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Tuesday, 18 June 2019

Chasing the heat

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Prospects for the South-East Asian loan market remain strong even after a sharp decline in pricing, as yield-hungry lenders look to new markets to boost their returns.

Despite a slow start to 2015, South-East Asia is still seen as one of the hottest regional loan markets in Asia Pacific after a stellar 2014. Although each emerging economy has a story to tell – not necessarily one of rapid growth – together they present a wide spectrum of borrowers for the region’s liquid lenders to chase.

The region’s total annual loan volume stood at US$89.39bn involving 196 deals in 2014, a 12.5% increase from 2013’s US$79.44bn via 190 deals, representing a 17% market share in Asia Pacific. Both Singapore and Malaysia saw volumes soar to record levels, and Indonesia’s number also surged to the highest since 1997.

The three countries are still the ones to watch for the year to come, market players say, even if loan volumes in the 10 ASEAN countries combined reached just US$4.8bn as at end-February, only 25% of the first-quarter level in 2014. The region’s pipeline finally started to swell in early March as banks came back from Lunar New Year holidays afresh and charged ahead with a string of high-profile names.

In Singapore, casino operator Resorts World at Sentosa returned with a S$2.25bn (US$1.66bn) dual-tranche five-year financing. Last year, Marina Bay Sands, its only rival in the city state, sealed the largest deal of the year in an amendment-and-extension exercise on its S$5.1bn refinancing signed in June 2012.

The commodity sector, which made up nearly a third of Singapore’s volume in 2014, is heating up and again arousing just enough market chatter, with Gunvor and Noble Group kicking off their annual refinancing loans. Gunvor has just walked out of the sanction shadow and is targeting a bigger group of banks, while Noble Group has been caught up in a battle with Iceberg Research on allegations that the trader employed improper accounting rules to inflate its commodity holdings.

M&A and event-driven financings, a major contributor to the region’s loan growth in 2014 amounting to 17% of the total volume, continue to excite the market.

The business empire of Thai billionaire Chareon Sirivadhanabhakdi has already brought to the table three transactions totalling around US$2.5bn, stretching paws into Vietnam and Australia. Potential deals worth around US$4bn from Singapore names are also expected to add to the market frenzy later this year.

“Singapore will have some interesting deals. Indonesia started slow, but will pick up. M&A and event-driven deals should still be on the rise,” said Boey Yin Chong, managing director and head of syndicate finance at DBS Bank. “The only problem is pricing, which is still a challenge.”

Abundant liquidity and a bullish bond market have led to a downtrend in loan pricing over the past year. Across the region, regular borrowers priced loans 25bp–55bp below previous levels in 2014, as retail lenders struggled to find deals that could meet their funding costs.

“Pricing tension will make it more difficult for some retail banks to participate in investment-grade transactions, so you have to be prepared not to rely on retail lenders all the time,” said Wayne Green, head of loan syndicate and sales Asia Pacific at BNP Paribas. “Investment-grade names continue to lean towards club transactions as they have access to a core group of relationship banks.”

Market-savvy borrowers have done well, playing between bonds and loans.

This month, Malaysia Airports Holdings exercised Asia’s first reverse flex in 18 months on its €500m (US$556m) seven-year loan after a strong response from the market. The 25bp reduction, however, is unlikely to deter lenders’ appetite as the 256bp–260bp all-ins are still fatter than other facilities for top-tier names in the region, which are mainly priced in the low to mid-100s.

Last June, Singapore-listed Gallant Venture took another dramatic approach to cut to US$166m the size of its US$410m dual-currency three-year acquisition refinancing and dropping 19 of the 23 lenders that committed to the transaction, after two successful bond issues.

However, tides are changing, according to Bryan Liew, managing director and regional head of loan syndications ASEAN at Standard Chartered Bank, as bonds are getting more expensive for non-investment-grade names, as a default on Chinese property developer Kaisa Group’s US$2.5bn of offshore bonds looms large.

“(In 2014) we saw non-IG bonds priced much tighter than syndicated loans; in certain cases, 100bp–200bp inside which is an anomaly,” Liew said. “(This year) bond spreads have gone the other way round. For the non-IG borrowers, bonds will now cost 100bp–200bp more.”

Another factor is the bond-yield curve, which is currently steep in the longer-dated end. That makes a floating-rate loan, which resets every three or six months, much more cost efficient than a fixed-rate long-term instrument, Liew said.

“It is quite likely that we will see a rejuvenated loan market for more credit-intensive issuers in the next four months – mid-cap, non-IG names and they form the bulk of the corporations from Indonesia, Malaysia and the Philippines. For a lot of non-IG names, the loan market will be the most viable option.”

Demand from such kind of borrowers has also attracted one of the region’s strongest pools of liquidity – the Taiwanese lenders, which have stepped up in more leveraged deals outside the plain vanilla segment and are starting to take on mandated lead arranger and bookrunner roles, especially in higher-yield names, Boey at DBS observed.

Three Taiwanese lenders joined the recently launched US$580m dual-tranche leveraged refinancing for Singapore-based disk-drive parts maker MMI Holdings, among a 10-bank lead group.

Cathay United Bank in mid-February also launched a US$100m–$150m five-year amortising loan for the Joint Stock Commercial Bank for Investment and Development of Vietnam as sole MLAB.

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