FA: How was the past year for the syndicated loans business?
I would say the past year has been pretty quiet in general, but has been punctuated by a number of significant deals. In Australia, we led the A$2.1 billion deal for Qantas and the BHP Billiton deal, which was a US$2.5 billion post-merger corporate financing and the biggest deal in Australasia in 2002. We also completed the US$950 million refinancing of Southern Cross Cables, the largest project finance deal in the region this year.
There were one or two other deals that stood out in the region, like the SingTel bridge financing related to the acquisition of Optus, although that deal has yet to create a syndicated loan opportunity in the way that HKT PCCW US$4.7 billion refinancing of their acquisition bridge has done.
Those are the high points in terms of substantial deals and in between that there has been some relatively plain vanilla mainstream financing, but the volumes in those transactions outside of Hong Kong have been pretty subdued.
Also, the M&A activity in Asia has not been as exciting this year as some might have hoped, following on as it did from a good year in 2000. The project finance market also continued at a modest level.
Do you expect those sectors to recover in 2002?
Definitely. Next year will be the year of power in Asia. You have got the obvious situations in Singapore and Korea where they are privatizing. For example there are three generators to be bought in Singapore and the loan market would be the typical source of finance for such purchases. Korea is also expected to move ahead with the privatization of its electricity system in 2002 as well. There will probably be some opportunities in Australia as well with Greenfield peaking plants and the refinancing of existing generators likely to create some deal flow.
What have been the forces driving the market in the past year?
Excess liquidity in the market, which we first started seeing in 2000, has been substantially attracted towards the higher quality credits. As a result, we have seen a contraction in pricing for the best names, particularly in Hong Kong. As pricing has got cheaper and cheaper, it has prompted most of Hong Kong's blue chip names to refinance existing debt, not just in the property sector but the utilities as well. For example, HK Electric and CLP have both taken advantage of cheaper pricing.
In Singapore, property has been the catalyst for refinancing, and around the region we've seen deals for Korean financial institutions as well as for the quasi-sovereigns such as KDB and Kexim. There has been a smaller volume of deals from South East Asia, but with the market offering attractive pricing it is rumored that the Malaysian government may choose to utilize the loan market again.
Refinancing of plain vanilla corporate deals has been a characteristic throughout the region, but with the exception of a couple of deals like the Maxis deal, the higher yielding, M&A related structured deals that we saw in previous years has been lacking in 2001.
You mentioned the tight pricing in Hong Kong. Is that situation going to continue for much longer?
It is clearly not sustainable and I think most people are coming up against their genuine pain thresholds. If you look at the latest deals in Hong Kong, although they have been able to achieve tighter pricing, they haven't been the blowouts that we saw earlier in the year.
It is likely that we have seen the bottom of the pricing cycle. I don't see that there is going to be any recovery in pricing in the near future: I think we are going to be in this sort of mode for the foreseeable future. Single-A credits will price in the high 30s to low 40 basis points, which is now not inconsistent with the levels you would expect to see in the European market.
One of the themes of 2001 and 2000 is that the Asian market is becoming more internationalized in terms of structure and pricing expectation as more banks adopt global pricing and portfolio models.
What about the covenants issue?
Clearly in periods of excess liquidity there are three things that come under duress. One is price, the second is tenure and the third is covenants. We have seen in varying degrees for many deals during the year that corporates want cheaper pricing, they want to go longer and they want more favorable terms.
In reality, when you are dealing with the blue chips in Hong Kong, Singapore, Australia and Korea - the developed markets that provide most of the volumes - most of these names have avoided giving stringent covenants anyway.
Added to that, the middle market sector has largely been left behind by the banks in this rush for assets because they are looking for better quality borrowers.
How difficult is it now for that second tier of companies to access the loans market?
To be honest, this sector has a limited appeal for most international banks. The middle market corporates require more monitoring, higher pricing expectation and these companies tend to be serviced by the more dominant domestic players. It is quite hard for international banks to break into that market when most of their business is already well serviced by the local players.
A lot of banks these days, Barclays included, are focused on the amount of ancillary business you can get out of a lending relationship. The middle market corporate does not tend to be the regular bond issuer or cross-border M&A type of client that you would prefer to focus your effort on.
Most banks have to be able to identify the extra revenues that they will derive from a client in order to justify the pricing levels we have at the moment. The need for good ancillary opportunities has become a more acute issue since the pricing has got tighter.
A lot of blue chip names, if they really are going to force the pace on their pricing, are equally diligent in identifying what their ancillary business flow is. So any bank that chooses not to support their very cheap corporate financing, understands that the flow of ancillary business to them will be put in jeopardy as a consequence.
In terms of exploiting these ancillary opportunities, it seems that closer cooperation between loans teams and bond teams also seems to have been a theme of the past year.
For several years, our loans team has had a very close relationship with our bond people on the origination and sales side. We cannot afford to act any differently.
We have avoided taking that as far as combining the two businesses because we still feel at the moment that distribution of loan assets and bonds are discreet businesses, particularly if you are looking at project finance or credits that require more explanation. Those are transactions that more obviously lend themselves to a loans team rather than a bonds sales team that would normally sell off the back of the borrowers credit rating.
Whilst we are closely integrated with our fixed income colleagues, we retain our own loan distribution team in order to provide the best service to our clients.
Looking forward to next year, you have mentioned your expectations for the project finance sector, so what else are you hoping for?
Apart from power, which is likely to be a good catalyst for project financing opportunities, we hope there will be some continued renaissance in the telecoms sector. We are seeing mixed signals at the moment: the US$4.7 billion PCCW HKT deal has turned out to be an extremely popular transaction, both at the time we did it and subsequently with the amount of secondary market activity related to it.
PCCW HKT has done some good work in enhancing its appeal to the bank market by securing its investment grade rating, issuing into the Japanese private placement market and the dollar market and consequently prepaying its three year tranche. It has clearly established itself as a successful borrower in the international capital markets, which is starting to create some scarcity value in the loan market.
The success of the Maxis deal also gives us cause to believe that the Telco indigestion in the region is improving, although a number of cable transactions have struggled in the market, which indicates that the improving sentiment toward the sector has not been uniformly applied.
