Why funding costs are still low for companies

THE uneven implementation of regulations such as Basel III, together with a continued surge in liquidity, has led to low funding costs for today's corporations, and in particular, those in the emerging markets.

"It's a great time to be a borrower, because there are a lot of options," said Isabelle Roux-Sharpe, head of export finance business units and projects at Societe Generale, and a discussion panellist at GTR Asia Trade Finance Week, on Tuesday. "Basel III is not translating into (borrowing) cost."

Ms Roux-Sharpe noted high pressure on banks to offer export financing at attractive rates that were previously reserved for clients with top credit ratings.

Shivkumar Seerapu, regional head of trade finance Asia Pacific at Deutsche Bank, said: "It's a dichotomy we struggle with, especially in the emerging markets. We wonder sometimes whether the pricing and margins are based on risk-return, or on the demand-supply of liquidity."

And because local banks are flush with liquidity, pricing continues to go down, he added.

"Till such time that all banks start complying with Basel III, we will continue to see this issue where pricing is determined more on the basis of the demand-supply of liquidity."

In parts of Asia, and other markets such as Russia, corporates have also diversified their funding sources, said Ms Roux-Sharpe, who recalled speaking to some Russian corporates in 2007 about the crisis then.

"They said, 'what liquidity crisis'? To them, the gap of the European banks had been filled by the Japanese banks, and non-European banks. They were not relying anymore on one source of funding."

At the same time, though European banks have trimmed their lending, corporates are still getting funding, thanks to strong demand for their high-yield bonds. This means there is no pressure to raise loan pricing.

"Investors are looking for yield, and they are looking for anything that gives them more than the current deposit rates," said Paul Gardner, global head of structured commodity finance at Westpac Banking Corporation.

But Mr Gardner thinks funding costs will head north once interest rates tick higher - an event widely expected next year.

"Once central banks start to taper their quantitative easing, once interest rates start to rise, we will see a dramatic change. Those investors won't be there anymore."

Deutsche Bank's Mr See-rapu noted that regulations have forced lenders to prioritise on key markets, but argued that global banks can still add value.

"There's enough space in the market for local banks, regional banks, and global banks, as corporates, especially in Asia, are looking to become more international," he said.

But Westpac's Mr Gard-ner responded that if banks are to develop into specialists, the industry would move from a global banking model, and towards one based on alliances, as seen in the airline industry.

"What you got there is a lot of different airlines working around the globe to provide a global ability to travel. That may well be the model that evolves out of this current crisis that we've been through."