European banks dump Asian loans

European banks – especially French lenders – are circulating long lists of Asian loans they are attempting to offload – so-called “axe sheets” – as they look to boost their capital ratios. Axe sheets are a standard feature of secondary loan trading as lenders manage their portfolios, but the volume and number of loans for sale have increased markedly in recent weeks.

“What you’re seeing is evidence of what one is hearing, that the European banks are deleveraging and selling assets,” said Philip Cracknell, Hong Kong-based global head of capital markets at Standard Chartered Bank.

Axe sheets are typically circulated by major lenders to participant banks, mirroring primary syndications. However, some French lenders are sending sale lists to their major competitors in an effort to offload individual positions, some amounting to several hundred million dollars.

Credit Agricole is offering 64 Asian loans for sale – for a total asking price of US$1.1bn – nearly a third of which were signed this year, according to the bank’s most recent axe sheet. In comparison, in November 2009, the bank was offering US$170m of Asian paper through eight loans.

But the offer is no fire-sale. The vast majority of loans for sale are high-quality assets, priced near par.

Nonetheless, the unprecedented volume of Asian loans on offer for sale in the secondary markets is threatening to drive up pricing on new deals, as by offering a discount to tempt buyers secondary sales create an overhang on the primary market that could impact on pricing and liquidity.

“Anyone who comes in and wants do a new primary deal is going to have to make it more attractive than the secondary discount,” said a senior banker in Hong Kong.

As lenders become more selective and liquidity shrinks, the small and mid-sized companies that do not enjoy deep banking relationships are likely to be hardest hit by rising funding costs.

Top-tier credits such as India’s Reliance Industries feature heavily on recent axe sheets, including the Credit Agricole list and one from HSBC.

That has increased the risks of underwriting new financings even for frequent borrowers in the primary markets, said Cracknell.

“Anyone who comes in and wants do a new primary deal is going to have to make it more attractive than the secondary discount”

“It increases underwriting risk, because if you’re left with anything that you have to sell in secondary, you have to compete to sell that with highly motivated sellers,” he said.

No takers?

Europe’s biggest banks, including BNP Paribas and Societe Generale, have in recent weeks pledged to sell assets. Together, they are expected to shrink their balance sheets by as much as €5bn over the next three years through a combination of sales, asset run-offs and recapitalisations.

Analysts, however, believe the French banks may struggle to sell much in secondary easily given they are offering paper at par or at only a small discount to par. The sellers want to avoid big write-downs on these assets, while potential buyers are holding out for bigger reductions.

Bankers suggested that package sales comprising multiple loans are a more practical solution. These could help sellers get rid of big chunks of exposure in one go, provided the loans were offered at a steeper discount.

“Most of the time, loans in Asia are priced well inside the pricing levels for bonds from the same borrower because of relationship reasons. Any bank wanting to develop or cement a relationship with a borrower would prefer to take exposure in the primary market through a new loan,” said one loan banker in Singapore. “Secondary buyers are mainly looking for yield, which means they are unlikely to be enticed by loans selling at or close to par.”

Added complications

Asia’s secondary loan market is far smaller than in Europe or the US, where there is an institutional investor base eager to buy loans in the secondary market. The dominance of commercial banks has held back secondary trading in Asia, as banks are often reluctant to sell for fear of antagonising borrowers and damaging relationships.

Moreover, some loan agreements require a borrower’s consent before a secondary transfer can take place. This might hinder a package sale as getting consent from several borrowers can be cumbersome.

The consent clause also helps Asian borrowers monitor who the loan is sold to in secondary trading, as they typically would not want the paper to end up in the hands of fast-money investors such as hedge funds.

Moreover, in certain jurisdictions, such as India, borrowers consent to secondary trades that are withholding tax-neutral so the borrower does not have to gross up.

Whether the French banks achieve their objectives and how long it takes them is anyone’s guess, but one thing is certain: their participation in primary loans will decline. The market share of European banks in Asia ex-Japan loans fell to 16% in the first half of 2011, from 25% in 2007, based on Thomson Reuters data. That fall is likely to be even more precipitate in the second half of the year.