In the third quarter, 115 offshore deals were announced or closed in Asia ex-Japan, compared to 163 deals during the same period last year. At the same time, deal volume also declined to $57bn from $61.4bn, according to Dealogic data.
“The number of deals has dropped, but the deal volume hasn’t changed dramatically, and our pipeline is okay,” said a Hong Kong-based banker from an international lender. “But the main reason for the poor performance is the lack of event-driven deals.”
The slowing numbers can be seen pretty much across the board. North Asia, southeast Asia and south Asia were all quiet in the third quarter. North Asia, for instance, had 75 announced or closed deals worth $36.3bn, compared to 100 deals worth $38.2bn last year.
In the first nine months of this year, 356 offshore deals were announced or closed in the region, lower than the 416 deals during the same period last year. But deal volume increased slightly from $170bn to $ 172bn.
Many believe the slower deal flow is thanks to fewer M&A related transactions, particularly from China following a tightening in regulation around overseas acquisitions.
Others reckon the depreciation of renminbi is also part of the reason. Chinese companies are less interested in offshore borrowing, and those that have done international loans are using the proceeds for refinancing.
“Renminbi has been depreciating, so companies don’t want to borrow dollars,” said a Hong Kong-based banker from a Chinese lender. “I even have a few clients that have already closed syndication but haven’t drawn their money yet, because they don’t want to report an exchange loss on their balance sheet. It’s very common now.
“I think only a few of them that need the money urgently will draw the money in the fourth quarter, and most of them will wait until next year,” he added.
Some bankers were also quick to point to trade tensions between the US and China for a slow period of loan issuance.
While bankers admit the trade war is not affecting deal execution, they said companies are being more cautious about hitting the market. They are hesitant to start new projects or borrow new money, given worries the trade situation will impact their businesses in the coming year, said bankers.
Away from China, Indonesia, typically a bright spot for loans bankers, has also disappointed. In the southeast Asian country’s case, the government’s requirements that companies have to meet certain hedging rules to raise dollar loans have caused a slowdown.
“I think the reason is that it is not rupiah loans, and a lot of infrastructure companies, which can’t meet the requirement, have borrowed in local currency,” said a Singapore-based banker from a Japanese lender.
Light at the end of tunnel
All is not lost, however. There are sure signs the market is picking up slowly, with bankers expecting more deals to come, including for M&A.
“The market is heating up; there are more offshore M&A deals in India, and infrastructure loans in other parts of the region,” said the Hong Kong-based banker from the international lender.
Two chunky loans from India have already captured the market’s attention.
Vedanta Resources is seeking a $1.1bn multi-tranche loan led by Credit Suisse and Standard Chartered. That transaction, containing three tranches with tenors of three months, 18 months and three years respectively, is priced at a high 400bp area, according to a banker close to the situation. Proceeds are for taking the London-listed company private.
Indian agriculture company UPL also launched a $3bn five year deal into general syndication this week. The proceeds will be used to back the company’s $4.2bn acquisition of Arysta LifeScience. MUFG Bank and Rabobank are the original mandated lead arrangers and bookrunners. They have brought in ANZ, Barclays, DBS, First Abu Dhabi, JP Morgan and Société Générale in senior syndication.
In addition, aluminium company Hindalco is expected to mandate banks in October or November for a loan to back its $2.58bn acquisition of US firm Aleris.
More issuance, especially from housing finance companies, is also expected thanks to a regulatory tweak.
“The Reserve Bank of India made some changes at the beginning of this year, allowing housing finance companies to do offshore borrowing. The sector is good, and I think more housing finance names will come to the offshore market,” said another Singapore-based banker from an international lender.
But what about pricing, which has only gone down over the months, causing many borrowers to struggle in syndication? Has pricing bottomed out?
It depends on the kind of borrower, say bankers.
“I don’t see the pricing in India tightening further except for financial institutions, as the pricing has gone very low and they come to the offshore market too many times,” said another Hong Kong-based banker from an international lender, who believe there will be an increase of 10bp-20bp in pricing for Indian institutions.
In China’s case, top tier players are unlikely to see a change in pricing. But with second and third tier companies, there is room for an upward push in margin , as they are more likely to be affected by the trade war, said a Hong Kong-based syndicate banker from a Chinese bank.