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Asia CommentGC Asia View

Asia’s loan market needs to move faster

Hong Kong

Rising volatility and increasing funding costs mean the loan market’s traditional way of working needs to change quickly

Asia’s syndicated loan market has long been considered slow-moving — slow to close to deals and slow to innovate, often taking cues from developments in the West before new structures trickle over to the region months later.

There has been some change in the past year, with issuers, investors and banks embracing new structures like term loan Bs and unitranche deals, pushing the market to new levels.

Yet, Asia’s issuers and banks need to be more nimble and creative — issuers to find the right funding options at the right time, and lenders to take advantage of tough bond market conditions to win over more clients.

Take the example of many Chinese borrowers recently requesting banks for possible fixed rate loans rather than the traditional floating rate loans to navigate rising interest rates from the Federal Reserve. Or the fact that some Mainland firms are trying to repay loans early and replace them with new deals with longer maturities.

While certainly thinking out of the box, it may be a case of too little, too late already for these borrowers.

For one, interest rates are already much higher than six months ago — the Fed hiked rates by 25bp last month to a range of 0.25% to 0.5%, its first since 2018 — when borrowers should have started taking a closer look at their debt maturity profile and got ahead of the rate rise.

Their approach to look for fixed loans will also not appeal to banks, whose funding costs remain in floating rates, meaning they will have to hedge their exposures on fixed rate loans.

Early repayments could make borrower’s balance sheets look better, especially if they are holding off on capital expenditure amid the recent spike in Covid-19 cases in the major cities of Shanghai and Beijing. This means savvy borrowers could issue loans with longer tenors now to lock-in a relatively lower interest rate and repay outstanding loans with the new money.

Whether they are actually going ahead with these kinds of deals is another question, though. Many bankers said these transactions are only being discussed, with issuers preferring to take a wait-and-see approach before pulling the trigger.

That, however, may be a mistake. Banks and issuers need to show they are nimble to rapidly changing market conditions and take the plunge to tackle their financing requirements. If the first four months of 2022 have taught markets anything, it’s that volatility — be it due to geopolitics, China’s property bond crisis or the rout in technology stocks — is never too far away. Being prepared is key.

While borrowers need to be brave, banks should also be ready to make daring calls when needed and offer clients timely advice. The depth of liquidity in Asia’s loan market certainly helps their case.

The sluggish of market participants is visible in other ways too.

Take a recent survey conducted by the Asia Pacific Loan Market Association (APLMA) about switching out of Libor and into the secured overnight financial rate, which replaced Libor beginning this year. APLMA found that despite Sofr having officially succeeded Libor, it will take at least a year to remove references to Libor from all existing loans in Asia Pacific.

After polling 90 institutions among APLMA’s members, only 8.2% said they can complete the remediation of the legacy book in the first half of this year, while 37.7% said the process would be completed by the end of 2022.

Over half of the respondents said they expect to complete the remediation process on existing loans in the first half of 2023. The delay is mainly due to a lack of consensus in Asia on the best way to calculate the new risk-free rate: whether to use term Sofr, Sofr compounded in arrears or daily simple Sofr. In comparison, the US market has already embraced term Sofr, while in the UK and many other markets, regulators are in favour of compounding methods.

Banks and regulators in Asia need to show a united front on this to hurry along the transition process before it’s too late.

As volatility increases globally, challenges facing loan market participants will also only increase. Being nimble and agile around decision making could go a long way.

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