September 28, 2018 / 7:12 AM / in 21 days

Asia lending falls further in third quarter

Hong Kong, Sept 28 (LPC) - Syndicated lending in Asia Pacific (ex-Japan) declined marginally by 1% to US$324.17bn in the first nine months of 2018 compared to a year earlier, but third-quarter volume of US$79.21bn showed a steeper 16% year-on-year drop as China’s economy and M&A activity slowed amid fears of a global trade war, according to Thomson Reuters LPC data.

The effects of rising interest rates and oil prices depressed third-quarter volume leading to the lowest quarterly figure in six years since the third quarter of 2012.

“Lending in Asia Pacific this year has dropped mainly because of event-driven financings taking a back seat and the overhang of rising interest rates and oil prices,” said Mildred Chua, head of syndicated finance, Asia, at DBS Bank.

Sluggish dealflow is reflected in the fact that the biggest US dollar loan of the third quarter from Asia, excluding Japan, was a US$1.855bn 364-day refinancing for commodity trader Vitol SA in July, as refinancings dominated activity.

“The region’s borrowers remain cautious and new-money transactions have been few and far between this year with market activity largely dependent on refinancing and amendment and extension exercises,” Chua said. DISMAL M&A LENDING Only US$5.9bn of M&A loans were completed in the third quarter of 2018, compared to US$11.97bn in the preceding three months when large deals closed. The third quarter saw only three M&A loans of size, the largest of which was a €1.5bn (US$1.75bn) bridge loan in July backing Chinese state-owned technology conglomerate Tsinghua Unigroup Ltd’s acquisition of French smartcard components maker Linxens SAS.

Event-driven financing totalled US$22.77bn in the first nine months of the year, 36% lower than US$35.54bn in M&A loans closed in the same period in 2017, as rising geopolitical tensions took a toll on lending.

Japan - Asia’s largest loan market - saw a 7.8% increase in the first three quarters to US$184.81bn compared with a year earlier as Japanese companies embarked on an overseas acquisition spree and their Chinese counterparts stepped back.

Japanese firms clocked a record US$289.7bn of M&A deals in the first nine months of 2018, more than doubling from the same period last year and exceeding the previous all-time high of 1999, Thomson Reuters data showed.

Boosting Japan’s loan volume was a ¥1.6trn (US$14bn) refinancing in August for Japanese mobile phone giant Softbank Corp, which was Asia’s largest syndicated loan in the third quarter and attracted more than 20 lenders.

Japan has also proved to be a fertile hunting ground for international companies that raised long-term Samurai loans from Japanese lenders which are able to lend at low rates due to low funding costs.

Commodity trading firms including Olam International Ltd, Vitol and Trafigura Beheer BV raised yen-denominated financings for non-Japanese borrowers towards the end of the third quarter, along with Indian companies such as Reliance Industries Ltd, Indian Railway Finance Corp Ltd, Power Grid Corp of India Ltd and NTPC Ltd.

Loans from China and Hong Kong, where Chinese companies raise offshore loans, have also been on a downwards trajectory since Chinese regulators imposed controls on capital outflows in the second half of 2016.

Volume from China declined 15% in the first three quarters to US$72.62bn, compared with US$85bn in the same period last year. Hong Kong lending also slid 2% to US$78.17bn in the same period. POCKETS OF GROWTH Taiwan and Singapore were the only major loan markets in Asia Pacific (ex-Japan) to record strong increases in loan volume in the first three quarters. Taiwanese loans soared 47% to US$25.20bn from US$17.16bn a year earlier and Singapore also jumped 21% to US$35.59bn from US$29.36bn a year earlier.

As far as the activity in the third quarter of the year was concerned, India and Indonesia were the only major markets to post growth, raising US$5.94bn and US$4.44bn, or surging 15% and 26% year-on-year respectively. Australia recorded the biggest drop in the third quarter, plummeting 55% year-on-year to US$9.73bn.

Despite the largely tepid numbers, some bankers expect Asian loan volume to recover in the fourth quarter, giving a strong finish to the year as M&A activity continues.

“Although year-to-date syndicated loan volumes have declined marginally, we are of the view that there is still sufficiently strong cross-border M&A activity to push them up to higher levels than 2017,” said Adnan Meraj, co-head Asia Pacific syndicated & leveraged finance at Bank of America Merrill Lynch. DRAWING A LINE? Low dealflow and abundant liquidity continue to maintain pressure on pricing – a trend that has been playing out for the past few years. But ever-decreasing loan pricing is starting to run into resistance as rising interest rates make dollar loans more expensive.

Tata Sons, the holding company of Indian conglomerate Tata Group, had a taste of this change in sentiment in early September when a US$1.5bn multi-tranche loan attracted only one bank in general syndication with a mere US$20m–$25m ticket as lenders protested the tight pricing.

The top-level blended all-in pricing on the deal was 103bp, 104bp and 113.7bp respectively based on a blended average interest margin of 90bp over Libor and a blended average life of five years.

Similarly, other tightly priced loans from India met with poor responses in syndication. Loans for Yes Bank Ltd and State Bank of India toiled in the market, with the former taking six months to close a US$300m three-year loan and the latter failing to attract any commitments for a US$750m three-year facility in general syndication. The deals paid top-level all-in pricing of 105bp and 90bp, respectively. (Reporting By Prakash Chakravarti; editing by Tessa Walsh and Luis Morais)

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