Plastic producer Formosa has sent out a request for proposals for a $2bn loan, which will be used for its Vietnam business. Banks in Taiwan are understood to be hotly competing for the mandate in a bid to book assets before the end of the year.
Their eagerness to bank with a strong credit like Formosa, rated A3 by Moody’s and A- by S&P Global Ratings, is natural.
Deal flow has been thin this year, as corporations put capital expenditure on the backburner and hunker down for a tough period amid the coronavirus pandemic. For Taiwanese banks specifically, their pivot over the last few years from lending to Chinese borrowers to working with southeast Asian clients has also received a setback, due to rising default fears in the region.
This means these banks are increasingly willing to agree to aggressive pricing terms from Taiwanese firms as they shift gears to support local borrowers.
Formosa’s planned fundraising is a case in point. The company, through a number of subsidiaries, is seeking bids from banks for a five year tranche, and a three year portion with a two year extension option.
Speculation is rife that the firm will push pricing down considerably, and even set a new benchmark for dollar loans from the region.
This would, of course, be a win for Formosa. But it could have damaging consequences for Asia’s loan market if Taiwan’s banks don’t stand their ground.
Taiwan’s banks, especially the state-owned lenders, are not known for being very strict with their return requirements. They are often willing to accept pricing that does not justify a deal’s risk when they are struggling to find deals to participate in. They sometimes also join loans that are priced at levels lower than their funding costs, in a bid to build and expand their relationships with new borrowers.
That approach is not sustainable however, and will suffer further if the banks give Formosa more leeway on its loan pricing, because if and when the company comes back to refinance, it will be likely to ask for the same level of pricing, if not lower. This will put banks in a dilemma: do they risk damaging their relationship with one of Taiwan’s most avid dollar loan borrowers by pushing back on pricing, or make a loss on yet another transaction?
It’s a tricky balance, especially as Formosa is a frequent borrower. If its Vietnam subsidiaries manage to reduce their funding costs this time around, it is likely that the firm’s other subsidiaries will similarly be keen to reprice their debt.
This would set a precedent for other Taiwanese borrowers, which will try to push the envelope on pricing. More companies from the island are expected to raise dollar funding, as this is cheaper than funding in the domestic local currency market for now.
More importantly, however, it could also cause a domino effect in the rest of Asia’s syndications market.
Taiwanese banks typically point to international banks and their cheap dollar liquidity as a reason for compressing margins in Asia’s loan market. This has been particularly the case with several south and southeast Asian firms, which have been able to narrow pricing with every loan return. For instance, a Taiwanese banker told GlobalCapital Asia this week that she has been soft sounded for a loan from State Bank of India four times by different international banks this year. All offered razor-thin margins.
However, if Formosa manages to hit a new low with this outing, it will show that Taiwanese banks are willing to sacrifice returns to counter a slow market. Borrowers in the rest of Asia, and international banks, would pounce on that to tighten pricing further on deals.
There is an obvious winner with this, of course: borrowers that can save on their funding costs. But that advantage could quickly disappear if market conditions turn and banks struggle to survive on loss-making loans in the absence of sufficient ancillary business.
Taiwanese banks should stand firm on their pricing requirements — or risk facing an even more challenging loan market in the future.