Bank of the Lao People’s Democratic Republic (BOL) is creating a buzz among loans bankers with its maiden international syndication. It is understood to have approached the arrangers directly, mandating First Commercial Bank and Cathay United Bank to lead the fundraising.
BOL is looking offshore to kick-start new relationships with commercial lenders, said sources close to the situation. Laos has relied on concessional loans from agencies such as the International Monetary Fund in the past, and is keen to diversify.
But the diversification comes with a caveat, with BOL focusing mainly on Taiwanese banks to distribute the four year loan.
“They already have relationships with many [non-Taiwanese] lenders, so that’s why they are focussing on Taiwan for this syndication,” said a senior banker familiar with the trade.
BOL is understood to have given the bookrunners a list of lenders to avoid approaching, as those banks already have strong relationships with the central bank. Having previously obtained bilateral loans from numerous lenders in countries like China, Thailand and Vietnam, the central bank is now looking to Taiwan to open up a fresh pool of liquidity, added the banker.
The strategy is well founded as Taiwanese lenders, particularly those with state backing, are increasingly being encouraged by their ministry of finance to step up operations and deployment of capital in southeast Asia and south Asia.
This is not only because of limited growth opportunities at home, but also down to the pressing need to diversify away from Chinese borrowers, which have typically been a big part of the portfolio of Taiwanese banks.
“The authorities are urging us to increase exposure [southeast Asia] and open branches,” said a Taipei-based banker at a state-owned lender. His firm is strongly considering joining the syndicate for the Laotian loan, he added.
But a banker at a privately-owned lender in Taiwan was less convinced about the benefits of signing up for BOL’s transaction.
“It is quite hard to review this credit,” he said. “How strong are they when it comes to supporting dollar liabilities? But if you believe in its potential as a developing country, you would be willing to take a position. And as far as I know, there has been no default [on external debt before].”
Analysing risk
The traditional method of studying cash flows would not suffice for assessing the central bank's credentials, said one banker. “We have to investigate the country’s economic indicators,” he said. “Although the central bank is the borrower, it would be pointless to study its balance sheet. They can print money. So the GDP and forex reserves are more relevant.”
Laos had a gross domestic product of $11.77bn in 2014, a 7.5% rise, according to data from the World Bank. The supranational expects the country to grow by 6.4% this year and by 7% in 2016 and 2017.
Its foreign reserves at the end of the first quarter of 2015 were $945.97m, up 16% from the previous quarter and enough to cover about 4.18months of prospective imports, according to BOL data. Excluding grants, the current account stood at a negative $212.28m during the first quarter.
Although the Laotian sovereign is not rated by international agencies, it has tapped overseas investors several times in the past. Most recently, it made its fourth foray into the Thai baht bond market in June, opting for a private placement to issue its biggest bond yet and debut in a 10 year tenor.
Banks are relying on information provided by Thai ratings agency, TRIS, which assigned the sovereign an issuer rating of BBB+ and its June Bt12bn ($356m) senior unsecured bonds a rating of BBB+ stable.
“The ratings reflect the strong growth rate of the nation’s economy,” a TRIS statement said on June 10. “The ratings also reflect an abundance of natural resources, the increasing of government revenue from the hydropower sector, the government commitment to modernise the economy and alleviate poverty.”
However, the country’s ability to service foreign debt vis-à-vis its foreign exchange reserves has emerged as one of the main concerns among some bankers looking at the central bank’s syndication.
An IMF report published in February 2015 said Laos has a highly vulnerable external position, with international reserves not providing enough cover in case of any external shocks.
“While FDI and long-term loan inflows are robust, particularly for export-oriented resource projects, the portion of the current account deficit financed by other, traditionally more volatile flows remains high at 7% of GDP,” the IMF said.
Nevertheless, some participants draw comfort from the fact that the BOL has no immediate repayment risk, and the country’s growth potential is very high.
Open sesame
BOL’s loan is open to participants at three levels. Senior mandated lead arrangers joining with commitments of $15m or more earn an all-in of 448bp, MLAs committing $10m-$14m earn an all-in of 445bp and arrangers committing $5m-$9m earn 442bp. This is based on a margin of 435bp and an average life of 3.4 years.
There is an early bird fee of 5bp if banks submit their commitments by early November, said a banker who has received the invitation. But there is no hard deadline for early bird commitments.
More than 10 lenders attended a bank meeting in Taiwan last week and feedback is expected over the next two weeks, with closing slated for the end of November. A visit to the central bank is also planned, but the date of the visit was not disclosed.
BOL will use the new loan to support infrastructure development in the nation and also to maintain liquidity. Calls to the central bank were unanswered by press time.