Bankers say Asia loan market to stay weak as war saps confidence

[HONG KONG] Asia’s loan market is heading into the second half of the year with little sign of a rebound, according to bankers, as the fallout from the Iran war continues to suppress confidence among lenders and borrowers.

Loan issuance in US dollars, euros and yen across Asia-Pacific ex-Japan dropped 15 per cent from a year earlier to US$69 billion in the first six months, the weakest first-half performance in 16 years, according to data compiled by Bloomberg.

The Middle East conflict has delayed investment and deal-making in Asia, while financing timelines are dragging out as lenders subject transactions to closer scrutiny for risks. Bankers say these headwinds will likely persist over the rest of the year, with competition also likely to curb some loan margins.

“With increased uncertainty, there is a reduction in corporate confidence,” said Andrew Ashman, head of Asia-Pacific loan syndicate at Barclays.

Expectations for mergers and acquisitions to drive more loans have not materialised, and the geopolitical situation may continue to “impact new money deal flow going forward”, he added.

There’s also been less liquidity coming from the Middle East, with banks in the region becoming more selective on offshore deals to preserve liquidity for their home markets, according to half a dozen bankers Bloomberg spoke with.

“Over time, we expect flows to recover” as the Asia-Middle East corridor continues to strengthen, said Ashish Sharma, head of leveraged and acquisition finance and loan syndications for Asia-Pacific at HSBC. “In the near term, things need to settle. But structurally, the ties between the two regions remain strong.”

Syndicated loans are a key source of funding for large acquisitions, expansion projects and corporate refinancing, making them a barometer of business confidence. With companies and banks taking a more cautious approach to risk, the weakness may indicate slower investment and deal-making across the region, even as policymakers try to support growth.

Beyond the Middle East, China’s prolonged property downturn continues to weigh on borrowing, the Indonesian government’s clampdown has made businesses more cautious, while higher oil prices and weaker currencies have made conditions tougher in markets such as India.

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“The second-half volume may not be different from the first half purely because of macroeconomic reasons,” said Birendra Baid, head of Asia-Pacific loan syndication at Deutsche Bank. With banks still willing to lend, “pricing will compress”.

Higher yields

With volumes staying muted, some lenders are shifting towards higher-yielding areas of the market.

Structured credit has emerged as a bright spot, offering banks and investors higher returns than conventional corporate loans. Mizuho Bank recently hired bankers from Bank of America and UBS in Hong Kong to build out its underwriting and distribution capabilities.

“Investors are attracted to the pricing premium and bespoke structures,” Barclays’ Ashman said. “We are likely to see growth in that market going forward.”

Data centre financing is also seeing a steady flow of deals. Recent funding include DayOne Data Centers Singapore’s doubling of a RM15 billion (S$4.8 billion) loan from last year, Blackstone-owned AirTrunk’s US$2.3 billion facility for a Malaysia project, and another US$3 billion loan the company is seeking for a new Sydney data centre.

The demand for capital is pushing up borrowing costs for data centre deals. Margins on a recent Malaysia data centre deal was 310 basis points over the US Secured Overnight Financing Rate, compared with levels largely in the 200s over the past year, according to Deutsche’s Baid.

There are more such transactions to come, Baid said. “Some of them may not have hit the market yet, but the expectation is when they do, you will see pricing inching up by 20 to 50 basis points.”

Australia

Even one of Asia Pacific’s more resilient markets is seeing a slowdown. Australia’s loan volumes fell about 10 per cent in the first half. An influx of bank liquidity has also increased competition among lenders, impacting margins.

“Some banks have re-deployed capital from the Middle East to Asia Pacific, with Australia particularly seen as a safe haven,” said Gavin Chappell, global head of acquisition finance & syndication at ANZ Bank in Sydney.

The deep pool of capital chasing limited transactions has helped keep spreads down. A five-year loan for an investment grade BBB-rated regulated utility pays around 100 basis points and 120 basis points for a similarly-rated company.

Loan bankers said that those levels are tight and unlikely to change over the next six months.

“Loan margins continue to be under pressure as there is a supply and demand imbalance,” Chappell said. BLOOMBERG