September 30, 2019 / 8:35 AM / 2 months ago

APAC third quarter lending slides to two-year low

HONG KONG, Sept 30 (LPC) - Syndicated lending in Asia Pacific, excluding Japan, declined to a two-year low to US$338.76bn in the first three quarters of 2019 as the ongoing trade war between China and the United States continued to depress economic activity in the region.

Loan volume in the nine months ended September 30 represented a 6% drop, compared with the US$360.26bn raised in the same period last year, according to Refinitiv LPC data. Third quarter lending also dropped to a two-year low to US$102.72bn this year, a 17% slide from the US$123.90bn clocked in the preceding three months.

Uncertainty over geo-political developments such as the trade war and Britain’s impending exit from the European Union led to slower global economic growth, in turn knocking down the number of loans in Asia (ex-Japan) to 924 in the first nine months of the year, a 4.6% dip compared to the 955 loans closed during the same period in 2018.

“The market has been relatively slow in the first three quarters of the year, though the trend is improving,” said Ashish Sharma, head of loan syndications, Asia Pacific at HSBC. “There has been an overhang of trade tension discussions that has prompted some CEOs and CFOs to put their plans on hold until they know what the macroeconomic climate is going to look like.”

Asian borrowers tapped the bond markets to lock long-term funding amid a benign interest rate environment that has seen central banks cut rates to lift exports through weaker currencies. In mid-September, the US Federal Reserve cut interest rates a quarter of a point and signalled the need for a further rate cut before year-end amidst slowing global growth.

Hong Kong’s flagship carrier Cathay Pacific is venturing for its first US dollar bond in more than 20 years. The airline has not borrowed in the loan markets since December 2017. Last week, Chinese oil major CNOOC raised US$1.5bn from a dual-tranche bond, its first in 18 months, and extended its maturity curve by more than four years with the deal.

“We have seen a volume shift away from loans into the bond markets,” said HSBC’s Sharma. “CFOs have been keen to exploit the lower rates conditions in the region.”

Borrowers from Asia (ex-Japan) have ramped up bond issuance in G3 currencies, raising US$306.49bn in the first three quarters, a 20.4% jump year-on-year, according to Refinitiv data.

GLOOMY OUTLOOK

Among the major loan markets in Asia, Hong Kong was the only one to post significant growth. The territory, which is fighting anti-government protests that have been raging for over three months, clocked a historic high of US$105.58bn in volume, up more than 15% from the US$91.78bn raised in the same period a year ago. Jumbo loans for Chinese companies contributed significantly to the tally.

The territory also relegated China to the second position as Asia’s largest loan market outside Japan, even though the mainland registered a marginal year-on-year increase to US$71.71bn.

However, the outlook appears bleak with China expected to slow down further. The Asian Development Bank cut China’s growth forecast this year to 6.2% from 6.3%, according to its September 25 report, while projecting the economy to cool further to 6.0% in 2020.

The rest of Asia has felt the ripple effects too. Lending in Australia and Singapore plummeted around 30% apiece to US$50.15bn and US$30.81bn respectively. This was despite both markets closing a few big-ticket deals such as the mammoth S$8bn (US$5.86bn) financing for Singapore-based casino operator Marina Bay Sands and theA$2.15bn (US$1.52bn) multi-tranche loan supporting the leveraged buyout of Australian hospital operator Healthscope Ltd.

Vietnam, however, was a bright spot, mirroring the benefits the country is deriving in the trade war as an alternative manufacturing base to China. The South-East Asian economy’s lending almost tripled to US$6.37bn in the first nine months of the year. With another US4bn in the pipeline, the country is poised to post a record in offshore loans.

“Vietnam should continue to shine as it has been growing faster vis-à-vis the region. Credit demand and supply have increased, thanks to a more receptive regulatory environment,” said Bryan Liew, regional head of syndications, Asean at Standard Chartered. “Looking ahead, key drivers are strong domestic demand buoyed by a developing middle class and a young population.”

PROMISING M&A

Meanwhile, despite the not-so-promising outlook on the economic front, event-driven financings recorded US$26.11bn in total in the first three quarters of 2019, almost flat to the US$26.28bn in the same period a year earlier. Healthscope’s A$2.15bn LBO loan was the largest M&A financing in the third quarter this year, helping Australia post a 57% year-on-year jump in such loans to US$7.67bn for the nine months ended September 30.

Some bankers are still bullish on the activity for the rest of the year, particularly financial sponsor-related lending. In mid-September, Nasdaq-listed China Biologic Products Holdings received a take-private deal for US$4.59bn in cash from a consortium of buyers, including China CITIC Capital.

Another example is German food wholesaler Metro’s China business for which a few private equity firms are vying and looking to raise debt financing of around US$500m.

“We do think deal flow will improve in the fourth quarter and should overall be busier that the first half,” said HSBC’s Sharma. “We are seeing a pick-up in activity across the region, but particularly in Greater China and Australia, in terms of refinancings and a fair degree of M&A activity, across multi-national companies carveouts and financial sponsor activity.” (Reporting By Chien Mi Wong; editing by Prakash Chakravarti)

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