As the Covid-19 pandemic takes a toll on markets around the world, the usually resilient loan market in Asia is also feeling the pinch. A clear indication of that came in March, when Taiwanese banks invoked a market disruption clause on a loan to Indonesian finance company BFI Finance.
The clause allows lenders to push for new terms, especially better margins, than originally negotiated with borrowers. In the case of BFI’s $100m loan signed in March, which pays a margin of about 133bp over Libor, Taiwanese banks are demanding juicier pricing to offset their rising dollar funding costs.
Local dollar costs for Taiwanese banks have soared in recent weeks. Three month TaiFX, the local interbank dollar interest rate, was about 1.8% at the beginning of March but closed the month at 2.5%.
That alone is not much cause for concern. But the rising TaiFX contrasted with a fall in three month Libor, the benchmark used for the dollar loans banks give their clients. Three month Libor stood at about 1.9% at the beginning of 2020, but slumped to below 1% in early March. It had crept up to about 1.4% by the end of the month.
As the spread between Libor and TaiFX has widened, Taiwanese banks have struggled to make profits on dollar syndicated loans. The lead bank on the BFI deal, Standard Chartered, is now negotiating with the Indonesian firm for a new margin.
This is worrying for an Asian loan market that has become used to tapping the vast pool of liquidity at Taiwanese banks. Between them, they typically take large portions of syndicated loans, although individual banks' commitments are often small. Sometimes, bookrunners even advise borrowers to run a specifically Taiwan-focused syndication.
The recent change in pricing dynamics also bodes ill for a loan market that tends to be more immune to volatility than most. The rapid movements in Libor and TaiFX are concerning. During difficult times, some changes in the benchmarks are only to be expected. But the extent of the fluctuations, and the resulting impact on funding costs for banks, are a worrying signal.
As one senior syndications banker at a global bank recently told GlobalCapital Asia, funding costs for his bank were changing daily as a result of the volatility caused by the Covid-19 pandemic.
That means taking longer term calls on deals is increasingly difficult. Instead, loans bankers are facing a whole new challenge: navigating extreme volatility in their own funding costs, at a time when many borrowers are turning to the loan market over bonds for their funding needs, whether for bilateral facilities, club loans or syndicated deals.
The Covid-19 pandemic will test the loan market’s resilience in such a turbulent period.
Big, high grade, frequent borrowers offering ancillary business opportunities are likely to be prioritised by banks, over the more marginal, lower profile credits. Borrowers that have long been used to dirt-cheap pricing on their loans will have to contend with higher costs. Banks will have to closely monitor their funding costs and consider adding more conditions on loans to serve as a buffer if their own costs soar.
No matter where the market lands once the pandemic is behind us, banks and borrowers — and their relationships — are unlikely to emerge unscathed.