June 29, 2018 / 8:02 AM / 5 months ago

Q2 slowdown hits Asian lending

Hong Kong, June 29 (TRLPC) - Syndicated lending in Asia Pacific, excluding Japan, showed a steep 31% year-on-year decline to US$94.17bn in the second quarter, dragging first-half borrowing volumes down 9.2% to US$211.60bn, according to Thomson Reuters LPC data.

The second-quarter total is the region’s lowest quarterly tally in five years, as the combination of China’s economic slowdown, fewer M&A financings and heavy bond issuance hit loan volumes.

China’s tougher rules on overseas investments continued to weigh on outbound acquisitions.

“The slowdown in Chinese outbound M&A deals and acquisition financing is partly the result of companies needing more time to understand the implications,” said Lewis Wong, head of North Asia for Credit Suisse’s APAC financing group.

Deal flow across the region plunged 33% in the second quarter, with 227 Asian loans closing compared to 340 a year earlier.

First-half volume hit a five-year low, and deal flow, with 556 loans closed, was 20% lower than that 12 months earlier.

Hong Kong, home to China’s offshore loan market, topped Asia (ex-Japan) with loan volume of US$48.15bn in the first half. Australia and China followed close behind with US$45.56bn and US$44.51bn respectively. The three markets combined accounted for 65% of the market share for Asia (ex-Japan).

Meanwhile, although globally announced M&A deals hit a record US$2.5trn in the first half, event-driven financings in Asia dropped 25% to US$16.86bn as fewer Chinese companies were able to complete strategic overseas acquisitions and Australia lacked big-ticket take-private buyouts that helped boost loan volume in 2017.

Australian M&A lending recorded the biggest slump as a result, sliding 79% to US$1.77bn in the first half, although overall Australia loan volume recorded a 13.5% increase.

Among the major loan markets in the region, excluding Japan, Taiwan volume more than doubled in the first half, thanks to jumbo borrowings including a NT$90bn (US$3bn) five-year term loan backing Taiwanese chipmaker Advanced Semiconductor Engineering’s merger with peer Siliconware Precision Industries.

Taiwanese lending rocketed 110% to US$18.88bn in the first half compared with US$8.98bn in the first six months of 2017.

Japan, Asia’s biggest loan market, saw strong acquisition financing activity and raised US$16.83bn in M&A loans, including a giant ¥825bn (US$7.51bn) facility for a Bain Capital-led consortium’s buyout of Toshiba Corp’s memory chip unit. Interestingly, Japan’s tally in the first half was neck and neck with the M&A loans transacted in the rest of Asia.

As a result, Japanese loan volume rose 4.2% to US$124.86bn in the first six months of this year, compared with US$119.86bn in the same period last year.

The tally is set to jump in the second half, when a mammoth US$30.85bn bridge loan backing Takeda Pharmaceutical Co Ltd’s £46bn (US$62bn) acquisition of London-listed rare-disease specialist Shire Plc is added. BOND DYNAMICS Frenzied bond issuance in the first quarter by Asian borrowers contributed to the loan market slump, as companies locked in long maturities ahead of anticipated US interest rate rises.

Excluding Japan, Asian companies raised US$182.5bn from 313 bonds in G3 currencies in the first half, but borrowers are expected to shift back to loans with more rate rises on the horizon.

The Federal Reserve has already increased its benchmark rate seven times since the end of 2015, and the prospect of further rises and uncertain conditions in bond markets, are expected to boost the appeal of floating-rate loans.

Bond issuance slowed in the second quarter, which is likely to continue through the holiday period as macroeconomic concerns refuse to abate.

A looming trade war between China and the US has sent a chill through the markets, along with a possible flight to quality by investors in the region’s dollar-based emerging markets.

With falling secondary prices in the US and Europe and fears over aggressive documentation hitting the high-yield bond markets, Asian lenders are likely to be more discerning towards high-yield credits.

“Both loan and bond markets are open for high-grade borrowers, but for high-yield credits, borrowing in either market is challenging,” said Birendra Baid, head of loan syndication for Asia at Deutsche Bank. GRINDING TIGHTER Reduced deal flow is continuing to push loan pricing lower as banks compete aggressively for scarce mandates as highlighted by a recent US$950m multi-tranche loan for Indonesia Eximbank.

The deal attracted more than 30 lenders in general syndication despite offering extremely tight pricing.

The loan paid top-level all-in pricing of 60bp, 92bp and 108bp, respectively, based on interest margins of 45bp, 75bp and 95bp over Libor for one, three and five-year maturities.

This is significantly lower than the borrower’s last US$1bn loan of May 2015, which the current facility is refinancing.

That loan paid top-level all-in pricing of 146.3bp and 174bp based on interest margins of 118bp and 150bp over Libor for the three and five-year tranches, respectively. (Reporting by Prakash Chakravarti; Additional reporting by Yan Jiang; Editing by Tessa Walsh and Vincent Baby)

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