Minsheng Financial Leasing made banks sit up and take notice earlier this month when it decided to cut the margin on a $200m offshore loan by a hefty 45bp to 180bp over Libor. The move came nearly three months after the deal had hit syndication, and after more than 10 lenders had put in commitments.
That wasn’t the first time Minsheng changed terms on a loan already in the market. Also this month, the company decided to reduce the size of an onshore dollar loan from a target of $175m-$200m to $150m.
The changes have not come without a certain amount of friction from the lending group, with banks forced to seek credit approvals all over again and work towards getting their committees comfortable with a lower margin — with the extra paperwork creating a big headache.
Making an already long syndication process even longer is undoubtedly painful, but it’s time banks stop complaining and prepare for more such situations.
The truth is that foreign currency offshore loans have lost some of their sheen for Chinese companies. Onshore costs have become more palatable than offshore loans, and will only continue to gain lustre, thanks to the People’s Bank of China cutting its base rate by 25bp last week — the sixth time since November 2014.
PBoC’s attempt to stimulate credit growth on the Mainland by lowering bank reserve requirement ratios (the ratio of capital banks have to put aside for the loans they give out) also makes the domestic market a far more tempting alternative with lower corporate financing costs and more liquidity.
With onshore loans increasingly appealing, it’s only natural for borrowers to try to get better terms for their offshore fundraising. And instead of complaining, lenders need to adapt to the fact that China’s environment is constantly changing and that if they don’t jump on board now, they might lose out later.
After all, so many new loans are based on old relationships. If a bank gets out of a syndicate now because of slimmer margins than originally agreed, it might not be invited to join the next time around.
Also, with loan volumes looking pretty bleak this year, the chances are slim that banks would be able to reap better rewards from rival transactions. This year’s theme has been one of abundant bank liquidity with fewer deals driving pricing lower. Lenders need to put their money to work, and if they turn down rejigged deals now, they will find it hard to find a new home for that cash.
Banks need to realise that unless Chinese companies have an imminent need for offshore funds, such as an overseas acquisition or refinancing overseas debt, there are plenty of reasons for them to remain onshore and stick to the local currency. But if banks are willing to be more flexible with changing terms of offshore loans at the last minute if needed, they might yet have a chance of seeing some new business.
If Chinese monetary policy continues to evolve as frequently as it has done this year it will only be a matter of time before other top tier borrowers begin rethinking their syndication strategy and pricing. Banks need to get used to the new normal for pricing. As with loan volumes down in the dumps they can’t afford not to.