Emerging market borrowers signed around $3.7tr in loans in the first quarter of the year, a leap of $267bn from the previous quarter and by far the largest quarterly increase on record, according to data this week from the Bank for International Settlements (BIS).
That borrowers have such access to credit and are getting more willing to use it is great news. But the price lenders have had to pay to coax those borrowers back into the market is beginning to look far too high.
Last year saw the lowest loan volumes in CEEMEA since records began. Signed deals totalled just $639.4bn for the entire year, down by 40% from 2011. Even seasoned loans bankers began to sound increasingly unconvincing towards the end of the year when they talked of the market being in a cycle that would hopefully end soon.
So it has been heartening to see volumes bounce back in early 2013. Asia accounted for much of the spike, with 45% of all cross-border loans to emerging markets in Q1 being through Asia Pacific borrowers, according to the BIS data.
But CEEMEA borrowers did their part too. Russian firms borrowed $29bn more in Q1 2013 than they did in the final quarter of 2012 — Russia’s largest quarterly increase on record.
But a huge whack of Russia’s total comes from oil firm Rosneft’s $31bn TNK-BP buyout facility that signed in two tranches in January and February. And sure enough, this deal was the first indicator of the sacrifices banks would have to make to kick-start the loan market this year.
Tough beginnings
Amid much lender outcry, Rosneft trimmed 10bp off the margin of the $14.2bn second tranche compared to the first tranche, bringing it down to an eye-watering 200bp. At the time, bankers said they despised lending at that price but that there was no way they were prepared to sacrifice the relationship for the sake of 10bp. Fair enough, perhaps, for a one off mega-deal.
But fast forward to the beginning of September, and fertiliser firm EuroChem gets its debut unsecured loan away at 185bp. This is the same price it paid for a pre-export finance facility and 30bp less than higher rated comparable firm Uralkali paid for a PXF just months earlier.
Two relationship banks revolted, turning down the deal and leaving EuroChem’s inner circle. But most bankers just said they hated lending at those terms but that there was no way they were sacrificing the relationship because of cheap pricing. Sound familiar?
It’s not just Russian borrowers that are pushing banks to breaking point. Turkey posted an increase in loan volumes of $7.1bn (3.9%) in Q1 2013 compared to the last quarter of 2012, which was entirely driven by Turkish banks borrowing more money.
Turkish banks, long seen as masters of negotiation in the loan market, have slashed 60bp off the price they paid for their one year loans this time in 2012. There are even fears brewing that when Garanti comes for its November loan, the 75bp all-in benchmark could be reduced by up to 7.5bp more.
You won't find many lenders arguing for activity to fall. But they are running the risk of backing themselves into a corner if they keep agreeing to increasingly demanding terms from borrowers. It might soon be time to take the power back.