September 30, 2015 / 7:40 AM / 2 years ago

China slowdown and currency volatility hit Asian lending

Sept 30 (IFR/LPC) - Syndicated loan volume in Asia Pacific (excluding Japan) fell by 16 percent to $324.2 billion in the first nine months of 2015 compared to a year earlier. Activity dwindled in the third quarter as effects of China’s continued economic slowdown and currency devaluation rippled through global markets in September.

The third quarter saw $110 billion of loans in 366 deals, as investors stood back in a ‘risk-off’ environment as fears of China’s slowdown caused a rout in its stock market and dragged commodities prices lower.

Lending has fallen so far this year in almost every major loan market in Asia, with the exception of Taiwan, due to slower economic activity and bank returns are under pressure with fewer opportunities to lend. Across Asia, 974 deals were completed in the first nine months, compared to 1,314 loans in 2014.

“Banks that look at plain vanilla deals only or just buyout event deals have felt the strain,” said Boey Yin Chong, head of syndicated finance at DBS Bank.

Despite its economic and fiscal woes, China continued to dominate the region with volume of $100 billion in Q1-Q3 2015, accounting for 31 percent of all lending in Asia, excluding Japan.

The surprise devaluation of the renminbi prompted some Chinese borrowers to reduce foreign currency loan exposure, including manganese metal maker Hong Kong Tian Yuan Manganese International Trade Co Ltd, which put a $150 million loan on hold, days after launching it to syndication in September.

In September Minsheng Financial Leasing Co Ltd also sought to revise the terms of a three-year bullet loan, including reducing the size and cutting the tenor and pricing, after deciding to increase it to $250 million from an initial $200 million. In late August luxury car dealer Zhongsheng Group Holdings Ltd cut the size of its three-year term loan to $200 million from $250 million.

Foreign currency loans for Chinese companies had already started to slow from early 2015, well before the People’s Bank of China moved to devalue its currency on August 11. In the first three quarters of 2015, foreign-currency loans for mainland borrowers dropped to $8 billion from 18 transactions, compared to $15.6 billion from 25 deals in the corresponding period in 2014.

The slowdown was also felt in neighbouring Hong Kong, Asia’s second-largest loan market (ex Japan), where Chinese companies raise offshore dollar loans via international banks. The territory saw an 18 percent drop in volume in the first nine months to $59 billion compared to a year earlier. The third quarter generated volume of $17.7 billion from 49 transactions, 28 percent lower than the previous quarter.

Australia has also had a quiet 2015 so far, mirroring a sluggish regional loan market. Asia’s third-largest loan market (ex-Japan) saw a 23 percent drop on a year earlier in the first nine months to $54.5 billion characterised by refinancing and amending and extending existing deals as borrowers took advantage of strong bank liquidity to reduce borrowing costs.

India and Indonesia saw the biggest year-on-year drops of Asia’s major loan markets. Indian offshore loan volume of $8.7 billion in the first three quarters is nearly half that of a year earlier and Indonesian volume of $6.7 billion in the same period is 45 percent lower in the same time.

Japan saw a smaller 3.5 percent year-on-year drop to $174 billion with third quarter volume of $57.2 billion from 648 deals. Although the number of deals was higher than the second quarter, it was just enough to boost 2015 dealflow to 1,635 loans, compared to 1,650 transactions at the same time last year.

Taiwan was the lone good news story as the only major Asian loan market to show positive growth. Volume increased by 49 percent in the first nine months to $37.3 billion from 134 deals, thanks largely to a jumbo NT$382 billion ($12.5 billion) restructuring deal for Taiwan High Speed Rail Corp, although the number of transactions was lower than last year’s 166. PRICING GRINDS TIGHTER Increasing interbank competition due to fewer loans means that top-tier companies have been able to cut pricing despite global market volatility, particularly in India where annual borrowers have been able to halve pricing compared to a year earlier.

A $150 million five-year loan for state-owned Rural Electrification Corp, which is its third deal of the year, is expected to be able to get a very low all-in pricing of just over 100 basis points. REC sealed a $400 million five-year facility in October 2014 with top-level all-in pricing of 190 basis points over Libor.

Commodity trading companies, which raise large loans in Asia, were also able to benefit from pricing compression before commodity prices fell. Mercuria Energy Trading SA launched a $900 million multi-tranche refinancing with top-level all-in pricing of 120 basis points, based on an interest margin of 85 basis points over Libor, well inside the 170 basis points and 200 basis points top-level all-in pricing it paid respectively on a $1 billion three-tranche loan in November 2014.

“Commodity sector borrowings are still in demand. Whilst we have seen some headwinds recently, we are still closing out between 10-12 deals this year from the commodities sector excluding M&A related deals. Volumes raised yearly on the average have been circa $12-$14 billion for past few years (if M&A financings are excluded) and we expect the same for 2015,” said Boey. WEAK M&A Lower loan volume across the region also reflects lower M&A activity of $26.4 billion in the first nine months, which is 36 percent lower than the $41.3 billion in the corresponding period last year. Leveraged loans backing private equity firms, including dividend recapitalisations, totalled $6.3 billion in the three quarters of 2015 compared with $2.6 billion in the same time last year.

“While (M&A) transactions have continued to pop up with some frequency, there have been far fewer across the board in 2015 compared with previous years,” said Lyndon Hsu, head of leveraged and acquisition finance for Asia Pacific at HSBC.

M&A deals currently in the market that are expected to close this year include a W4.3 trillion ($3.63 billion) buyout loan for Tesco’s Homeplus unit in South Korea, Canadian fund Brookfield Asset Management’s A$1.9 billion ($1.35 billion) financing backing its acquisition of Australian rail freight firm Asciano Ltd and a $450 million bridge loan backing Hong Kong listed dietary supplements maker Biostime International Holdings’ acquisition of Australian vitamin manufacturer Swisse Wellness Pty Ltd.

“M&A and related loan market activity have significantly slowed this year as China’s economic slowdown has stalled deal-making in the rest of the region and interest margins cannot go any lower. That will continue into next year if there are no changes of direction on the macroeconomic front,” said Hsu. (Reporting By Prakash Chakravarti; editing by Tessa Walsh)

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