Now is the time to reassess the Asian loan market
The Asian syndicated loan market has held up this year, amid a sell-off in the region’s US dollar bond market, declining risk appetite, higher interest rate environment and worries about inflation and growth.
G3 foreign currency lending in Asia excluding Japan stands at $77.2 billion across 159 deals so far this year. That volume tops the $74 billion seen this time last year, while the number of deals is slightly lower than the 172 seen in 2021, according to Dealogic data.
By comparison, G3 bond volumes in Asia ex-Japan fell to $176.7 billion — down about 45% year-on-year — while the number of deals also fell 32%, according to Dealogic.
The gutting of the debt market is due to a host of factors: rising US Treasury yields are making funding more expensive; geopolitical volatility; growth concerns, including China’s zero Covid approach; a real estate crisis in mainland China; and rampant defaults and missed bond payments by Chinese developers.
On the other hand, loan bankers who have long touted the benefits of the syndication market have been vindicated. This year, its liquidity, stability, resilience and relatively slower reaction time to global market upheavals were highlighted.
There were challenges, of course. Syndicated loans take much longer to close because participating banks do more due diligence. And, as high-yield names shut out of the bond market turn to bank lending, lenders are becoming more selective about which credits they will lend to and are demanding higher prices on transactions.
One of the attractions of the Asian loan market is the extremely thin margins that many borrowers can get away with. While this year’s interest rate hikes by the US Federal Reserve are making bonds more expensive for issuers, in Asia the rise in loan prices is a long time coming.
Bankers say that despite many major lending houses seeing spikes in their funding costs in the second quarter, many did not pass them on to borrowers for fear of missing out on deals.
For example, the overnight financial rate (Sofr) rose from 0.3% on April 1 to 1.5% at the end of June, and stood at 3.05% on Monday. Recently, there have been marginal increases in the pricing of some Asian US dollar loans that are in line with Sofr’s hikes, but these have not been significant enough to suggest that a broader review is underway.
But such a repricing could be good for the syndication market. Currently, bookkeepers get lower returns unless they get ancillary business from borrowers.
As lending becomes more popular, borrowers have access to fewer financing tools, banks have more pricing power that they could leverage. Slightly higher loan costs are unlikely to deter borrowers who are cut off from other sources of funding, especially those who need to refinance their debt. 2022 has already seen some companies abandon the US B term loan market due to volatility and turn to the Asian bank loan market.
Of course, the Asian loan market is not homogeneous. And lenders are taking a binary attitude towards borrowers, syndicating stable names while offering alternatives to riskier ones.
But now Asian banks are in a position where they can demand higher returns for their underwriting risks. They should find their voice and do it.