Asia syndicated loan pricing seen rebounding from decade low


HONG KONG • Asia’s corporations, which are enjoying the lowest borrowing costs from the syndicated loan market since the global financial crisis, may soon see higher rates as default risks rise, according to bankers.

Surging debt delinquencies in China and India are unnerving lenders and expectations of higher funding costs for banks linked to the London interbank offered rate (Libor) will prompt them to finally pass some of that onto their clients.

The impact will be particularly felt on riskier borrowers who already face surging yields in the junk bond market, according to Credit Agricole SA.

Ample liquidity and rising competition among regional banks have led to a growing number of lenders fighting for a limited pie of quality borrowers. That has pressed the average margin on three-year dollar syndicated loans this year to 160 basis points, the lowest since 2008, Bloomberg-compiled data show. Yet, there are signs that deals for weaker firms are taking longer to close as banks become more selective.

“Pricing will be widening particularly for weaker borrowers along with the increasing costs of funding based on surging US Federal Reserve’s rates,” said Christophe Cretot, head of debt origination and advisory, debt optimisation and distribution, Asia Pacific, at Credit Agricole in Hong Kong. “We might see more local currency-denominated syndicated loans raised onshore instead of offshore next year.”

The US three-month Libor yield will climb to 2.88% by the end of the first quarter (1Q) of 2019 and to 3.1% by the end of the 2Q, according to median estimates of economists surveyed by Bloomberg earlier in November.

The current yield of 2.71% has already surpassed their forecasts for the final three months of this year.

Loan Failures
Loan failures have gathered pace in recent months. CAS Engineering & Development Corp, a construction unit of state-backed Chinese Academy of Sciences, missed repayment on a 1.05 billion yuan (RM630 million) syndicated loan in June. China XD Plastics Co reneged on the final payment on a US$180 million (RM756 million) loan that was due late August. In India, lenders were spooked by a landmark default by the nation’s shadow lender Infrastructure Leasing & Financial Services Ltd.

“We expect a stronger flight to quality in India” with lenders gravitat ing towards high investment- grade borrowers, which means there will be less liquidity, said Sergio Morita, Credit Suisse Group AG’s head of syndication and distribution for the Asia-Pacific financing group.

On India, “in situations where there is stress in the sector or for a borrower with a challenging credit outlook, banks are becoming more selective and terms will likely need to improve to attract liquidity”, said Andrew Ashman, head of loan syndicated for Asia Pacific at Barclays Bank plc in Singapore.

More Loans
The rise in junk bond yields may push issuers to borrow in the loan market, said Credit Agricole’s Cretot, who expects this increased demand for lending to push pricing higher.

Loan pricing for state-owned companies and good quality credits are likely to remain tight as banks compete to lend to better credits in the current risk-averse environment, said Lewis Wong, head of North Asia, APAC Financing Group at Credit Suisse in Hong Kong.

“We have seen dampened lending appetite from Taiwanese banks to Chinese firms given an increasing number of defaults or troubled cases in the country”, said Phoebe Li, a Taipei- based head of corporate finance department at CTBC Bank Ltd.

The bank is becoming more cautious on Chinese companies since even state-owned enterprises are not necessarily considered as a “safe credit” now, she said.