The large balance sheets of Chinese banks have been a big boon to the country’s frequent loan borrowers, which have managed to seal dollar loans at negligible margins. The secret to their success has been their willingness to play Chinese banks off against each other, calling into question the value of relationship lending and putting the focus entirely on price.
That strategy looked sensible only a few months ago. While macroeconomic conditions were strong, and there was enough liquidity available, Chinese banks ─ especially the big four state-owned banks ─ were more than willing to write large cheques.
Syndication was never much of a concern. Even if the banks were saddled with big final holds on these offshore loans, they didn’t bat an eyelid. The sheer size of China’s biggest banks meant even the largest offshore loans could be done as club deals.
That is no longer the case. The Covid-19 pandemic has raised many questions for all of us, including how we work, how we travel and how we consume. For Chinese corporations in the offshore loan market, it has raised a more fundamental question ─ how can we raise money?
Banks now have big worries about credit risk. China will not announce its first quarter economic data until Friday, but economists are already warning of a sharp slowdown. Goldman Sachs has cut its forecast for first quarter gross domestic product to a year-on-year contraction of 9%, compared to the bank’s previous estimate of 2.5% growth.
A host of Chinese companies have been downgraded recently by the rating agencies, mainly due to refinancing pressure. Among them are many firms with outstanding dollar loans.
The rising risks associated with a number of loan market borrowers are sure to flag warnings to lenders. The Covid-19 pandemic should serve as a wake-up call to borrowers.
Companies can no longer turn to different banks for cheap financing. Even the big four mainland banks have stopped lending regardless of the pricing. Some bankers from big Chinese lenders told GlobalCapital Asia that they have turned down deals from borrowers in the past few weeks because borrowers were still playing hard ball on pricing.
Pricing negotiations and demands for higher margins are becoming increasingly common. While banks are treating flex clauses in loan agreements cautiously – as they want at least a semblance of a relationship with their clients – more conversations behind the scenes on boosting margins are taking place.
Banks are asking for about 20bp to 30bp extra in many cases, but less fortunate borrowers are struggling to raise money at any price. Chinese banks are facing difficulty getting internal approvals to participate in live loans, with some even having trouble getting sign-offs for deals from their existing clients. The big four are also stepping back from underwriting, as pressure on their balance sheets heats up due to their big final holds on past transactions.
That is all natural. Banks have little ability to predict a future that has proved increasingly unpredictable; the least they can do is shy away from uneconomic loans.
It is time for borrowers to wake up to this new reality. The market has not seen a big change in pricing from Chinese borrowers yet. But bankers say it is only a matter of time before the first few big borrowers will be forced to pay up for their loans, leading to a repricing of the rest of the market.
That means mainland companies will soon see that cheap money is no longer a given. Relationships will once again become more important than margins. Pricing will have to adjust.
The coronavirus has changed the world dramatically in the last two months. Chinese borrowers need to change, too.