Bilateral loans: sound on paper, challenging in reality
Asian borrowers are showing growing interest in sealing multiple bilateral loans over syndicated deals in a bid to save time and funding costs. But while one-on-one fundraising exercises make sense in the current market environment, issuers should be wary about abandoning syndication entirely.
Loans bankers in Asia are seeing a change in the market. Many senior syndication bankers who spoke to Globalise Asia in the past week said there is growing demand from firms that would traditionally do a syndicated deal for bilateral facilities instead.
Banks’ abilities to tap into their balance sheets for chunky loans amid low deal flow, plus borrowers’ desire to save time and money with bilateral deals, have triggered the shift. The fact that syndication timelines have got longer in the past year owing to due-diligence challenges during the pandemic have only boosted the appeal of bilateral loans. Most discussions are private, and bankers have been tight-lipped about the borrowers ditching syndicated loans for bilaterals, but there is plenty of chatter in the market about these changing dynamics. For instance, there is growing speculation that Jardine Matheson may opt for multiple bilateral loans to fund a restructuring of its business.
The advantages for borrowers opting for multiple bilateral loans are clear. On paper at least, they can save on syndication fees, while getting the money relatively quickly compared with a fully-fledged syndicated deal.
But firms looking to ditch syndication for bilateral loans should realise that the reality is quite different.
For starters, multi-bilateral loans may not actually save as much time as borrowers expect.
Many believe syndicated loans are taking longer to wrap up because they require two rounds of banks getting internal approvals — first bookrunners and then the participants during general syndication — while bilateral loans only need one round of sign-offs.
But bilateral loans can be equally (if not more) time consuming, given the negotiations needed between borrowers and each bank. For bilateral loans, borrowers discuss loan terms with each lender and sign separate contracts. That can be more time consuming compared with syndicated deals, where companies only reach out to a small group of bookrunners and let them arrange the rest of the process.
Second, lower costs associated with bilateral deals come at the expense of the breadth of services offered.
For instance, if the borrower plans to make amendments to a syndicated loan, the facility agent will deal with the syndicate team and the related paperwork. For bilaterals, the corporate treasurers need to hold one-on-one discussions with each of the lenders.
Bilateral deals also restrict borrowers’ abilities — especially relatively new credits — to boost their relationship with a larger consortium of banks. This may not be an issue when market conditions are strong, but it can pose a hurdle if liquidity is thin and existing lenders are reaching their maximum lending capacity for a particular credit.
From a long-term perspective, borrowers may not be able to rely on their bilateral relationships if banks’ lending appetite changes once the pandemic crisis abates. Also, when international travel resumes, banks will naturally start to build new client relationships, meaning some of the existing thinly-priced bilateral relationships may be less of a priority.
If there is one thing the pandemic and past financial crises have taught markets, it is that funding conditions can change very quickly, and having access to numerous fundraising avenues is necessary to maintaining business stability.
Bilateral loans over syndication may be the flavour of the month, but borrowers should be aware it could leave them with a sour taste.