Royal loan default is a time for introspection
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Royal loan default is a time for introspection

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Royal Industries Indonesia rattled the loans market last week when it failed to pay the first principal instalment on a $380m deal signed in June 2015. The incident has caused consternation among participating banks, with many being quick to blame the bookrunners on the trade. But this should be a wake-up call to lenders, who need to re-examine their internal approval procedures.

Agro-industrial company Royal Industries, which raised a $380m loan in June last year, was unable to pay the first principal instalment that was due this month, GlobalCapital Asia  reported last week.

CTBC Bank, Deutsche Bank and First Gulf Bank were the original mandated lead arrangers and bookrunners, with Indonesia Eximbank coming in at the top level but not as an active bookrunner.

Royal’s woes were down to a liquidity crunch caused by a clutch of unfortunate circumstances — one of them being its suppliers’ reluctance to extend credit, forcing it to dip into its cash reserves to pay the advance.

Following a conference call organised by facility agent Deutsche Bank at the end of last week, the mood among participant banks that GlobalCapital Asia spoke with was understandably subdued. And it was all the more difficult for them to digest the news given they had received no sign or notification from the borrower in advance that a default could occur.

The frustration among participating banks is understandable. And some have been quick to say that the MLABs should have done a more thorough job in analysing the borrower’s credentials before putting together the syndicate.

But here is where their thinking is wrong. And the Royal affair is yet another example of the differences that often crop up between participants and arrangers when loans don’t go well.

Of course, such situations are far from desirable, but unity in the syndicate is usually in the best interests of all the banks.  Although it is natural to feel wronged, participating banks should note that while the MLABs have more control on the transaction, the participants are willing lenders on trades.

While it is fair for them to rely on the information memo provided by the MLABs; that can only serve as a starting point. Incoming banks also need to be meticulous in their own research and due diligence of the borrower, its financial structure and management. What is not fair is for syndicate members to put the blame on the MLABs if things go awry, especially if it is due to unforeseen circumstances.

Also in this case, those at the top have plenty of skin in the game. The MLABs were allotted $40m each at the end of syndication last year, while Indonesia Eximbank took $100m. It’s worth remembering that the leads will pay a far heavier price in the loss of reputation and trust that follows any kind of default. This is why they spend a significant amount of time and energy on cementing relationships with other financial institutions during the syndication process.

Loan documentation clearly states that banks have done their own research and independently decide to commit to a deal. If certain lenders do not have the resources to carry out as through a due diligence process as they would like, then they may be better off giving the loan a miss.

While that does mean fewer assets in their books, it would also lead to fewer possibilities for non-performing loans. And in turn, fewer instances of playing the blame game.

The truth is that things can go wrong. But when they do, passing the buck is counter-productive. Complete transparency while working together to find the best solution for the syndicate and the borrower should be the priority. Finding a scapegoat is not.