The return of Asia's loan market

IFR Asia 977 - February 4, 2017
6 min read
Asia

Things are looking up in the Asian loan market. I spoke on the phone last week with a veteran loan banker, an old friend, who informed me over the background noise of a bar in Hong Kong’s Lan Kwai Fong that syndicated lending is back in business after a lull of around two years - using rather colourful language that might have emerged from the mouth of the newly elected American president.

A variety of elements are at play, including some refinancing, acquisition and event-driven deals, and the willingness among banks, including the Chinese and the French, to put balance sheet to work. It is hardly an unrestrained bull market, he cautioned, but it was better than the sleepy morass of the past few years and a welcome change.

One thing hasn’t really changed since I first started writing about Asian loan markets a decade and a half ago: loan margins are still compressing and no loan banker really imagines they are getting the full bang for their buck. Plus ca change there, but it’s better than dusty silence.

The loan market I am referring to in Asia is the one that has remained largely unchanged in terms of structure, outlook, and - in many of the highest echelons - staffing, since the early days of this century. It has a faint post-colonial feel, involving as it does cross-border lending, largely in US dollars.

Those who appreciate nostalgia will be pleased to know that the same old hands are in charge of the game in Asia, and that they are not charging very much more for their balance sheet than they were in the years following the Asian financial crisis, when spreads over Libor quickly reverted to their pre-crisis parsimony.

THERE ARE SOME differences, of course. The Chinese banks are the new kids on the block, with a willingness to ease up on covenants and bid low for new business. We’re too early in the cycle to work out whether that is a prudent growth strategy or errs rather too much on the side of aggression, although I certainly have my own view. Whatever your belief, there’s no doubt these new players will be here to stay for the forseeable future.

And, as I have written only recently, the once-moribund secondary loan business in Asia is adding something of a frisson, as par and high-yield loan trading has suddenly become a hot commodity.

The corollary might be that the region faces more default risk than it has done since the late 1990s, hence the willingness of some parties to reassign paper, but there’s no doubt that people are making a living from this business and in my opinion the existence of a market is better than no market at all.

There are also some nice diversions which weren’t there before: the existence of the Asian Infrastructure Investment Bank is one, which aims to mobilise more commercial balance sheets across Asia. Admittedly the AIIB hasn’t really got itself involved yet in the business of fully syndicating loans, but it has created goodwill by teaming up with its supposed arch-rival, the Asian Development Bank, to finance regional infrastructure projects.

The AIIB’s arrival can only compress floating-rate spreads further, and regional loan bankers complain that the coming wave of soft lending will lower the bar for the more hard-headed of the industry’s banking professionals. We shall find out if that hold true in due course.

THE LOAN PRODUCT should indeed be coming back into favour, now that we are on the cusp of rate normalisation from the Federal Reserve and the supposed reflation of the US economy thanks to “Trumpenomics.”

If I were managing money, I wouldn’t mind putting some loan paper in there to capture that cycle without the duration risk which comes from fixed-income paper, even if my entry point had been recent, after the Treasury bond yield rise which heralded Trump’s election victory.

Indeed, it might be that a return - of sorts - to the glory days of banking is upon us. Banks make decent money when the yield curve is positive sloping, for the simple reason of carry, whereas they bleed money when the yield curve is negative. That’s one reason. Another is that, in absolute terms, a higher Libor rate means a higher return on capital, even when hedged through the interbank market.

So I’m wondering if the “locker room” comments of one old Asian hand might herald a kick in the vitals for loan banking, not just in Asia but globally.

In any case - and here’s an amusing diversion - one piece of recent activity includes a chunky loan, currently in syndication, for the buyout of McDonald’s in Asia by China’s state-owned Citic and its partners.

We learned recently that America’s new commander-in-chief survives on a diet with the Golden Arches at its core. Given Donald Trump’s take on China, it will be interesting to see if he sticks with his regular intake of Big Macs on his first trip to the region as US president.

Jonathan Rogers