FA: How would you assess the past year in the syndicated loans business?
Generally speaking it has been a pretty good year for most houses, particularly in the North Asia markets because that's where the bulk of the business has been. The southern Asia markets have been a bit slow, although that's understandable given the situation down in Thailand and Malaysia. We have seen a few more transactions to come out of these countries than was expected, but you cannot compare it to North Asia.
In terms of activity, Hong Kong has been the strongest. The market has been dominated by refinancing activities because the spread has come down substantially and liquidity has driven the market.
We also saw pricing come down in South Korea, but this has been more for the bank names rather than financing for corporates. Australia also has had a strong deal flow, with activity on the corporates and project related financings.
You mention that the HK market has been driven by refinancings. Has this been the case elsewhere?
In Korea, that has always been the case because the banks have been refinancing themselves. Since 1997, the government stood behind them to help to rollover some of the maturing debt for Korean banks. In the last couple of years, the banks have been back in the market refinancing those mature financings on a one or two year basis.
However, the refinancing phenomenon has been particularly prevalent in Hong Kong. If you purely look at the corporate side, you would probably see that 90% of transactions have been refinancings.
Do you expect that to continue?
No, because a lot of the deals maturing this year or next have already been refinanced in 2001. Next year the market in Hong Kong will be different because the refinance borrowers have already taken advantage of the low pricing and locked the spreads today.
The Hong Kong market has been characterized by tight pricing and lower fees. Is that set to change in 2002?
We've been starting to see more recently that the appetite from the smaller retail investors has started to subside because pricing has gone down to a level that's beyond their internal requirements. A lot of deals are club deals because you really cannot find the smaller takers for the paper. Pricing is probably going to stabilize at this level and when it goes back up is anyone's guess. My feeling is that it will not go down any further.
What have been some of the key deals that you have been involved in this year?
We have been involved in 20 deals this year. In Hong Kong, the majority of these have been in the real estate sector and rightly so. We have also done a fair few red chip deals and also the large corporates.
We did the CKI refinancing in Australia, Mandarin Oriental Hotels, real-estate such as Wharf and Henderson as well as red chips like Beijing Enterprise. We've also built up the business for the small and medium sized enterprises (SMEs) and have brought to market local manufacturing names like Moulin Optical. This is a particular strength of BNP Paribas and for the right company we can help them access the capital markets.
What is your presence like outside Hong Kong?
If you look at Australia, we have acted as arrangers or sub-underwriters on about six transactions, so this a market that we're focusing on developing our presence. It's fair to say our base is in Hong Kong, but we have also done deals in Singapore, Taiwan and Korea. In Taiwan the deal was for Walsin Lihwa Holdings, which is in the electrical wire/optical fibres business.
We are definitely spreading our reach and there has been a lot more co-ordination between the different offices. We now have a team of about 10 professionals in Asia.
How do you expect the market will develop in 2002?
As I have said, the deals in Hong Kong will be different. I feel there is good potential for acquisition financing type deals because the values have gone to very low levels. The minute people sense that the US economy has stabilized or has an upturn, they will then start to make new investments and look closely at which companies offer value.
The latest signals are that the US is not going to nosedive so if the market stabilizes, there is a lot of money in the region from funds looking to pick up good assets.
If we look from market-to-market, the situation is obviously different. One other thing we have noticed in the last few years is that a lot of what would have previously been offshore financings have being done onshore.
If you take Thailand for example, offshore liquidity could disappear overnight and the companies are basically strangled. So the governments in places like Thailand and Malaysia have focused on developing the local capital markets, for bonds and loans.
Domestic interest rates in the past have been quite low for borrowers to tap and they haven't had to take foreign exchange risk.
What we have noticed is that because of the substantial decrease in US interest rates, when you compare the offshore rates to the domestic rates, there has been a reversal of the trend. US rates are now lower in a lot of cases and even when you tag on the spread, it is generally better for some companies in Malaysia, Thailand and Korea to start looking at the US dollar market again and swap back into local currencies because they still can get a pick up.
Obviously a lot will depend on whether the US rates stay at the current level, but for the time being domestic rates are not coming down because there is concern about inflation. We expect more borrowers who can be accepted by the offshore market - the top-tier companies and quasi-sovereign names can still tap these markets.
Is there enough of a swap market in some of those places?
It depends on what currency you are talking about, the amount that is borrowed and the maturity as well. If you look at the curve, for a seven year deal the swap is probably inefficient but for three and five year deals, I think there is a market for it.
It seems that most of the currencies have stabilized at a particular level. They are still moving but not dropping by 10% or 20% overnight. Some borrowers may take the view that they will take the risk if they can manage it well. They may not hedge 100% of it, but may take 50% of it and mix it with some of the sales that are offshore driven.