Year to date, syndicated loan volumes in Asia ex-Japan stand at $33.86bn. With just over two weeks to go, they are in danger of failing to reach the $36.35bn worth of business that trickled out in the last three months of 2008, or the $37.47bn of deals signed in the first quarter of 2009.
Unlike in that period, liquidity is certainly not the problem. Banks are flush with cash as countries across Asia loosen monetary policy to spur consumption and European banks start rebuilding their lending businesses in the region.
But this strong liquidity has also come at a time of macroeconomic uncertainty over China and Europe, not to mention concerns over the natural resources sector — all of which has given rise to a degree of risk aversion among banks.
On top of that, fewer deals by high grade borrowers, even as lenders are swimming in money, means that banks are increasingly scrambling to write big cheques for key clients at very low rates, deploying capital through bilaterals to win business.
“I wouldn’t be surprised at all if bilaterals have been ticking up,” said a banker at a North American lender. “It’s easier for strong borrowers — banks will approach it as a club or bilat and just skip the underwriting stage.”
Disintermediation
A few examples of recent deals that have gone the bilateral way or have had just a token syndication include a $125m deal for Oil India, mandated to Mizuho, and two facilities of $200m each that were raised by Philippine Long Distance Telephone from Bank of Tokyo Mitsubishi UFJ and Mizuho, respectively.
A recent loan of $450m mandated by Indian company Power Finance Corp to BTMU, Mizuho and SBI may also skirt retail syndication, said a banker on the deal. “It’s a big amount but we are keen to hold,” he said. Having a general syndication, with heavy scalebacks at the end of it, would be a disappointing outcome for new lenders, he said.
Another reason that banks are comfortable offering bilaterals is that their balance sheets have not been growing much.
“Most of the deals are refinancings, there are fewer fresh loans, less capital expenditure,” said a Hong Kong based banker. “In this scenario there is a tendency to want to hold on to more exposure by way of clubs or bilaterals. It’s not so much about risk distribution if you have a long running relationship.”
A senior syndications banker echoed this sentiment, but noted that bilaterals can be priced lower if the borrower is a strong one, perhaps one with state backing. They could be more expensive for those lower down the credit curve or which do not already have a long relationship with the lender.
“Bilaterals can be lower priced or sometimes higher priced than syndicated loans,” he said. “Of course banks can look at it as an alternative. Much like the bond market, if there is more disintermediation, there are more bilats, then there will be less syndicated loans.
"It is difficult to see the volumes for bilaterals, though, because unlike the syndicated loan market, there is a lack of transparency.”
This trend is unlikely to end any time soon, as bankers do not foresee a sudden reversal in the benign conditions for highly rated borrowers. Companies will continue to go the bilateral route if they can get more attractive pricing there.
Thankfully, the rise of bilateral lending should not unduly affect pricing on syndicated loans, with bankers expecting a sideways movement rather than a downward trend. This is because not all borrowers have the capacity of being able to raise massive amounts bilaterally, and also that deals of $1bn or more will still need to use the club or syndication route.
There is also a sense that syndicated loan pricing is already bottoming out.
“It is [Japanese] institutional level pricing that is becoming market pricing,” said the banker at the North American lender, referring to narrowing of returns on recent Indian state owned deals. “What do you do? It’s the choice between lower returns on a few deals and no returns if you don’t do those deals.”
Source: Dealogic