[HONG KONG] In a world awash with cheap cash from major central banks, it may seem ironic that companies in the top emerging market growth hotspot cannot get their hands on reasonably priced bank loans.
But Asia’s credit landscape has changed dramatically over the past year and January provided the strongest evidence to date, with dollar lending by banks virtually non-existent except for the most pristine names – and at very rich prices.
Borrowers rushed into the more fickle and demanding bond markets, catching investors early in the year but still paying through their nose for the cash.
The flurry included eight top-tier Hong Kong-based companies that hit debt markets with a record US$8 billion worth of dollar bonds in January.
“There’s never been a period with such a level of activity from Hong Kong corporates in the bond market. It’s unprecedented,” said Anthony Arnaudy, head of debt capital markets for North-east Asia at Standard Chartered Bank.
Hong Kong property developer Nan Fung International Holdings was a first time bond issuer in January, as was property firm Wheelock.
Spreads widened and yields soared. Bond issuers in Hong Kong paid a mark-up of as much as four percentage points above US debt yields to secure five-year funds, about 10 times more than they did in 2007 before the US subprime crisis.
The risk, say bankers, is now of a long-term jump in funding costs in the region as US and European banks stay away.
At first glance what has been happening in Asian credit markets might seem incongruous. On the one hand, the Federal Reserve and European Central Bank have pumped cheap dollars and euros into the financial system to support their faltering economies. US rates are set to stay near zero for at least two more years.
And yet corporates in fast-growing Asia are not able to get banks to lend them dollars or euros. This had not happened before. Not in 2009, and certainly not in any of the previous episodes when financial markets were this liquid.
But the past year has been different. The easiest carry trade in global markets has been disrupted by trussed up bank balance-sheets, the stringency of Basel III capital requirements and, most of all, the drawn out European debt crisis.
It’s not the best time to be seeking foreign currency loans, yet there’s potentially huge demand. At least US$14 billion of dollar, euro and Hong Kong dollar denominated loans are scheduled to mature this year and might come up for refinancing.
And borrowers are sensing the terrain is not going to shift in their favour anytime soon. Hong Kong’s Nan Fung returned quickly to the dollar bond market with another issue this month, paying 5.15 per cent for five-year debt.
Others too, have been adapting to the changing game. Singapore’s MMI holdings decided to replace its loan with a bond, India’s Power Finance Corporation had to cut the tenor on a loan proposal, and Hong Kong’s IFC Development both cut its bond offering by more than a third and upped its yield.
Forced by the turn in the credit cycle, borrowers have sought out alternate sources of funding, shifting to more liquid markets in Singapore or Japan.
Henderson Land, for instance, issued a S$200 million five-year bond in Singapore late last year, while Cheung Kong Holdings, controlled by billionaire Li Ka-shing, also raised its bond offerings in the city-state.
Even so, loan volumes have collapsed. Across Asia, there were 28 deals totalling US$3.4 billion in January 2012, a tiny fraction of the 63 deals worth US$19.5 billion in January 2011.
That is worrisome, given the mountain of loans to be refinanced in Asia this year. Australia has about US$53 billion maturing this year, Hong Kong has US$26 billion and Singapore has US$17 billion, according to Thomson Reuters data.
“Even with the monetary easing, some banks are trying to preserve capital, which will have an effect on loan pricing,”said Benjamin Ng, head of Asia syndicate and acquisition finance at Citigroup.
One fear is that European banks, traditionally the biggest providers of foreign funding in Asia, will continue deleveraging. Analysts at Morgan Stanley estimate European banks, excluding British ones, have claims of about US$680 billion on Asia.
No one is quite sure how much of that cash has left the region in 2011, but one thing is certain: these banks are not committing new funds to Asia. And the billions of euros the European authorities are injecting into their banking systems are simply being recycled into safe deposits at the ECB and government debt.
“Not surprisingly, pricing on Asian loans has not budged much and the higher pricing is here to stay for some time to come,” said Birendra Baid, head of loan syndication, Asia-Pacific at Deutsche Bank.
Local banks, such as Singapore’s DBS and India’s ICICI Bank, have sensed there are rich pickings among the assets the Europeans are offloading.
The problem though is that the foreign currency part of their balance sheets is already stretched, and Basel III will require them to be even more prudent about managing risk and liquidity.
Foreign currency loan growth at most Asian banks has hit the 40-70 per cent annual pace, Morgan Stanley estimates, which means their lending in dollars has been far faster than the 15-20 per cent average rise in overall credit.
Moreover, dollar deposit growth has not kept pace, which has meant the ratio of dollar loans to deposits is upwards of an unhealthy 100 per cent for most Asian banks, particularly those in South Korea and Thailand.
In Korea for instance, savings banks, which are big non-banking lenders in the economy, deposited US$5 billion with their local lobby group late last year, preferring low yields over any exposure to risk.
“I don’t think it is a crisis by any stretch,” said Viktor Hjort, head of Asian credit strategy at Morgan Stanley. “What you have though is a situation where over the past two years Asia’s grown used to there being this very generous and very cheap access to dollar funding by Asian banks.
“That’s now much more constrained because lending has already expanded aggressively over the last few years and the European banks, historical providers of cheap wholesale funding, are pulling out.”
The implications are two-fold. One is the risk that Asian banks join the issuance queue aggressively, going on a dollar-funding binge as they try to cherry-pick assets and expand balance sheets – what Morgan Stanley terms the “dollarisation” of Asian banks.
Australia’s Macquarie Bank kicked off that country’s yankee bond issuance for 2012 this week, offering 420 basis points over US Treasury yields for a five-year US dollar bond.
The other risk is a more permanent jump in funding costs for Asia, at least until the US and European banks are able to come back into the emerging market wholesale lending business.
Even though private banks and funds have stepped into the space vacated by the banks, Asia’s funding needs are growing.
There has already been a marked jump in borrowing costs. And a simultaneous and worrying trend of banks invoking “market disruption clauses” to increase pricing on pre-committed loans to better reflect the rise in their own cost of funds.
One interesting example is the refinancing by the top-tier IFC Development Ltd in Hong Kong, which owns the building of the same name in the city’s business district. It initially wanted to borrow HK$17 billion (S$2.75 billion), but had to slash it by 71 per cent to HK$5 billion, hit by the liquidity squeeze. It also had to lift the pricing by about 20 per cent to attract more lenders.
Hong Kong-based Kerry Properties is currently offering 230 basis points for a HK$2.4 billion three-year loan, 70 per cent or 135 bps higher than it paid on a five-year loan in January 2011.
Loan pricing in Hong Kong needs to be at least 200 basis points over Hibor, even for top rated companies, according to several loan bankers. This is almost double what was being offered about a year ago.
The all-inclusive pricing for a five-year loan for a BBB rated borrower in Australia is close to 300 bps, a jump of 100 bps since November.
Simon Milne, treasury consultant at iSelect, an Australian insurance broker, said borrowers were facing the most difficult market conditions he has ever seen.
Mr Milne, who has more than 20 years experience in the Australian debt markets, including four as treasurer of gaming company Crown Ltd, says top-tier firms are still able to get loans at competitive rates. It’s the mid-range corporates that are struggling. “The risk of pulling a deal has increased,” he said.
Across in India, the Export-Import Bank of India, a frequent borrower in offshore loan markets with a good following given its status as a wholly state-owned borrower, is borrowing up to US$250 million for three years, paying an all-inclusive charge of 250 bps over Libor. That is nearly double the 140 bps over Libor that it paid on a US$150 million three-year loan in March 2011. – Reuters