Asia’s debt market has long seen a battle between club and syndicated loans, as GlobalCapital has reported on multiple times before. Club deals are most prominent during rough market conditions, when borrowers find comfort in simply turning to their trusted banks to offer them funding.
It has been a similar story in the past two-plus years.
Since the outbreak of the pandemic, club deals have gained popularity over syndicated loans due to market volatility. That only got a further fillip this year with the US Federal Reserve’s interest rate hikes and the war between Russia and Ukraine adding more risks to the market.
The rationale is clear. Club loans can help borrowers save time and cost, by avoiding a full-fledged syndication and paying related fees. Banks, on the other hand, can still put their balance sheets to work and get paid without the need to skim fees.
Only companies seeking large loans and less concerned about market risks are choosing to syndicate deals, GlobalCapital Asia understands. Additionally, those seeking funding for the first time are opting for syndication over clubs.
Clubs, on the other hand, continue to remain the avenue of choice for many firms, riding on their credentials and ties with relationship banks.
But such borrowers would be wise not to put all their eggs in the club basket. Diversified funding sources could come in handy in the future.
Asia’s bond market, for instance, continues to be buffeted by volatility. While deal flow is slowly picking up, many borrowers, especially those rated high yield, are still shut out of the market. Many of those are increasingly testing appetite among bank lenders for funding.
If those deals materialise, it means deal flow will pick up in the loan market in the second half of the year.
More deals mean more business for lenders. They also, however, mean a supply rush that could make banks choosy about the credits they lend to.
Having a diversified roster of bank lenders will benefit borrowers in such a situation. Whether it is the risk of lack of appetite due to thin pricing, or concerns around too much exposure to one credit, a bigger pool of lenders will come to the rescue.
After all, it is never bad to have more friends. The same theory applies to the loan market.
What if your relationship with relationship banks becomes cooler? What if the banks change their lending strategies and your business becomes less a priority? Or what if they are simply facing a glut of supply and need to be selective on the clients they choose? Borrowers need to think these questions through.
Being nimble, agile and savvy enough to diversify financing channels can go a long way. It will even help borrowers have the upper hand on the pricing negotiation table. This is one time in the market cycle when being an overzealous borrower can pay off.