There has been a pick-up in syndicated loans meant for general distribution in recent weeks, with borrowers from Hong Kong and China leading the pack. Smaller companies in the region that may not catch the attention of the big four Chinese banks are counting on liquidity from retail lenders and offering generous margins in return.
“It [general syndication deal flow out of Hong Kong and China] was inordinately slow since the beginning of the year so I would say this is a return to the run rate of the past 18 months,” said one senior banker.
Data from Dealogic show year-to-date Hong Kong dollar loans by Chinese and Hong Kong companies trail those for the corresponding period in 2014 by just 3%.
This looks like only a small gap, considering the first half of 2014 was considered a bumper one for syndicated loans, but bankers have been lamenting the lack of deals. This is because the data take into account deals signed so far this year, rather than those launched.
Additionally, loan volumes have been skewed by one or two very big deals, such as the HK$55bn ($7.1bn) for Cheung Kong Property, sealed in May.
Renminbi view
A combination of factors was at play in keeping Chinese borrowers from tapping the loan syndication market. One of them was the foreign exchange risk. The People’s Bank of China has been pursuing monetary loosening to stimulate credit growth since the beginning of the year.
An uncertain outlook on the renminbi, which was volatile at the start of the year but has since stabilised, dissuaded mainland companies from taking on more foreign currency debt. But that looks set to change as a clearer picture has emerged on the central bank’s plans for the country since then, said a banker who covers Hong Kong and China syndications.
“In part, borrowers needed more clarity on their financing plans and some were pessimistic on the renminbi depreciating. They were wary of putting more dollar liability on the balance sheet. They’d been doing dollar financing so far with a view to converting those dollars into local currency and making gains."
"But that changed [because of loosening]. Now people have a different view and are hoping renminbi will depreciate less.”
Generous returns
While most of the facilities are not massive, their presence has heartened loans bankers, especially at smaller lenders who seldom get a chance to come into exclusive clubs for blue chips.
With an overall pricing downtrend and razor thin returns for high grade companies, the pricing on these borrowings looks more attractive than ever, even though many of them are offering lower fees than the facilities they replace.
Recent loans for Zhuhai Holdings Investment and China Modern Dairy are paying top level all-ins in the range of 282bp-349bp in general syndication. These compare favourably to the 110bp-133bp range offered by top tier credits like Cheung Kong Property and Huawei Technologies.
Companies of all stripes, including oilfield equipment suppliers, transport service providers, electronics distributors and car dealers, are seeking funds in the syndicated loan market. But one area from which bankers definitely see more business coming is securities companies.
Haitong International Securities, for example, has unleashed an HK$2bn loan barely two months since wrapping up its last one (see separate story). It has also managed to cut the margin by 20bp to 180bp during the same period, reflecting bank demand. The forecast is there will be more borrowing by such firms.
“They need money for margin financing,” said the banker who covers Hong Kong and China syndications. “There is a stock connect between Hong Kong and Shenzhen that will happen soon, so brokers need more working capital lines to provide for more margin financing or for providing advisory services and creating and managing funds so people can invest.”
Leasing companies, ever hungry for money, are also expected to take advantage of the cheap funds and abundant liquidity available in the syndicated loan market, said bankers. One such company is Minsheng Financial Leasing. The firm is eyeing a fundraising of $175m-$200m onshore to refinance existing debt.
Small is beautiful
Although there is plenty of money available onshore, the benefits are not trickling down to the smaller players, especially privately owned ones, as major Chinese lenders focus on large, state owned names, said bankers.
This means the funding needs of small to mid-cap private sector players often slip through the cracks.
“There are a couple of factors [driving the recent uptick in Hong Kong/China syndicated loan activity],” said a syndicator with a European bank.
“International banks obviously want to do more business and some borrowers, especially privately owned, can’t get enough funding from onshore. Though there is sufficient liquidity there, there is not enough funding available to them because Chinese banks might not be interested.”
He also pointed out risk aversion surrounding Chinese high yield bonds that could drive companies back to the loan market.