Asian loan markets are at a crossroads. 2016 has been a dismal year for the product with volumes declining to a three-year low amid market volatility, slow economic growth and limited M&A activity. The 12% year-on-year drop in the first nine months of 2016 compounds a similar decline in the same period in 2015, which was already reeling from a slowing Chinese economy.
When participants in the Syndicated Loans Roundtable met in mid-October, one of them commented that we live in a world of ‘VUCA’ – volatility, uncertainty, complexity and ambiguity. While none of the participants predicted a victory for Donald Trump in the US presidential elections, the comment on VUCA is ringing out to be truer than any of us expected.
Questions linger over the direction the global economy will take and the consequences of Trump’s presidency and his policies – political, trade and economic – that follow. Closer to home, China remains stuck in a glut, while the consequences of demonetisation – an attempt to weed out corruption – in India will only be known in the first quarter of 2017, at the earliest.
Had it not been for a handful of jumbo event-driven financings from China, syndicated loan market activity in 2016 would have been even worse. The jumbo US$12.7bn recourse loan for China National Chemical Corp (ChemChina) for its SFr43bn (US$43.45bn) acquisition of Swiss seeds and pesticides company Syngenta broke the record for the largest loan from Asia (ex-Japan). Lenders would only be able to book income on the deal next year if the M&A closes successfully. If not, the pressure to generate returns for lenders will magnify amid a decline in deal flow and flush liquidity among banks that is pushing pricing lower and lower.
Fraught as they are with such risks of failure, event-driven financings still appeal to lenders, although they make a small percentage of the syndicated loan markets. The need for speed, and, most importantly, confidentiality means that the loan product is still the first port of call for companies seeking debt to finance their acquisitions.
China Inc’s insatiable appetite for overseas assets is expected to continue unabated. However, unlike a few years ago, international banks are no longer guaranteed a seat at the table as Chinese lenders step up to support these acquisitions.
Meanwhile, leveraged finance in Asia, particularly that involving financial sponsors, has not yet fulfilled its promise even though private equity firms continue to raise funds, adding to the US$100bn-odd in existing dry powder. Regulations, especially in China and India, remain a hindrance to structuring leveraged buyout loans, while the lack of an active institutional investor base for loans hampers the development of an alternative form of capital and secondary market trading.
Green shoots have emerged in parts of the region with the arrival of insurance companies and the setting up of a collateralised loan obligation fund that looks at loans as an alternative investment. Hopefully this will usher in the alternative form of capital that Asian loan markets need to take off. It is a slow and long journey nonetheless.
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