Hong Kong, March 29 (LPC) - After a revival in 2018, syndicated lending in Asia Pacific, excluding Japan, plunged to its lowest quarterly tally in seven years, with only US$76.40bn raised in the first three months of 2019 as geopolitical tensions continued to depress borrowing activity.
Lending dropped 39% in the first quarter this year compared with US$125.11bn raised in the corresponding period last year and the US$124.5bn tally in the fourth quarter of 2018, despite a surge in M&A lending in Hong Kong and Australia that saw several large take-private buyouts as Asia’s leveraged loan market continues to grow.
The number of deals completed fell to 189 in the first quarter, which was 46% lower than 352 loans a year earlier, as activity fell in most Asian countries.
China’s economic slowdown put the biggest brake on the market, as the trade war with the United States which started in mid-2018 continued to stoke uncertainty.
“Geo-political concerns with regards to the trade war and a lack of visibility on the outlook for the global economy led to many borrowers taking a cautious or wait-and-see approach, downsizing or deferring borrowing plans in the loan market during the quarter,” said Amit Lakhwani, head of loan syndicate & distribution, Asia-Pacific, at Standard Chartered.
China’s National Bureau of Statistics reported that total industrial profits fell 14% in the January-February period compared with a year earlier as the early Lunar New Year holidays in February distorted the country’s industrial activity and lending activity.
“Lending in the first quarter was slow partly because of the early Lunar New Year holidays, resulting in many new deals delaying launch until February. Many of those deals are still in syndication and expected to close in the next quarter. Moreover, major markets such as China and India have seen relatively slower dealflow this year compared to the same period last year,” said Andrew Ashman, head of APAC loan syndicate, at Barclays.
China’s loan volumes plunged 79% to US$7.74bn in the first three months of 2019 compared with US$36.20bn a year earlier. That marked the lowest quarterly number in seven years since the fourth quarter of 2011 when loans totalling US$5.62bn were completed.
China is bearing the brunt of the trade war. The US has imposed duties on US$450bn worth of Chinese imports since July 2018, but China retaliated and has imposed tariffs on about US$110bn of US goods.
Earlier in March, the US Federal Reserve abandoned its plans for further interest rate hikes this year after a three-year drive to tighten monetary policy amid looming global headwinds over trade and a weaker outlook for the US economy. In a major shift, the Fed also now expects to raise borrowing costs only once more through 2021.
More stable US interest rates may prompt Asian borrowers to adjust their capital markets strategy. In recent years, rising US interest rates have encouraged Asian companies to raise G3 currency (US dollars, euros and yen) bonds. First quarter Asian G3 currency bond issuance totalled US$92.58bn, close to the US$103.42bn raised in all of 2018.
“Many corporates prioritised bond market issuance, which impacted loan volumes from Asia and led to a softer market backdrop,” said Lakhwani.
The frenetic bond issuance and lacklustre M&A lending were among the factors contributing to a slowdown in Asian syndicated loan volume for most of 2018 before the year ended in positive territory. In the first quarter of 2019, M&A loans in Asia (ex-Japan) have more than doubled to US$11.41bn from US$4.89bn in the same period in 2018. Hong Kong and Australia have led the M&A charge accounting for nearly 80% combined of the event-driven financings completed in the first three months of 2019.
The largest acquisition loan in Asia Pacific (ex-Japan) in that period was a HK$25.2bn (US$3.21bn) loan backing the take-private of Hong Kong-listed Hopewell Holdings, which boosted Hong Kong’s M&A loans tally to US$5.34bn compared with US$2.94bn a year earlier. Despite the large size, the deal closed in senior syndication with 14 banks joining sole mandated lead arranger and bookrunner Citigroup.
Australia too has produced a healthy flow of event-driven financings so far this year, as acquisition lending rose to US$3.69bn from only US$818m in the first quarter of 2018. Australian M&A lending is set to rise further in the second quarter with a strong pipeline, particularly for leveraged buyout financings with several large public-to-private buyouts, including hospital operator Healthscope, accounting and business services software firm MYOB Group, and UK forecourt operator EG Group, among others.
“Australia has produced several large leveraged buyout loans, including new money deals for EG Group and Healthscope. It is highly unusual to see so many deals in the market at the same time. The market is absorbing the flow and liquidity remains strong for LBO financings,” said Ashman.
Strong M&A lending in Hong Kong and Australia helped the two markets jump ahead of every other jurisdiction in Asia (ex-Japan) in terms of overall loan volume. Hong Kong generated US$28.41bn in the first quarter of 2019, taking a 37% share of regional lending and Australia’s tally of US$15.89bn accounted for 21%. Both markets were, however, 16% and 6% lower respectively compared to the first three months of 2018. (Reporting By Prakash Chakravarti; editing by Tessa Walsh)