The Asian loan market needs to move faster
Asia’s syndicated loan market has long been seen as slow – slow to close deals and slow to innovate, often taking inspiration from developments in the West before new structures arrive in the region months later.
There have been some changes over the past year, with issuers, investors and banks adopting new structures such as B term loans and unitranche agreements, pushing the market to new levels.
Yet Asian issuers and banks need to be more nimble and creative – issuers need to find the right funding options at the right time, and lenders need to take advantage of tough bond market conditions to win more customers.
Take the example of many Chinese borrowers who have recently asked banks for possible fixed rate loans rather than traditional variable rate loans to deal with the Federal Reserve’s interest rate hike. Or the fact that some mainland companies are trying to prepay their loans and replace them with new deals with longer maturities.
While certainly thinking out of the box, it may be too little, too late for these borrowers.
On the one hand, interest rates are already much higher than six months ago – the Fed raised rates by 25 bps last month to a range of 0.25% to 0.5%, its first since 2018 – when borrowers should have started taking a closer look at their debt maturity profile and got ahead of rising rates.
Their approach to finding fixed loans will also not sit well with banks, whose funding costs remain at floating rates, meaning they will have to hedge their fixed-rate loan exposures.
Early repayments could improve the look of borrowers’ balance sheets, especially if they hold back on capital spending amid the recent spike in Covid-19 cases in major cities Shanghai and Beijing. This means that savvy borrowers could now issue longer-term loans to secure a relatively lower interest rate and pay off outstanding loans with new money.
Whether they actually go ahead with those sorts of deals is another question, though. Many bankers said the deals were only being discussed, with issuers preferring to take a wait-and-see approach before pulling the trigger.
This, however, may be a mistake. Banks and issuers need to show they are nimble in the face of rapidly changing market conditions and step up to meet their funding needs. If the first four months of 2022 have taught markets anything, it’s that volatility – whether driven by geopolitics, China’s housing bond crisis, or rout in tech stocks – is never too far. Being prepared is the key.
While borrowers must be brave, banks must also be prepared to make bold calls when needed and offer customers timely advice. The depth of liquidity in the Asian loan market certainly helps their case.
The slowness of market participants is also visible in other ways.
Take a recent survey by the Asia Pacific Loan Market Association (APLMA) on the move from Libor to the guaranteed overnight finance rate, which replaced Libor from this year. APLMA found that although Sofr has officially succeeded Libor, it will take at least a year to remove references to Libor from all existing loans in Asia Pacific.
After surveying 90 institutions among APLMA members, only 8.2% said they could complete legacy book remediation in the first half of this year, while 37.7% said the process would be completed in the first half of this year. by the end of 2022.
More than half of respondents said they expect to complete the remediation process on existing loans in the first half of 2023. The delay is mainly due to a lack of consensus in Asia on how best to calculate the new risk-free rate: whether to use the term Sofr, capitalized Sofr in arrears or simple daily Sofr. By comparison, the US market has already adopted the term Sofr, while in the UK and many other markets regulators favor capitalization methods.
Banks and regulators in Asia need to show a united front on this to speed up the transition process before it is too late.
As volatility increases globally, the challenges facing loan market participants will only increase. Being nimble and nimble in decision-making could go a long way.