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APAC Q1 lending plunges to seven-year low on China cooling
March 31, 2017 / 5:47 AM / 8 months ago

APAC Q1 lending plunges to seven-year low on China cooling

March 31 (LPC) - Asia Pacific lending in the first three months of 2017 fell for the fourth consecutive quarter to US$59.45bn, the lowest first-quarter volume in seven years, as China’s slowdown and thin M&A activity continued to take a toll.

With the effects of China’s cooling economy reverberating across the region, lending activity plummeted 46% from US$110.5bn a year earlier. First-quarter deal count was also down 53% at 173 loans compared to 372 deals a year earlier.

A lack of jumbo acquisition loans saw M&A loans drop 83% with only US$3.9bn of deals closed in the first quarter, compared to US$22.7bn a year ago, as China’s government tries to curb capital outflows and ‘irrational’ overseas takeovers.

“The biggest factor is Chinese economic activity seems to have slowed down and Chinese outbound M&A activity has declined,” said Atul Sodhi, head of debt origination and advisory for Asia Pacific at Credit Agricole CIB in Hong Kong.

The biggest acquisition-related loan in the first quarter was a US$800m five-year facility backing the US$2.75bn acquisition of a unit of Netherlands-based NXP Semiconductors by a consortium of Chinese investors. In the first quarter a year earlier, the top five M&A loans all exceeded US$1bn, including a US$5bn-equivalent deal backing Cinda Asset Management Co Ltd’s purchase of Nanyang Commercial Bank.

Indonesia and Vietnam were the only bright spots in the region. Volumes took a severe hit elsewhere, particularly in Australia, China, Singapore and Taiwan, as borrowers stayed on the sidelines in the current uncertain global economic environment.

Interest rates are expected to rise further later in the year following the US Federal Reserve’s 25bp rate rise to a range of 0.75% to 1% in mid-March, which is dampening US dollar denominated lending.

“We are really just talking about small rate increases at the end of the day. The bigger risk for loan markets is how the global economy responds to a rising rate environment,” said Aziz Dean, head of loan markets at Westpac Institutional Bank. BRIGHTER PROSPECTS The deal pipeline is looking stronger with more client inquiries and discussions afoot as borrowers get used to the new normal of higher base rates and grow more confident about the economic environment compared to last year.

“The market pipeline has rebounded and this should be reflected via higher volumes in the data later in the year,” said Phil Lipton, head of loan syndications in Asia Pacific for HSBC in Hong Kong.

Notwithstanding rising US interest rates, borrowers can expect favourable margins and borrowing terms as the recent lack of deals sets the stage for competitive bidding for mandates and banks come under greater pressure to meet budgets after the sharp drop in first-quarter volumes.

“The state of the Asian credit markets is robust and Chinese lenders are expected to continue to dominate activity. Flush liquidity could impact margins on loans,” said Carsten Stoehr, head of Asia Pacific financing group at Credit Suisse.

Chinese internet giant Tencent Holdings Ltd is taking advantage of current conditions and has been on a borrowing spree. In the last 15 months, the company has raised US$15.04bn from four loans, three of which were for general corporate purposes, and has been able to tighten pricing on each loan.

It closed a US$4.65bn five-year bullet loan in March with a dozen banks. Lenders were offered a top-level all-in pricing of 115bp based on an interest margin of 95bp over Libor, which is lower than top-level all-in pricing of 125bp based on an interest margin of 110bp over Libor on a US$2.45bn five-year loan that closed in December 2015.

“The loan market is very competitive in terms of pricing and terms, and is the most attractive for borrowers since the financial crisis,” said Lipton.

Event-driven financings are also expected to pick up later in the year. Chinese companies have completed only US$1.6bn of M&A loans so far this year, but this is expected to accelerate as companies try to get around the government clampdown on outbound M&A.

“M&A activity in Asia is expected to remain robust and China will continue to be key to M&A and related financing. Among the drivers are private equity firms looking to make new investments in Asia or monetise their existing portfolios, as well as the return of the commodity cycle. Liquidity remains strong and should aid M&A activity,” said Stoehr.

“China M&A will pick up as Chinese companies have a strong desire to grow and that growth cannot only come from internally, it must come from external sources too,” said Sodhi. (Reporting by Sharon Klyne and Prakash Chakravarti; editing by Tessa Walsh and Vincent Baby)

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