FinanceAsia: How would you assess the performance of the loans market across Asia for the first part of the year?
Philip Cracknell: It's been pretty good. Before the Asian crisis, the volumes of syndicated loans were high, about $176 billion from over 1,500 deals, so it was a huge market with a lot of activity. Then the Asian crisis hit at the end of 1997 and the volume went down in 1998 to $75 billion. It started to pick up in 1999 and then there was a good year in 2000, with over $200 billion. For the year to date there has been $113 billion so it is likely that we could reach or exceed last year's total. If you look at the borrowing figures for the region, it is clear the market is alive and well.
Which markets have performed well this year?
In non-OECD Asia, Hong Kong is still the biggest, with $27 billion of loans completed this year, roughly half of the market outside Japan and Australia. Korea is next biggest with $9 billion, then Taiwan with $7 billion.
Spreads have come in significantly this year. Why?
It's a mixture of things. One of the major drivers for declining pricing is liquidity in the banking sector and there is huge liquidity at the moment. For example, the Chinese banks in Hong Kong are very liquid, and this is putting downward pressure on pricing.
Also, to some extent there has been an improvement in credit since the crisis and this has justified some downward revision of pricing. Competition for mandates has also pushed pricing down, but the main factor is liquidity. If that gets soaked up I think we will see pricing stabilise or even increase. Of course, the good thing about low pricing is that borrowers can raise money very cheaply û not only through lower margins but also from low absolute interest rates, as United States interest rates have been generally falling. It's a great time to raise money.
That's true, but as an arranger your margins will be affected.
From a bankers' point of view, of course we would like to see higher margins and arrangement fees. I do believe, however, that pricing at some stage will turn û it is a cyclical process. You can track these cycles over a period of time and as a lender you have to be careful about lending too much when you're at the downward end of one of those cycles. The question is when pricing will go up rather than if.
Which will be when?
I think pricing will continue to fall over the next few months and maybe next year we may see an up-tick in margins. I do not see an immediate increase in pricing, especially in Hong Kong, but there is more volatility in other countries. For example, in the Philippines pricing has fluctuated and is affected by what is happening in other emerging markets such as Argentina.
Outside of Hong Kong, where do you see growth in the market?
There is quite a lot of activity in Korea. So far we have seen mainly short-term bank deals that continually have to be re-financed. Now corporations are starting to participate as well. There are a lot of local currency syndications in Taiwan and domestic banks largely drive the market. In the Philippines, there have been big project finance deals, big telecommunication deals such as Globe Telecom. There are a number of public sector borrowers raising money and some of the stronger companies, such as San Miguel, are using the syndicated loan market.
As for elsewhere in the region, in Thailand, Malaysia and Singapore you have reasonably well-developed local-currency capital markets so a lot of capital has been raised through bonds rather than loans. In Singapore, the government has been actively encouraging the development of the capital market and there are other organisations that are keen to see an alternative source of capital to bank loans. And Thai banks have been reluctant to lend so the bond markets have stepped into the void.
Is it also the case that borrowers from the bond markets can get access to longer-term money?
That is certainly another attraction of the bond markets. Traditionally, investors in bond markets are institutional investors and their willingness to invest over a long period of time is quite different to banks, which will normally lend for a relatively shorter period of time.
The loan as an animal is very flexible because it gives the borrower the ability to draw down over a number of periods and allows you to manage your cash flow with an amortizing maturity rather than a bullet maturity. Typically a bond is a lump sum, drawn out on payment date with repayment on maturity. It has less flexibility but longer maturity and has other advantages; for example, it allows you to diversify your source of funding and gives you access to a different group of investors.
With bonds and loans, Standard Chartered is trying as much as possible to submit joint proposals. When a company is trying to raise money we can give them a proposal that incorporates a loan option with a bond option. Only last week we were offering financing to a customer in the Philippines that featured a vanilla loan, a structured loan and a local currency bond component. We work very closely with our debt capital markets team and I believe that other banks are moving in that direction as well. In some ways, when you look at bond and loan markets, a convergence is happening. In Western markets, institutional investors are beginning to participate in both primary and secondary loan markets, loans are becoming more liquid, loans are being rated and you even have loan traders now.
What deals have you done this year and what's on the horizon?
Standard Chartered has done a huge number of deals in Asia and has been mandated on 36 transactions with a volume of nearly US$17 billion. They include nearly all of the big names you would expect: names like Swire, Hong Kong Electric, Mandarin Hotels, Amoy, Sun Hung Kai Properties, indeed many of the blue chip names. We've just completed a $5 billion loan for Swire which we were mandated to arrange together with HSBC and Bank of China, but we were particularly proud to have been mandated as coordinator, and we're signing a $5 billion transaction for Henderson today. Standard Chartered does particularly well in Hong Kong, Korea, India and Malaysia, where we have a strong market share.
How strong has the market been in India?
It has been very strong and right now we are doing a $250 million syndication for Reliance Petroleum which is in tranches of three, five and seven years. Standard Chartered Bank, Citibank and ANZ, three of the strongest players in India, are jointly underwriting the loan. The introduction of withholding tax could have an effect on the loans market and it may detract borrowers from raising money offshore. It could mean more local currency borrowing being completed and perhaps yen loans swapped into US dollars to minimize the impact of the tax. We may see less activity in the cross-border markets.
What is your focus as a loans team?
Standard CharteredÆs focus is on the emerging markets: Asia, the Middle East, Africa and Latin America. We will not be a dominant player in the US and Europe but we are in the emerging markets. We have teams in New York, Miami, London, Bangladesh, Dubai, Pakistan, Hong Kong and Singapore. We are growing our business significantly. We have a new head of syndications for Southeast Asia, Pat Waranimman. We've announced the appointment of a new global distribution head, Anton Martin, who joined us from West LB and will be based in Hong Kong to look after distribution in the primary and secondary markets. We have a new head of syndications in the Americas, Steven Aloupis, and we are about to announce a newly appointed head of syndications in London who will cover the United Kingdom and Europe, Africa, the Middle East and South Asia.
What about the covenants issue in Hong Kong? There is some concern that borrowers are having it too easy in this area.
My opinion is that for prime blue chip names in Hong Kong borrowers do not need to give financial covenants. If they were issuing through a floating-rate note or a bond, they wouldn't give financial covenants. These are very good quality borrowers and many of the covenants featured in syndicated loans have been token covenants, so in some ways they are meaningless. For the non-blue chip, however, top quality financial covenants remain very important.
Has the growth in the region's bond markets had any effect on your business?
Standard Chartered offers both bonds and syndicated loans and we try hard to ensure the customer gets the most appropriate funding vehicle for his or her needs. There is no reason for there to be competition between the two products, we see them as complementary and it is one of our strengths that we can offer both.
Are mainland Chinese borrowers now using their domestic market rather than Hong Kong?
The odd thing is that there hasn't been that much activity in mainland China. If you look at the figures, this year there have been eight deals for just over $1 billion. It is surprising in one way because before the crisis, there were a lot of transactions being done. That said, the crisis brought about a few well-known collapses and I think banks became a bit shy about rushing back to lend to Chinese borrowers. There is demand, though, for the right names but people are also increasingly looking at the credibility of the borrowing companies. The old days of "name lending" are over. I think that with all the developments in China, with its membership of the World Trade Organization on the horizon, there will be a lot more activity in China and given our long track record - weÆve been in China for almost 150 years - we will be putting more focus on business there.
