Last year a Taiwanese curtains and blinds manufacturer called Nien Made Enterprise changed hands in a rare example of a leveraged buyout succeeding in a difficult market. But the significance of the deal did not lie in its size – NT$18 billion ($600 million), with financing of NT$14.2 billion ($470 million) – but in the people who provided the money.
The purchaser, CVC Capital Partners Asia Pacific, appointed Citi and JP Morgan as lead arrangers, but the other 12 members of the syndicate were all from the region.
While American and European lenders have been hit by the subprime crisis, Asian banks have flourished. Instead of reining in their financing, they have found an opportunity to build relationships and earn fees that had previously been denied to them. “Contrary to what you’re seeing and hearing in North America, banks in Asia are actually looking to lend,” says Ismael Pili, head of regional banks research at Macquarie in Singapore.
“The reasons for that start from the top-down picture, especially in south-east Asia: there are healthy reserve positions, appreciating currencies, a lot of countries that are becoming less dependent on export cycles and more on intra-Asian trade, and for the most part the banks are very liquid too in terms of loan to deposit ratios.”
He adds: “It’s bad to use the word decoupling, because that never seems to be the case. But there’s certainly a greater resilience to these economies, and given their developing nature, a lot of the banks there still want to lend.”
The Nien Made deal was not unique: when Supernova, part of Citigroup Venture Capital International, needed a $200 million facility to buy Singapore’s Seksun, a specialist metals manufacturer, it appointed Taiwan’s Chinatrust with DBS and UOB Asia, both of Singapore, as lead arrangers. Macquarie’s $261 million buyout of Singapore’s Miclyn Offshore and Express Offshore was also mostly financed by regional banks, with only a few European lenders participating.
The extent of the shift in financing is rapidly becoming apparent. In 2006, eight of the top 10 banks in ex-Japan Asian syndicated lending, including the top four, were European or American. In the first quarter of this year, only two foreign banks made the list. The three biggest lenders were Bank of China, India’s SBI Capital Markets and Singapore’s DBS.
The local lenders have not necessarily undercut foreign rivals, but taken advantage of their comparative withdrawal from the market, particularly in local currency deals. “The pricing is less aggressive than before,” says Lee K Kwan, group treasurer at Malaysia’s CIMB. “This is prevalent not just in Malaysia but also in Indonesia, Singapore and Thailand.” As for the foreign withdrawal from funding: “Well, it makes life slightly easier for us.”
Local funding
At the same time, local currency markets are becoming more important and more attractive in their own right. Asian businesses have long since learned the main lesson from the Asian financial crisis: that funding in a foreign currency carries considerable dangers if the exchange rate moves quickly and drastically.
Since 1997, Asian currency bond and loan markets have become far more important sources of capital for Asian borrowers. An increase in Asian domestic savings rates has meanwhile underpinned liquidity. “For most corporates in this part of the world, the understanding now is very clear that funding in local currency markets is much safer and more sustainable than in overseas
markets,” says Lee. “Local savings rates have always been reflected in bank deposits, but now the institutional pool is getting bigger. And there’s much less liquidity risk: if you borrow in a non-local currency, your central bank can’t help you out much.”
This trend, naturally, plays to the advantage of locally domiciled banks, although several foreign houses (most notably Citi, HSBC and Standard Chartered) remain strong players in most local currencies in Asia.
In addition, local currency pricing has grown more attractive for borrowers. This is particularly evident in the debt capital markets. Sanjeev Nanavati, Citi chief executive officer for Malaysia, says highly rated credits – AA and above – can be 40 basis points cheaper when issued in ringgit and exchanged for dollars, than when issued in dollars directly. “That’s a combination of credit spreads and local liquidity,” he says.
Lee at CIMB notes the “big disparity between local currency spreads and US dollar spreads”, and “the cross-currency basis: that has widened quite a bit.”
This is evident in the arrival of regional institutions in local markets. Malaysia is a strong example. Export-Import Bank of Korea (Kexim) raised M$1 billion ($310 million) in five- and 10-year bonds in March. The lead manager was Malaysia’s RHB Bank, and Malaysian and Singaporean banks worked as lead arrangers, although Merrill Lynch acted as financial adviser.
But corporations rated lower than AA have found it increasingly difficult to tap international capital markets. Instead, Asian corporate expansion will be financed in the near term through the loan market. “Corporates are renewing their relationships with bankers,” says Pili. “Working capital and capex will have to be funded more by bank loans than other types of financings.”
Pili expects to see a growth in loans of 22–25% this year in Indonesia, a figure that would show how differently Asian economies are affected by global conditions.
Financial incentives
“One thing a lot of these countries have going for them is some semblance of fiscal stimulus packages going through,” he says, referring to Malaysia’s ninth development plan, the new leadership in Thailand, fiscal reform in the Philippines, a revamped banking sector in Indonesia and the multi-billion dollar integrated resort developments being built in Singapore. “That helps buoy lending.”
But foreign banks have not gone away, and in the largest deals they still dominate. When Tata Motors bought Jaguar and Land Rover from Ford, at $2.3 billion – arguably the most significant acquisition financing this year – five of the seven mandated banks were American or European. The only Asian participants were Mizuho and State Bank of India.