Asia Syndicated Loans Slide to Two-Year Low as Club Deals Rise

Syndicated lending in Asia fell to the least in two years in 2012 as companies use their bank relationships to strike cheaper bilateral or club deals in the private market.

Lending volumes in the Asia-Pacific region outside of Japan slumped 17.6 percent to $376.4 billion last year from $456.8 billion in 2011, according to data compiled by Bloomberg. Average interest margins for dollar-denominated loans increased 15 basis points to 273.6 basis points, versus a rise of 40 to 351.8 in the U.S., where the decrease in syndicated debt was a smaller 14.8 percent.

At the same time as the economy slows, reducing companies’ willingness to make new investments and expand, higher-rated borrowers in Asia are finding that reverting to loans which aren’t marketed to a wider group of banks in syndication is a more competitive source of funding. The rise of Japanese and Chinese bank participation in some parts of the syndicated market meanwhile is reducing costs, with other lenders forced to match lower rates or bow out of transactions.

“High-grade borrowers are turning maturing facilities into bilateral loans because they can leverage their relationships to get better pricing and more favorable terms,” Priscilla Lee, the head of northeast Asia loan syndications at Bank of Tokyo-Mitsubishi UFJ Ltd., said in a Dec. 14 interview. “Many don’t care to go to the syndicated market.”

Missing Borrowers

Hutchison Telephone Co., a unit of phone carrier Hutchison Telecommunications Hong Kong Holdings Ltd., is paying an interest margin of 160 basis points more than the Hong Kong interbank offered rate for a HK$5.5 billion ($709.6 million), three-year club loan it signed in June, Bloomberg data show. That’s 121 basis points less than the average interest margin for syndicated dollar loans signed in Asia outside of Japan last year.

Hong Kong realtors Sun Hung Kai Properties Ltd. and Henderson Land Development Co. were missing from the city’s syndicated financing market in 2012 having sought Hong Kong dollar-denominated loans almost annually over the past decade, according to data compiled by Bloomberg. Sun Hung Kai borrowed in the city’s currency every year since 2002 except 2009, while Henderson Land completed six deals since 2003.

Sun Hung Kai’s only loan in 2012 was a 2.7 billion yuan facility ($433.4 million) arranged by Bank of China Ltd., the data show. The company also sold about $1.04 billion-equivalent of bonds. Henderson Land meanwhile borrowed about $946 million-equivalent in the bond market. Its $700 million of 4.75 percent securities due 2017 and sold in February are yielding 2.953 percent, from 4.872 percent at issue, Royal Bank of Scotland Group Plc prices on Bloomberg show.

Clubs, Bilaterals

Developing economies in the East Asia and Pacific region will probably expand 7.5 percent in 2012 versus the 8.3 percent recorded in 2011, according to a World Bank report released Dec. 19. With weak demand for exports from global markets, domestic demand has remained the main driver for most economies, the World Bank said in the report.

Risks include delays in solving Europe’s debt crisis and a possible “sharp decline” in the growth of investments in China, where expansion is forecast to slow to 8 percent in 2014 from a projected 8.4 percent in 2013, according to the bank.

Club and bilateral loans, which typically aren’t publicly reported, will remain popular this year so long as the economic uncertainty continues, according to Pedro Cheung, the head of corporate finance at Bank of China Ltd. (Hong Kong), the city’s no. 1 ranked arranger of syndicated loans in 2012 with an 11 percent market share.

“Borrowers will still opt for syndication, but only when pricing reaches an attractive level,” he said.

M&A Financing

Sales of bonds in Asia excluding Japan surged 46.6 percent to a record $788 billion in 2012 while the number of transactions rose 29.2 percent to 4,907, according to data compiled by Bloomberg. The number of syndicated loans signed fell 13 percent to 1,276, the data show.

If the cost of borrowing in the syndicated loan market falls in 2013 as liquidity improves due to central banks’ economic stimulus packages, that should help to support volumes, according to Credit Agricole SA.

“Pricing will stabilize,” said Atul Sodhi, the Hong Kong-based head of global loan syndication at Credit Agricole, “Issues such as Basel 3 could increase pricing but on balance, I’m inclined to believe costs will stabilize.”

China Rising

Mergers and acquisitions will be another area of opportunity for banks this year, he said. “Asian corporates are in good shape with low leverage and plenty of cash,” Sodhi, who is also the chairman of the Asia Pacific Loan Market Association, said. “Banks in the region are well placed to support them and valuations are reasonable which augurs well for a pick-up in M&A activity.”

Although deal volumes globally declined 7.9 percent to $2.23 trillion last year compared with 2011, activity in China jumped 16.9 percent to $134.4 billion, Bloomberg data show.

Alibaba Group Holding Ltd. replaced $2 billion of bridge financing used to help privatize its Hong Kong-listed unit with a bilateral loan from China Development Bank Corp., people familiar with the matter said in June. Some 19 international lenders, including Australia & New Zealand Banking Group Ltd., Barclays Plc, Citigroup Inc., Credit Suisse Group AG, HSBC Holdings Plc and Morgan Stanley, had provided the bridge, the people said.

Cnooc, Nexen

China National Offshore Oil Corp., known as Cnooc Ltd., China’s biggest offshore oil and gas explorer, meanwhile is working to complete documents for a $6 billion bridge loan to back its $15.1 billion buyout of Canada’s Nexen Inc., which received approval from Canadian Prime Minister Stephen Harper on Dec. 7., a person familiar with the matter said Dec. 13. The facility is well supported by mainland lenders such as Agricultural Bank of China Ltd. and Industrial & Commercial Bank China Ltd.

Bank of China was the No. 3 ranked arranger of loans in the Asia-Pacific region outside of Japan last year, up from eighth in 2009, Bloomberg-compiled data show. Sumitomo Mitsui Financial Group Inc. rose to equal fourth from 15th over the same period while Mitsubishi UFJ Financial Group Inc. ranks sixth from 11th.

“M&A financing is relatively opportunistic as deal flow isn’t steady,” Bank of China’s Cheung said. “Having said that, loan volumes in 2012 would have been even lower without it.”

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