Syndicated lending in Asia Pacific plunged to the slowest quarter in eight years as the coronavirus pandemic took its toll with several countries imposing lockdowns and grinding a range of business activities to a halt.
Loan volumes in Asia Pacific (ex-Japan) dropped 39% to US$68.92bn in the first quarter from US$113.79bn a year ago, while deal flow shrunk to 221 from 377 loans completed in the same period, according to Refinitiv LPC data.
The volumes for the first three months of 2020 represent the lowest quarterly tally since the first quarter of 2012 when lending in Asia Pacific slumped to US$62.21bn from 231 deals in the aftermath of the 2011 eurozone crisis.
“Overall, the market has been off to a really slow start and outlook for Q2 is uncertain and changing by the day,” said Bryan Liew, regional head, loan syndications, ASEAN at Standard Chartered Bank in Singapore. “I think we will see more caution and maybe asset repricing.”
The market volatility from Covid-19 has forced borrowers to shelve fundraising, acquisition, and capital expenditure plans, and seek covenant amendments or waivers from lenders. Every market across the region posted declines with Singapore being the worst hit, nose-diving over 84% year-on-year to US$1.09bn in the first quarter of 2020.
Two financial sponsors terminated their proposed acquisition of New Zealand-listed dental service provider Abano Healthcare Group, dealing a blow to a NZ$190m (US$107m) five-year loan for the buyout that had been in syndication since November.
Earlier this month Australian retail property group Vicinity Centres suspended a A$300m (US$176m) seven-year loan until further notice. Lenders to Singapore-listed Eagle Hospitality Trust issued a notice of default and mandatory prepayment on a US$341m loan signed last May. MGM China Holdings asked lenders in February to waive the leverage covenants on a HK$9.75bn (US$126m) loan for the next 12 months after Macau’s government closed all casinos for 15 days that month.
Although G3 currency bond issuance from Asia Pacific (ex-Japan) has ground to a halt since March 11, the volumes for the first quarter posted only a 5.81% year-on-year decline to US$96.32bn. Bankers expect some bond issuers to turn to loans, which historically have been more resilient during times of crisis.
“The coronavirus-induced market volatility will create a heightened focus for all corporates on what their funding strategy is going to be for the next 12 months,” said Gavin Chappell, head of syndications Australia at ANZ in Sydney. “I think we will see some transactions that couldn’t have been done in other markets come into the bank market.”
In a report released on Monday, rating agency S&P warned of a risk of recession across Asia Pacific, likening the current situation to that during the 1997-98 Asian financial crisis. It noted that corporate and institutional borrowers in the region, unlike their US peers, continue to borrow a huge amount from banks rather than from other sources.
Credits from the hardest-hit industries of aviation, tourism and hospitality, among others, are grappling with challenges, while cash-strapped companies with impending debt maturities in other sectors are also facing the heat.
“We often see a polarisation effect during times of market disruption – strong credits in stable sectors continue to receive support from their relationship banks, while weaker credits or those in volatile sectors may struggle to raise financing or see their terms become less competitive,” said Andrew Ashman, head of loan syndicate Asia Pacific at Barclays in Singapore.
The outcome pf syndication for Chinese travel agency Trip.com Group’s US$1.2bn loan will provide a gauge of sentiment. Singapore Airlines, Australia’s Qantas Airways, Air New Zealand and Hong Kong’s Cathay Pacific Airways took steps to lock liquidity with support from their governments and other lenders.
StanChart said it will commit US$1bn in financing for manufacturers and distributors in the pharmaceutical industry and healthcare providers, as well as non-medical companies that have volunteered to add manufacturing capabilities for goods such as ventilators, face masks, protective equipment, sanitisers and other consumables.
NOT ALL GLOOM AND DOOM
Leaders of the Group of 20 major economies pledged on March 26 to inject over US$5trn into the global economy to keep Covid-19 from tipping the world into a recession. Whether this and other stimulus measures are enough to help borrowers survive through the crisis remains to be seen.
“As perception of credit risk goes up, so too should credit spreads,” said Ashish Sharma, head of loan syndications Asia Pacific at HSBC in Hong Kong. “But as interest rates have come down, and given quantitative easing by a number of central banks, some of the stronger borrowers may see their overall interest cost come down with the significant decline in benchmark rates, even if their credit spreads go up.”
It is not all gloom and doom, however, with event-driven financings providing the silver lining. Thai billionaire Dhanin Chearavanont’s Charoen Pokphand Group is raising a bridge loan of about US$7.5bn for its proposed acquisition of Tesco’s Asian business, the largest from the South-East Asian country. Freeport Indonesia is preparing launch of a US$2.8bn five-year loan for copper smelter in East Java into general syndication as early as April.
Vodafone Hutchison Australia and TPG Telecom are forging ahead with a larger A$5.25bn loan for their proposed merger, returning to the loan market after cancelling a A$4.75bn facility that backed the exercise last year.
“When the situation hopefully settles, the level of activity should come back up,” said HSBC’s Sharma. “Even though things may not be back to exactly as they were in January, there should be opportunities in the loan market, particularly in M&A financing and other financings to help rebuilding in various economies.”
StanChart’s Liew is also optimistic of the region’s prospects and expects a pick-up of activities from the third quarter.
“Fundamentally, the outlook in Asia remains intact with three of the largest economies – China, India and ASEAN – all in growth mode and several at the start of industrialisation,” he said.
