HONG KONG, Sept 29 (TRLPC) - Syndicated lending in Asia Pacific, excluding Japan, hit a five-year low of US$292.47bn for the first nine months of 2017, 19.55% lower than the same period last year as more borrowers turned to the bond market and China's curbs on overseas acquisitions dented volume.
A third-quarter total of US$72.49bn from 210 deals is the lowest quarterly tally in Asia for seven years and is 37.31% lower than US$115.64bn at the same time last year.
“G3 bond market issuance has increased this year from Asia, due to low benchmark rates and search for yield by investors. On the other hand, loan activity has seen a decline, leading to a volume shift from loans to bonds,” said Ashish Sharma, head of Asia Pacific loan syndication for Credit Suisse.
Asian companies locked in low borrowing costs in Asia's bond markets, driving record issuance in G3 currencies, in anticipation of a rise in interest rates following the US Federal Reserve's decision to start unwinding its quantitative easing programme.
At US$303.47bn for the year-to-date, bond issuance in G3 currencies have already eclipsed Asia Pacific's previous full-year record of US$293.07bn raised in 2016, according to Thomson Reuters data.
In contrast, China’s clampdown on outbound mergers and acquisitions (M&A) and a weaker domestic economy is starting to hit loan volume. Lending to China in the first nine months is 36% lower at US$76.62bn compared to a year earlier as the mainland suffered the sharpest slowdown of any major country in the region.
“M&A volume seems to have dropped mainly because of the impact of the regulatory restrictions on Chinese acquirers eyeing assets overseas," said Benjamin Ng, head of debt syndicate and acquisition financing, Asia Pacific, at Citigroup.
Excluding Japan, China is Asia's biggest market and still accounted for 26% of regional loan volume in the first three quarters of 2017 despite the drop. In the same period last year, China’s share of the regional lending activity was 32%.
In the third quarter, neighbouring Hong Kong eclipsed the mainland with a 25% share, the biggest in regional lending as buyout activity picked up.
Low dealflow and abundant liquidity continued to put pressure on Asian corporate loan pricing, as highlighted by Indian companies that frequently tap the market.
Indian Oil Corp mandated Scotiabank to lead a US$300m five-year loan in late August with all-in pricing of 93bp, undercutting the company's last similar loan in June that was priced at 95bp and closed after a poor response.
“The challenge with India is that we have seen a lot of spread compression and that’s because there are not enough new deals,” said Siong Ooi, co-head of debt capital markets for loans and bonds at Mitsubishi UFJ Financial Group.
Chinese companies are also able to access lower pricing. State-owned Zhejiang Energy International Ltd launched a US$300m three-year debut loan in July, which pays a top-level all-in pricing of 100bp – a level that is expected to find few takers, according to bankers.
BUYOUT BOOST Event-driven financing boosted Hong Kong’s volume in the third quarter, including a jumbo HK$28bn (US$3.6bn) leveraged buyout loan backing the privatisation of shoe retailer Belle International Holdings Ltd that was the territory's largest buyout.
A consortium comprising Chinese private equity firms CDH Investments and Hillhouse Capital Group along with the shoemaker's executives took the company private in a HK$53.1bn deal.
Another US$900m-equivalent LBO backing the acquisition of tycoon Li Ka-shing’s fixed-line phone unit, Hutchison Global Communications Ltd, had a positive reception from lenders.
The deal set the stage for a bigger US$4.10bn loan backing the mammoth S$16bn (US$11.9bn) LBO of Global Logistic Properties Ltd, Asia’s biggest warehouse operator.
GLP’s privatisation also involved Chinese sponsors and HGC’s deal was the first LBO in Asia for investment manager I Squared Capital.
The two deals for Belle and GLP are the biggest Asian buyouts of the year so far amid a constant flow of event-driven financings. Australia's active buyout financing market continues to drive developments with the arrival of unitranche structures.
US alternative investment firm Highbridge Capital underwrote a A$650m (US$516m) six-year unitranche financing backing iNova Pharmaceuticals (Australia) Pty Ltd's US$930m-equivalent buyout by private equity firms Carlyle Group and Pacific Equity Partners.
In September another A$250m six-year unitranche backing private equity giant KKR’s acquisition of Laser Clinics Australia Pty Ltd closed as a club deal, adding to an unusually active run of Australian leveraged loans. “Institutional non-bank investors have started becoming more active in senior LBO loans,” Sharma said.
Despite a steady flow of LBO loans, only US$27.68bn of volume from 51 deals backing Asian M&A activity were completed in the first nine months, compared with US$55bn from 57 financings in the same period in 2016.
The M&A loans tally for the three quarters of 2017 is lower than US$21.74bn of similar loans completed in the third quarter of 2016 alone, which included a US$12.7bn bridge financing backing state-owned China National Chemical Corp’s acquisition of Swiss seeds and pesticides company Syngenta AG.
China's curbs on capital outflows and outbound M&A are taking a toll on event-driven financings, after the government banned deals of more than US$1bn that were outside of the core business of a Chinese buyer.
Bankers still see lending opportunities with increased volume and enquiries across the region.
"Private equity firms have been active in various parts of Asia, which has improved the prospects for leveraged buyouts and related financing,” Ng said. (Reporting By Prakash Chakravarti and Chien Mi Wong; Editing by Tessa Walsh and Steve Garton)