APAC Secondary: Lower 1H volumes boost demand for secondary loans
16-Jul-2015 20:42 PM HKT
Subdued loan volumes in Asia Pacific (ex. Japan) in the first half of this year could turn into a boon for sellers in the secondary loan market as demand picks up from buyers hungry for paper.
“The primary market has some effect on the secondary market, but banks still have their portfolio and inventory to sell,” said Kate Kwan, executive director at JP Morgan in Hong Kong, who also chairs the Asia Pacific Loan Market Association’s secondary loan trading committee. “It has actually been a better year for some of the sellers.”
Slowing regional economies resulted in syndicated loan volumes dropping 15 percent to US$214.1bn in the first half of 2015 compared with the first six months of 2014, according to Thomson Reuters LPC data.
“As the primary market slows down, more people will seek opportunities in the secondary market, even if there is less supply. People become less picky,” added Kwan.
A large number of club deals has exacerbated the lack of dealflow leading to smaller retail banks being excluded from primary deals, according to bankers.
“We’ve seen an increase in secondary reverse inquiries from these investors because they have so few deals to look at in the primary phase,” said Andrew Ashman, head of loan syndicate – APAC at Barclays in Singapore.
The demand-supply imbalance has also helped tightened secondary yields, with most performing loans trading near par or at around par. However, many of these retail banks in search of paper still have the same pricing hurdles as they would in the primary market, with some even seeking better yields, observed Ashman.
“Hurdle rates do not change between the primary and secondary markets. Some participants are more opportunistic and look for better pricing in the secondary market,” he said.
While buyers still maintain pricing discipline, they are more flexible about the structures of the assets on offer in the secondary market, and are willing to look at undrawn or partially drawn revolvers, in addition to term loan tranches, bankers said.
The average bids/offers on loans in the region have fallen as loan volumes continue to fall. Bids have dropped to 81.857 at the end of June from 89.539 at the end of the March quarter.
Bids on non-leveraged borrowers in Asia Pacific continue to trade below European names for the last 18 months, with the differential being more pronounced in the past six months. Asian non-leveraged credits have traded down in the second quarter of 2015 to 96.05, while their European counterparts have remained largely flat at around 99.03.
The difference between European and Asian leveraged names has widened considerably after the latter traded down a massive 12.6 points to 74.213 at the end of June, down from the 86.813 at the end of the March quarter.
COMMODITY NAMES IN DISTRESS
Activity in the distressed loan market has been quiet this year as the wave of defaults that emerged after the 2007 global financial crisis has slowed down.
“We are waiting in terms of volume for the next wave to come through,” said Michel Lowy, chief executive officer and co-founder of SC Lowy, an independent fixed-income trading firm headquartered in Hong Kong. “In Asia Pacific at the moment, there is very limited activity in the distressed loan space. I see more volume in high-yield than in distressed as there are not a lot of distressed assets.”
Activity to date has centred around South Korea’s shipping industry and insolvent companies in Indonesia and Singapore. However, continued soft commodity prices are expected to put a lot of pressure on mid-to-small-tier miners in Australia and Indonesia, including Australia’s Atlas Iron Ltd and Bandanna Energy Ltd, which is under administration, as well as mining services companies.
“Commodities is an industry where we are increasingly seeing action and we expect to be really busy in the next couple of years in Australia and Indonesia as commodities prices have collapsed,” said Lowy. “It is extremely unlikely that commodity prices will rebound given the state of the Chinese economy.”
In Australia, the sluggish secondary market received a fillip when LS NewCo Pty Ltd, a joint venture of Apollo Global Management and Leighton Holdings Ltd’s Leighton Services, issued a A$900m (US$663m) dual-currency covenant-lite Term Loan B in May. The transaction set a benchmark with a A$ denominated covenant-lite tranche, a first for that market. The deal met with a good reception from fund investors, many of whom were first-time investors in the loan market. Barclays was joint bookrunner with Credit Agricole CIB, ANZ and Goldman Sachs.
The A$359m tranche is being quoted at around 99.75-100.50 with some of the debt having exchanged hands.
“The development of this product has introduced a group of new investors to the loan market which will increase secondary market activity,” said Ashman from Barclays.
For the rest of the region, trading in North Asian names has been more active, compared to assets in South and Southeast Asia, while property loans are also popular.
(By Sharon Klyne)
(Additional reporting by Kane Wu)