By Sudip Roy
The bank lending market is changing character, which is forcing both suppliers and borrowers to re-assess their strategies, according to a leading player.
David Fass, co-head of debt products at Deutsche Bank, says that corporates and financial institutions are no longer reliant on traditional bank providers. “There are many investors that are non-traditional players providing senior bank debt,” he says.
These new providers include hedge funds, CDO funds, CBO funds, funds of funds and other non-traditional investors. Spurred by the development of the credit derivatives market, these investors are offering borrowers an alternative flow of funds. “The whole development of the credit default swap market has opened the fixed income asset class to a new set of investors,” says Fass.
Traditional providers of bank loans, therefore, have to re-assess their ways of doing business. This is not to say that traditional bank lending is dying. The big commercial banks still dominate the industry; they are still the largest providers of capital. But things are changing.
Security
“The difference between the bank market of old and today is that in the past it was mostly a relationship-driven business, a very patient business, with buy-and-hold investors,” says Fass. “Now, the senior debt asset class is becoming treated more like a security. There is mark-to-market every day. The securities market philosophy is infiltrating the bank market.”
While this trend is most evident in the US, Fass says the emerging markets are not far behind. “This trend will take place in the emerging markets in short order,” he says. “It will first happen in Europe, then Asia and then Latin America.”
Many banks have already reacted and have reorganized. “From an emerging markets perspective, we've seen a growing maturity among funds providers,” says Fass. “They are digging deeper in the asset class in order to try and outperform.”
Corporates will also need to react, adds Fass. “Chief financial officers need to broaden their minds and their understanding of the hedge fund community. They need to spend time understanding the alternative funds providers that are emerging.”
The other thing they need to grasp, he adds, is that the days when corporates could vacillate over their funding strategies are over. “CFOs have to be prepared to take advantage of market opportunities,” he adds. “Those watchwords have never been truer. Sometimes those opportunities can last for only a few hours or days, not weeks.”
Pricing policies
One consequence of that, says Fass, is that corporates should not worry too much about pricing. “Access to capital is binary,” he says. “You either have it or you don't. Corporates should take money onto their balance sheets when it's available. The cost of capital at the margins should not be that important a determinant.”
That may turn out to be just wishful thinking from an investment banker. Pricing in the bank market is getting tighter on the back of improving fundamentals and a positive credit environment in most countries. In addition, the fact that corporates have a choice of the international and local bond markets as well as the local loan market means that they are almost able to name their price.
Certainly, that was the case earlier in the year, especially in Latin America. At the beginning of 2004, one-year loans for top corporates in Mexico were being done at margins of about 40bp over Libor, three-year loans at around 60bp and five years around 70bp to 80bp. Pricing is also getting tighter in Eastern Europe. In June, Russian energy firm Gazprom received a $300 million unsecured three-year loan at Libor + 275bp. Two years ago, it obtained a secured loan at Libor + 400bp.
Asia: Getting Over the Blues
By Nick Parsons
The Asian syndicated loan market is showing signs of recovery from the long after-effects of the Sars crisis in the first half of last year. Liquidity in the banking system is as powerful as ever, but at last issuers are stepping up to the plate again.
Although there had long been signs that Asian economies were bouncing back, the demand for investment capital that should fuel the loan market was lagging. Supply, as a result, massively under performed demand, as banks in Asia looked for new places to dump their piles of cash.
Now the deals are flowing again, but borrowers are still mostly having it all their own way – getting away with ever tighter pricing, looser covenants and, in many cases, without the need for banks to arrange their loans.
“The market has been very active recently,” says Mohsin Nathani, head of global loan products, Asia Pacific at Citigroup in Hong Kong. “There has been good deal flow from an opportunities point of view, but there has also been a very significant fee and pricing compression because of the competition among banks and because liquidity is getting stronger.
“There has been a lot of refinancing, some event or acquisition-driven financing and also a demand for new capital,” adds Nathani. “As a result, the volumes are increasing and will continue to do so for the rest of the year, partly because of the growing credit quality of borrowers in the region.”
Total loan volumes in 2003 (ex-Japan) were around the $90 billion mark. This year up to August, over $70 billion has been raised in the loan market, with bankers forecasting volumes of $110 billion to $120 billion by year-end.
Hong Kong confidence
As an illustration of how solid the market is for borrowers, Henderson Land was in the market in September with a loan that was scheduled to raise over HK$10 billion – one of the largest ever in Hong Kong dollars.
Hong Kong blue chips feel so confident about their funding prospects that they are self-arranging deals, which allows them to attract a broader range of banks and exert pressure on pricing. Kerry Properties, for example, handled a HK$7 billion revolving credit itself in June, roping in 16 banks in a coordinating arranger group that was more than twice oversubscribed. And this was a BBB- rated property company that was paying a margin of just 35bp over Libor for five-year funds.
Banks have followed the time-honoured route of seeking opportunities away from their core borrowers to get some yield: they have been going down the credit scale to mid-tier corporates and focusing on structures like leveraged buy-outs (LBOs). They have been pouring money into the newly opened market in India and – most surprising of all – they have been shuffling out of Asia altogether and begun investing in European credits.