Tight margins forecast to flatten out

The tightening margin squeeze of recent years is likely to soon level off, according to a survey of lenders who say syndicated loans cannot get much cheaper. A South China Morning Post poll of six corporate bankers shows a consensus that any further contraction would only be marginal, particularly for blue-chip companies that are already enjoying record low costs. It is a view held by HSBC, which is ranked by Asian debt markets newsletter Reuters Basis Point as top bookrunner for syndicated loans in Hong Kong and Macau by helping with 21 deals worth US$2.4 billion last year and second as mandated arrangers with 33 deals amounting to US$2.21 billion. 'We are going to see a slight drop or flattening out of the margins,' said Phil Lipton, HSBC's head of loan distribution, Asia-Pacific corporate, investment banking and markets. 'The margins that some banks are earning on deals are already close to their internal minimum return on risk.' Banks, well-known for their ability to balance risk exposure and return received, will lend money only if they expect to earn a positive return after discounting the risk. Minimum return on risk is the benchmark they use to evaluate deals. Therefore, a convergence of the interest rate margins and internal minimum return on risk may suggest there is not much room for margins to squeeze further. Another banker from an Asian-based lender noted the increase in overhead costs, including rising rental expenses, was a burden that made banks unable to lend at a lower rate. Mr Lipton said that, in fact, margins had already dropped below the pre-1997 level because of the current excess liquidity and competition among banks keen to book loan assets. Top-tier developers such as Cheung Kong (Holdings) and Sun Hung Kai Properties are enjoying very tight interest rate margins with all-ins, which are calculated by adding the annual management fee and interest margins together, at just above 30 basis points. A recent deal for Kerry Properties, which is regarded as a second-tier developer, attracted good response from lenders for its self-arranged five-year refinancing deal offering just 36 basis points. The weighted average all-ins have been declining since 2000, according to Reuters Basis Point. Of the money lent, the decline in margins for blue-chip borrowers was very marginal while loans to medium-sized corporates and other companies were still contracting substantially. The margin today is very low when compared with 1996 and 1997 when margins tightened to 40 basis points for top-tier property developers and then surged to above 100 basis points because banks were reluctant to lend after the Asian crisis in 1998.. Mr Lipton said one reason for the decline was local banks which previously focused on retail banking had broadened their participation in the corporate loan market, becoming a valuable source of liquidity to the market. This also meant more competition from such banks. 'I agree that margins for blue-chip lending have already flattened out, yet we may see further squeezing of margins for some high-quality second tiers or red chips,' said a local banker. 'What we saw last year is that the margins narrowed significantly for the large industrials which sought to refinance their original deals - the ones priced above 150 basis points over Hong Kong interbank offered rate - while bankers who understand well the industrial businesses are still eager to lend at a tighter price.' However, he noted credit events related to Moulin Global Eyecare Holdings and video electronics manufacturer Orient Power Holdings had undermined banks' enthusiasm for lending to the industrial sector, alleviating the pressure for the squeeze. Therefore, the trend of margins for such lending remained to be seen. Moulin was in 'technical default' last April over a $750 million syndicated credit facility because its shares had been suspended for more than nine trading days. Within a few days, nine banks demanded repayment of more than $329 million in loans unrelated to the $750 million credit facility. The company came under provisional liquidators after 29 banks, led by HSBC, filed a petition at the High Court to have it declared insolvent. The bank hoped to reclaim at least $2.4 billion in debt. In the case of Orient Power, which had debts of about $1.4 billion, the banks considered this a credit event even though they had not yet asked the company to repay their loans. The company was named as a defendant by global electronics firm Royal Philips Electronics in relation to alleged evasion of more than US$50 million in patent royalties for the use of Philips CD and DVD technologies. According to Reuters Basis Point, the US$22.63 billion Hong Kong loan market was the second biggest in Asia-Pacific.