SC Lowy said this week that it was setting up a division dedicated to trading par loans — instruments valued at 90% or more of their face value. The firm, which has been active on the sub-par loans side already, is building the new unit in anticipation of increased business as banks attempt to manage their country and industry exposures better.
"The par loan market was simply non-existent in Asia to a large extent in the last 10 years but that has changed in the last 12 months or so,” said Michel Lowy, chief executive of SC Lowy. “We are also seeing the rumblings of a renaissance in the CLO market in Asia."
The evolution and growth of the secondary market has long been important for syndicate bankers. By having an active secondary market, lenders have more flexibility in altering the composition of their portfolios — key when responding to economic changes or strategy changes within the bank.
Moreover commercial banks, which often miss out on deals in primary syndication due to size or pricing barriers, get a chance to establish a relationship with a borrower they did not previously have access to.
The extent of activity has risen over the past few months, say bankers who specialise in secondary loan trading.
One of the reasons behind the pick-up is the growth in the syndicated loan market. Dollar loans in Asia ex-Japan climbed by 93% between 2012 and 2014, with volumes totalling $181bn at the end of last year, according to Dealogic. And as volumes picked up, so did secondary activity.
This year however, has so far been lacklustre. Year-to-date volumes are down by 33.3% when compared with the same period last year. This slowdown has, in some cases, led to lenders taking up bigger positions in primary to earn league table credit, and then trim that position in secondary, add bankers.
Lenders are also selling down syndicated loans closed a few years earlier, said a banker involved in secondary trading. To carry out more business with the same borrower, or with companies in the same geography, banks are increasingly finding the need to better manage their exposures. For example, some 13 deals signed just last year are expected to change hands in secondary soon.
This has become particularly important now as loan volumes have been dominated by China-related activity in the last few years.
Changing climate
Another big reason driving banks to secondary is the changing credit environment in countries such as China and Indonesia. Fears of a slowdown in China, accompanied by the volatility in Asian currencies, have made risk management all the more important.
Adding fuel to the fire is the volatility in the global commodities market, said a Hong Kong-based banker at a European lender.
“It’s more about risk management right now,” he said. “We’re seeing Chinese loans getting sold to mostly Chinese banks. And foreign banks are rethinking some of their positions there.”
Favoured sectors for sell-downs are the steel, casino and property sectors, say bankers. For example, an outstanding loan for an Indian steelmaker is understood to have been recently sold down at a big discount in secondary, according to an Indian banker. But he declined to disclose the extent of the discount or the name of the borrower.
Though the market has picked up, there are plenty of challenges facing secondary loan bankers and traders. For starters, as the market is still very nascent, most of the data is anecdotal, making it difficult to assess real volumes, said bankers.
While there are some figures provided by intermediaries like SC Lowy, they don’t capture all the transactions. According to SC Lowy estimates, Asia’s secondary loan trading volumes are $3bn-$5bn annually — just 1% of the volume in the US, which is closer to $500bn.
Steep curve ahead
There are lots of banks looking to sell in the secondary market in Asia but the amount of trading is still not too high, said a head of loans. According to him, banks simply sell a piece of a loan to another bank, which typically holds on to it rather than selling to a third party and creating a liquid loan market.
Adding to the problem is the bilateral nature of the secondary market. Arrangers with active secondary loans divisions are in frequent contact with a diverse group of buyers to identify selling opportunities. Through word-of-mouth, information gets around to interested buyers that then get in touch directly with the seller.
This means the market doesn’t feature a real bidding process, with banks simply approaching other interested lenders with potential sales, said the Hong Kong-based banker.
But posing an even bigger challenge is the fundamental nature of the Asian loan market — where practical considerations can take a backseat in favour of a relationship. This can often lead to problems among the banks and borrowers if the reasons behind why the bank is selling are not well understood.
“[Selling a par loan] depends on the motivation of the selling bank,” said the secondary loan trading banker. “If they are working on something else for the company and need capacity, that’s obviously positive as it means the relationship is growing and the company must be doing well. But if the bank sells the loan to, say a vulture fund, then that would signal a problem and potentially destabilise the syndicate.”
Even in cases where the loan documentation doesn’t include provisions allowing the borrower to control how the loan is sold following primary, banks could still face pressure.
“It’s a tight-knit group of banks here. In the US, if they want to have a say, they will include it in the documentation but here you may face some scrutiny even if there is no provision in the documentation,” he added.