure. Traditional syndicated loans are either taking the club or bilateral route. In some cases, there are questions over whether to syndicate or not for fear of a shoddy response from banks.
For example, Tencent Holdings’ €1bn Universal Music Group acquisition loan was signed in January with five mandated lead arrangers and bookrunners. Discussions over whether to launch the deal into syndication have continued since then, but no agreement has been reached yet.
Nor is all of Asia past the worst of the coronavirus. India and Indonesia are perhaps the starkest examples. They are both large, populous countries that offer a steady source of loan business. They are also both facing an alarming spread of cases.
There is some reason for cheer among loans bankers. Small improvements are better than nothing. But there is more pain to come before the market gets out the other side.