The second annual Borrowers & Investors Forum, Southeast Asia was held in late 2013 in Singapore. The forum explored fixed income funding and portfolio opportunities in the region.
As part of the event, Latham partner Timothy Hia moderated a panel titled “Loans on the rise? Or, more of an interplay with the bond market?” In this Q&A interview Hia summarizes the key takeaways from the panel and explains why continued growth in loan financing is expected in the region.
What were some of the key developments in loan financing in Southeast Asia in 2013 that the panel discussed?
Hia: Within the context of the broader financing landscape over the last couple of years, there was a continued sense that low interest rates were going to drive a fairly robust market in the near future. Obviously, there is a big footnote here because people are looking at the tapering and at increasing interest rates over time and realizing that could actually give people pause.
That said, there was also a general backdrop of optimism about Asia as a whole and about the Asian markets. Speakers on the panel noted the influx of credit back into the region, albeit with a move towards a more regional focus.
Regional and local banks are playing a larger role in capital raising exercises as a whole. The examples that were given were of international banks, particularly European banks, that exited the scene during the financial crisis back in 2008 and 2009 and were now beginning to come back but were being much more careful about how they lent and to whom they lent. This has meant that much of the market has been taken up by the regional and local banks. So, there has been a little bit of a shift in the dynamic and in market power here.
What was the panel’s outlook on loan financing in 2014? Is continued growth expected?
Hia: I think people are still relatively optimistic about it. There is still a real sense that Asia is on the upswing. It is difficult to talk about Asia as a whole because you've got so many different economies—this panel, for example, focused a lot on Indonesia. The consensus on Indonesia was that while there have been some hiccups over the last few months, and while there continue to be structural issues within the economy that need to be dealt with, there is a strong impetus to keep things going and growing, so yes I think there is a sense that things will continue to move upwards.
How will the trend toward regionalization manifest itself?
Hia: Local and international banks are the primary financiers in the loan market, as opposed to private equity or opportunistic investors. There was a sense that this trend will continue. We will see growing regionalization, increasing roles of banks as opposed to private equity and other investors, and a general sense of regionalization as local economies and local banks get more sophisticated and are able to do larger deals. The consensus from the panel was that we will eventually regularly have significant transactions funded and run entirely by local banks without any international bank involvement.
What is the interplay between the loan and bond markets in the region?
Hia: There were two primary factors that were discussed on this topic. At a very granular level we discussed how an issuer makes a decision as to whether they are going to issue a bond or take a loan. There were differing views on the panel. We had some folks who were very much concerned that they have strong working relationships with their bankers and would be able to deal with issues as they came up on a much more relational level, which would give them more agility. In that context, they tended to be happier to go with loan financing because they felt like they would be working with relationship banks whom they knew and with agents who understood their business and who were more likely to be sympathetic to requests for waivers and consents than bond holders might be.
The second factor was pricing issues. The high yield bond market in particular has seen an uptick in pricing over the last few months, particularly since the summer doldrums in July and August. There is a general sense that the high yield market has been pricing itself a little bit above where loans are, whereas loans for some reason continue to be relatively cheap.
Along those same lines, I think there was also a sense that the local banks and the regional banks have sufficient balance sheet strength so that they can effectively use their balance sheets to build their existing customer relationships, allowing them to offer more competitive pricing and, in some ways, price out bonds as a potential instrument.
That said, I think we had a couple of panelists, particularly some of the more seasoned issuers, who were very open to continuing to use loans and bonds. They were just looking at dealing with the market on a very opportunistic basis, which makes a lot of sense. Again, it comes down to which way prices are trending at any given time and capitalizing on the situation when you are at the right point in the deal curve.