Companies turn to loans as bonds fall out of favour
With debt market stalling, Chinese borrowers take advantage of liquidity to gain better pricing
Chinese borrowers are using loans to replace dwindling credit in bond markets. Such firms borrowed US$40.4 billion via syndicated loan markets in the year to date in G3 currencies, according to Thomson Reuters, handily eclipsing loan volumes in the same market for all of last year.
Meanwhile, bond markets have been at a virtual standstill over the summer thanks to an outflow of cash on the back of regional currency volatility and rising rates for US treasuries.
Phil Lipton, HSBC's Asia-Pacific head of syndicated finance, said companies had been switching from bonds for loans because loan pricing increasingly favoured borrowers.
Hilong, a mainland oil and gas firm, sought a bond earlier in the year. It abandoned that plan to take a US$200 million syndicated loan that closed early this month.
China Minzhong Food, a mainland firm specialising in vegetables, explored a bond earlier in the year but likewise abandoned that plan in favour of a US$150 million loan, announced last month.
"Some of the borrowers who were looking to issue a bond waited to see how the market would unfold during the summer, to see whether they should continue with their plans to tap the bond market, or if they should move on to the loan market where they know there is liquidity," Lipton said.
Bond and loan markets are crossing paths, with bond markets on their way down and loan markets on their way up.
"There is always tension between the loan and bond markets, but right now the loan market is winning," said Frank Kwong, head of the Asia-Pacific fixed-income syndicate at BNP Paribas.
Investors have taken about US$11 billion out of emerging market bond funds since May, when the US Federal Reserve began to drop hints that it is looking to unwind its US$85 billion-a-month bond buying programme. Yields on US treasuries have since risen by more than 120 basis points and investors are moving cash out of emerging markets in favour of US assets, especially government bonds.
Bond markets are also correcting from a very strong 2012, when investors appreciated bonds' income-generating aspect in a climate of near-zero deposit rates.
That global trend was very much reflected locally, with 96 per cent of all new money put into Hong Kong retail funds last year going into bonds, according to the Hong Kong Investment Funds Association. That trend reversed in the first half of this year, when bond funds captured only 7 per cent of the new money invested in local retail funds.
Institutional investors are also pulling money out of local-currency Asian bonds because they are worried about their foreign exchange risk after watching the Indian rupee and Indonesian rupiah decline. Deutsche Bank estimates that global investors have withdrawn about US$19 billion from Asian currency debt markets over the past three months.
"Money has flowed out of mutual funds investing in higher-yielding Asian bonds," said Mark Konyn, head of Cathay Conning Asset Management, a fund house. "Local currency bonds have been most affected as a result of concerns that currencies will continue to weaken in markets where the economy is running a current account deficit."
Kwong said bond funds were keeping about 10 per cent of their portfolios in cash in expectation of redemptions and Asian issuers had only squeezed out a handful of bonds in the past two months.
The loan market, meanwhile, is flush. European banks pulled capital out of Asia in 2011-12 as they grappled with the euro-zone crisis but European institutions are again pouring money into Asia, providing a big boost to loan syndication.
Lipton said that last year, Hong Kong blue chips would have paid about 200 basis points over the Hong Kong interbank offered rate for a three-year loan. Now, the same borrower could get five-year money for around 135 basis points in syndicated markets, and the spread has been tightening this year.
"The loan market has been very liquid in most countries in Asia, and certainly in Hong Kong it's very liquid at the moment," Lipton said. "Pricing has come down this year, and deals have been well received by banks."
A recent example was a US$1.75 billion facility for Reliance Industries, which was launched into syndication at the start of the month. The issuer is based in India, which is battling the worst currency devaluation in the region, yet the firm is getting better pricing (London interbank offered rate plus 170 basis points for five years) than on a large loan it took out one year ago, for which it paid a spread of 245 basis points for 51/2 years.
That kind of pricing is spurring demand for loans. Shenzhen-based Huawei Technologies finalised a US$1.5 billion loan last month that was upsized from US$700 million, while Sun Hung Kai Properties signed a HK$15.2 billion syndicated loan earlier in the year and CNOOC took out a US$6 billion bridge loan at the start of the year to finance its acquisition of Nexen.
Loans present their own challenges to borrowers. They are typically floating rate instruments, which is not ideal in a context of rising interest rates. Furthermore, the best loan pricing is saved for the biggest and most established firms with the tightest relationships with banks - other borrowers may find themselves out of luck. Finally, loans tend to come at a shorter tenor than bonds.
But loan markets do boast the virtue of liquidity. It's telling that when AVIC International, a mainland aviation firm, ventured a rare bond into the market earlier this month, it sold the US$300 million five-year deal thanks to the support of one particularly keen investor group that took 44 per cent of the deal - banks.