Bond frenzy adds to APAC lending woes

By Prakash Chakravarti

March 29 (TRLPC) - Syndicated lending in Asia Pacific, excluding Japan, fell to its lowest quarterly tally in nearly six years to US$80.48bn in the first three months of 2018, as frenetic bond issuance from Asian borrowers trying to beat interest rate rises and a steep drop in M&A lending suppressed loan volumes.

The first three months saw 176 deals completed, the lowest quarterly volume since the third quarter of 2012, when US$77.91bn was raised from 253 loans. It was also 17% lower than US$96.86bn transacted in the same period in 2017, when bond issuance was also strong.

Bond issuance (ex-Japan) by Asian borrowers in G3 currencies in the first quarter already reached US$97.57bn, following on from the record US$407.93bn raised in all of 2017.

Several high-profile Asian credits such as India’s Tata Steel Ltd and China National Chemical Corp (ChemChina) took advantage of bond investors’ hunger for yield, and locked in long maturities as the curtain falls on the era of low interest rates.

"Volume from the loan market has been channelled to the bond market, as issuers rushed to raise money ahead of the US Federal Reserve hike cycle of 2018,” said Aditya Agarwal, head of loan syndicate and sales at Maybank.

Some Asian companies raised smaller loans than planned after success with sizeable bond offerings. In January, Tata Steel reduced a proposed US$2.16bn six-year loan to US$1.7bn after raising US$1.3bn from a dual-tranche bond.

ChemChina also opted for a loan-bond combination, raising US$10.35bn in March, including a US$5.5bn loan. The Chinese state-owned chemicals giant has largely relied on bond markets to refinance a US$12.7bn bridge loan it closed in September 2016 to fund its SFr43bn (US$44bn) takeover of Swiss seeds and pesticides company Syngenta AG. M&A SLUMP M&A financings from Asia (ex-Japan) plummeted to US$4.42bn in the first three months of the year, down 55% from the US$9.79bn closed in the first quarter of 2017.

A major factor for the slowdown was the effect of measures in the past 18 months from Chinese regulators to control capital outflows. China, Asia’s biggest event-driven financing market, produced only one M&A loan for a mere US$100m in the first quarter of 2018, in stark contrast to US$4.81bn in the same period in 2017.

However, several M&A loans are expected to boost second-quarter numbers, including a US$3.38bn loan to fund the equity contributions of the members of a consortium that acquired Global Logistic Properties Ltd, a US$1.6bn loan backing Philippine conglomerate San Miguel Corp’s loans totalling US$4.06bn-equivalent in Taiwan for Advanced Semiconductor Engineering Inc and footwear maker Pou Chen Corp, among others.

Despite the general regional slowdown in lending, Hong Kong and China continued to dominate activity in Asia (ex-Japan). Hong Kong contributed 28% of Asia (ex-Japan) loan volumes at US$22.35bn in the first quarter, down 6% from US$23.78bn at the same point last year. China, despite tumbling 48% to US$17.12bn from US$32.95bn a year earlier, took a 21% share.

Malaysian oil and gas giant Petroliam Nasional Bhd wrapped up a US$8bn loan for its Refinery and Petrochemical Integrated Development (RAPID) project, almost two years after the financing first emerged. The loan, Asia’s largest in the first quarter, boosted volumes to US$8.74bn, the highest for the country since the turn of the century.

Singapore and Taiwan were the only major loan markets in the region to record significant growth in first-quarter lending. Singapore skyrocketed 94% to US$10.14bn from US$5.24bn a year earlier, while Taiwan’s tally of US$6.29bn was 68.4% higher than the US$3.73bn raised in the first quarter of 2017. JAPANESE APPEAL Lending to Japanese companies also fell 18.4% in the first quarter to US$69.68bn from US$85.36bn in the first quarter of 2017, although its banks and insurance companies provided good liquidity to foreign borrowers eyeing long-term loans.

Indian state-owned power producer NTPC Ltd and Australia’s Sydney desalination plant tapped the Samurai and Ninja markets, respectively, reinforcing the appeal of the deals, which foreign companies raise in yen or other currencies and are syndicated in Japan.

NTPC is wrapping up a US$350m-equivalent yen-denominated 10-year Samurai loan, and Sydney desalination plant funded a refinancing that included a A$500m 11-year Ninja loan that was syndicated to Japanese regional and cooperative banks and life insurers.

“The benefit to borrowers is you are attracting a different investor base to other capital markets,” said Drew Riethmuller, head of corporate and institutional banking, Oceania, at MUFG in Sydney. “We believe this will continue to evolve given the wide pool of investors in Japan.” PRICING FALLING Lower deal flow exacerbated the pricing compression for high-grade borrowers and continues to characterise lending in Asia Pacific as banks remain eager to lend to blue-chip firms, despite ever lower pricing.

“The lack of loan deal flow has also meant that banks have been struggling to meet asset growth targets, leading to further compression in spreads and more relationship-structured club deals in the region,” said Maybank’s Agarwal.

The US$8bn club loan for Petronas, with a 364-day tenor and an extension option of six months, attracted 19 banks despite paying a tight interest margin of around 40bp over Libor for the first 12 months before it steps up to 55bp.

Hong Kong real-estate giant Sun Hung Kai Properties Ltd more than quadrupled its five-year refinancing to HK$21bn (HK$2.68bn) and attracted 16 banks. The deal offered an all-in pricing of 75bp based on an interest margin of 65bp over Hibor. (Reporting By Prakash Chakravarti; Additional reporting by Sharon Klyne; editing by Tessa Walsh and Vincent Baby)