Issue: 1252 - 26 April 2012

Keywords: Credit Suisse, Riddhi Shah, Justin Crane, Devesh Ashra

Asian borrowers have turned to the bond market in increasing numbers this year, as rising bank funding costs and the scale-back by European lenders have slashed loan volumes. But the bond market is starting to become a tougher place in which to fund, and high yield companies may soon head back to the loan market. According to senior bankers at Credit Suisse, such borrowers should consider taking the private route, adding structural tweaks to their deals to attract lenders. 

Loan volumes plummeted in the first quarter, falling by around 48% compared to the same time last year. The explosive growth in the bond market at the start of this year has helped make up for some of this lost funding opportunity, but as things get tougher in the bond market — and as a stream of deals matures over the next few months — borrowers may have to turn back to loans.

For smaller companies, this will mean private financing, often using collateralisation, equity conversion or other structural features that make these deals more attractive to lenders. This is often an expensive source of funding, but is seen as a good alternative to a stock market listing for companies that do not have many other options.

"Those companies that look for structured financing solutions are typically emerging market corporations that want bridge financing which they then intend to take out, often in the equity market," said Riddhi Shah, co-head of the emerging markets financing group at Credit Suisse. "But there are definitely a lot of issuers out there that do not view this as an ideal time to issue equity, so they are more willing to take on the relatively higher cost of private debt financing."

Big refinancing burden

There are $7.9bn of G3 bonds falling due in Asia ex-Japan next month, the biggest month of maturities all year. It appears there is now enough liquidity available to meet most of these funding needs, especially after the European Central Bank’s long term refinancing operation (LTRO) boosted liquidity and brought many European banks back to the Asian loan market in large size.

"There is a wall of maturities coming, but as long as we have bond issuance, loans, LTRO and private financing, that wall can be overcome," said Justin Crane, head of loan syndication for non-Japan Asia at Credit Suisse. "If you see bond issuance and LTRO disappear, then you have a problem — and those most affected in that position will be the mid-cap companies."

Some of those companies will be able to access the bond market. Debt bankers in Asia ex-Japan have enjoyed a blur of activity since the start of the year, closing $54bn of deals in the G3 market. The $42.5bn of bonds closed in the first quarter was a record for Asia’s debt market, and was 60% above the levels reached in the first quarter of 2011. But DCM and syndicate bankers say things have quickly become tougher.

Growing fears over Spain, which has announced it will breach its budget deficit target and struggled through a debt auction at the start of the month, have reignited investors’ worries after a raucous start to the year. Some borrowers have been forced to postpone their deals. Mongolia’s Golomt Bank and Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), have both cancelled planned dollar bonds. Neptune Orient Lines gave up on a planned hybrid in Singapore dollars.

These issuers could have found demand from investors, but not at a price that funding officials were willing to pay. High-grade companies and banks were able to get away with ultra-thin pricing in the first quarter, but they are now being forced to pay up a bit more. Sub-investment grade borrowers still have access to the bond market, but at a much higher price than they are used to.

"We are seeing mid-cap issuers which funded in 2011 with yields between low 7% and mid-8%," said Devesh Ashra, head of Asia debt syndication at the Swiss bank. "They are arguably better credits today, they have improved metrics — but market conditions require them to pay double-digits. That leaves weaker double-B and strong single-B issuers a little marginalised at present, and some of them may need to access the loan market."

Meanwhile, the syndicated loan market is still open to most companies, as long as they are willing to pay up, loans bankers said. Chinese property companies are having good success turning to bank lenders. Shui On Land, Longfor Properties, Soho China and Sino-Ocean Land have all turned to the loan market, or are now in discussion with bankers about potential deals. But many of these loans are being done in bilateral or club format, since few companies want to set a public pricing benchmark that would force their funding costs higher.

This is why Credit Suisse hopes companies will instead turn to the private lending market, adding structural features that firm up support among potential lenders. Philippines Airlines did this with a $50m loan that it signed privately with Credit Suisse, before the bank attempted to find demand from other lenders for another $50m. Retailer Courts (Malaysia) has also taken this approach, working with structured finance bankers at HSBC to create a MR300m three year revolver that was targeted at bank lenders.

The pull-back of some European lenders from the Asian loan market — often exaggerated by rivals, but still enough to knock liquidity — could drive more of these private, structured transactions, said Shah.

"There used to be a lot of European commercial bank money financing trade activity, so these kinds of transactions didn’t really come into the private financing market," said Shah. "But that has started to change. In a market like this, it makes sense for companies like Philippine Airlines to consider this type of structure."

Some bankers are more sceptical that structured and private financings will pick up much this year, and several argue that the traditional syndicated loan market — as well as selective bilateral lending — is enough for Asian companies to borrow.

"We often hear that the private financing market is going to take off in Asia, that it’s the next big thing," said a rival syndicated loans banker. "But we don’t see a lot of it happen in reality."

Credit Suisse says it closed more than 40 private and structured deals for Asia Pacific clients last year, raising around $10bn. But given the private nature of these deals, it is hard to gauge how much was done at other banks — or how likely it is that the business will increase this year.

Asian borrowers raised $44.5bn in the loan market over the first quarter, when all currencies are included. That was around 48% less than the previous year.

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