Asia-Pacific corporate loan prices rose to the highest in two years after syndicated bank lending slumped to the lowest since 2005, attracting investors to an emerging market for older debt.
Loans rising in value outpaced those falling by five-to-one in December, up from a ratio of 1.22-to-one in April, according to an Asia-Pacific Loan Market Association index tracking 122 actively traded obligations. That’s reversing a two-year trend, the APLMA benchmark shows.
PT Pertamina, Indonesia’s state oil company, has a $500 million loan maturing in December 2011 that traded at an average 98.535 cents on the dollar last month compared with 92.413 cents in March 2009, according to the APLMA, which posted data for February on its Web site yesterday. It traded as high as 99.805 cents in January 2008.
“Asia-Pacific is a net buyer of loans and that wasn’t the case 18 months ago,” said Bridget Auer, head of secondary loans trading in Sydney at Australia & New Zealand Banking Group Ltd, Australia’s third-biggest lender by market value. “The primary market has been relatively slow and banks are trying to source additional loan product for their balance sheets via the secondary market.”
Lending froze after Lehman Brothers Holdings Inc. collapsed in 2008, spurring banks to hoard cash as they struggled with $1.77 trillion in losses and writedowns, according to data compiled by Bloomberg. The Basel Committee on Banking Supervision proposed regulatory changes in December that would force lenders to shrink their balance sheets and hold better- quality assets to guard against a repeat of the credit crisis.
Syndicated lending in Asia-Pacific outside Japan fell to $24.8 billion this year, the lowest since the same period of 2005, from $36.1 billion last year, according to Bloomberg data.
The average price of loans on the Standard & Poor’s/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first lien leveraged loans, climbed to 90.59 cents on the dollar yesterday, the highest since it reached 90.7 cents on July 1, 2008. First lien loans give borrowers priority rights to a borrower’s assets.
“People are bidding against themselves and pushing up prices” in a race to profit from the rising market, said Taffy Gutu, Asia-Pacific head of secondary loans at ICAP Plc, the world’s largest broker of transactions between banks. “We can’t add assets quickly enough,” he said at a loan association conference in Singapore on March 17.
Citic Pacific Ltd’s HK$3.6 billion ($464 million) loan due April 2013 rose to 95.059 cents last month from 89.156 cents in March 2009 and traded as high as 98.955 in January 2008, the APLMA index shows.
Banks in Asia that “traditionally have had a hold-to- maturity mindset” are warming to the idea of selling loans, said Rafael Valbuena, head of secondary loans trading at London- based Standard Chartered Plc. “In the last nine to 12 months we’ve seen much more interest from clients.”
While buyers are typically local banks which “couldn’t access primary transactions due to ticket size” in syndicated or so-called club loans, sellers are still usually international banks, ANZ’s Auer said in a phone interview. Some are willing to sell at a loss “because they can make up the difference in fees from investment banking with the same borrower later,” she said.
Esprit Holdings Ltd, the biggest Hong Kong-listed clothing retailer, agreed to interest of 0.65 percentage point more than the Hong Kong interbank offered rate when it borrowed HK$2.6 billion in January from 13 banks including UBS AG and Bank of America Merrill Lynch, Bloomberg data show.
Though Esprit doesn’t have credit ratings, it would probably be about a BBB grade, Auer said. Loans with that rating trade at about 2 percentage points in the secondary market, she said. BBB is Standard & Poor’s second-lowest investment grade.
Wharf Holdings Ltd, rated BBB by S&P, paid 1.16 percentage point more than Hibor to banks including Standard Chartered and DBS Group Holdings Ltd when it borrowed HK$1 billion for five- years in February, Bloomberg data show.
The Hong Kong property developer’s $400 million in 6.125 percent bonds due 2017 last traded at a yield spread of 2.3 percentage points more than US Treasuries, according to Royal Bank of Scotland Group Plc prices on Bloomberg.
“We’ve been allocating resources to this area over the past year because we think the market will grow,” Jason Chu, head of Asia ex-Japan credit trading for Barclays Plc, said in a phone interview from Singapore. “With the pressure on banks to reduce their balance sheets, more loans should become available in the secondary market.”
UK banks including London-based Barclays may need to shrink their balance sheets by as much as 530 billion pounds ($808 billion) to meet liquidity and capital requirements, Credit Suisse Group AG analysts said on March 9.
“Banks are definitely going to face more regulatory capital issues that will push them to want to manage their balance sheets more and more,” David Kempton, Standard Chartered’s head of loan syndicate and distribution, said in an interview in Singapore. “That’s going to continue to deepen the secondary market.”