Asia Loan Market: Hard Times Ahead
The flow of deals in the Asian syndicated loan market has started slowly in 2021, with many bankers saying GlobalCapital Asia that their pipelines are emptier than in years past. Firms battling Covid-related pressures have put capital raising on the back burner, while origination hurdles posed by travel restrictions have left many lending offices with little visibility into transaction mandates.
It would be bad enough for the loan market, but the worst is probably not over. Banks will face many tests for their lending business this year – tests that will show their commitment to customers and shed light on the strength of the region’s syndication market.
Take the prices: Strong investment-grade credits that have long benefited from extremely low prices on their transactions continue to maintain tight margins, forcing banks to reconsider their relationships with certain customers over the yields offered. Chinese technology group Tencent Holdings, for its part, is offering 80 bps above Libor for margin and 85 bps all-in for a five-year, $6 billion club loan it is seeking.
Although pricing is in line with the company’s last loan sealed in 2019, the circumstances are dramatically different this time, amid a global pandemic and a more conservative lending strategy at many banks. A handful of relationship banks invited for Tencent’s deal have already said so GlobalCapital Asia they’re likely to miss it because the economy just doesn’t make sense.
Chinese conglomerate Fosun International has also cut prices on a $560 million loan it floated on the market last week.
The general consensus is that prime borrowers will continue to keep funding costs low this year as they seek to take advantage of asset-hungry lenders in an environment of weak deal flow.
How many banks will join these deals? This remains to be seen, but there will certainly be intense internal negotiations over the priority of returns over customers or vice versa, particularly in cases where the possibilities for ancillary activities are limited.
Chinese banks will also face an additional hurdle, due to new regulations on lending to the country’s real estate sector. The Chinese government, which last August tightened financing conditions for property developers with its “three red lines” policy, recently imposed a cap on bank lending to property names.
The regulations, implemented on January 1, require the six major state-owned commercial banks – Agricultural Bank of China, Bank of China, Bank of Communications, Construction Bank of China, Industrial and Commercial Bank and Postal Savings Bank of China – as well as the China Development Bank, to maintain their ratio of outstanding real estate loans to total loans at 40% or less.
The level was also tightened for other banks, depending on their size. Although the rules appear to apply only to renminbi-denominated loans, some bankers have said their offshore lending to the property sector is also coming under scrutiny.
That means Chinese banks, which have long been the main source of cash for mainland property developers seeking dollar loans, will either have to forgo new deals or sell their exposures in the secondary market. They will have to decide which businesses to keep and which to drop to meet the new regime.
Banks aren’t the only ones likely to face big decisions about their loan portfolios this year. Borrowers and their relationships with lenders will also be under pressure.
Since last year, there has been a growing demand for club loans, which help borrowers avoid additional costs associated with underwritten commitments or syndication, and have a shorter lead time than full syndications.
Bankers expect this borrower preference for club loans to continue into 2021. But while it makes sense in the short term, it won’t be a sustainable fundraising avenue for businesses in the long run. . By frequently opting for club loans with relationship banks, companies risk losing the larger pool of liquidity from smaller lenders and therefore their support for larger fundraisings in the future when their business rebounds. .
It will likely be a big test year for bank lenders. Their responses will provide insight into the trajectory of the lending market. They will also shed light on the long-term survival and resilience of the market.