Battle between loans and bonds offers rewards

The complementary nature of loans and bonds enables issuers to improve their bargaining power, lowering overall funding costs.

Although bonds are in general more costly than loans, accessing these two forms of financing can drive down overall cost of funding for an issuer, according to panelists at Haymarket’s fifth Annual Borrowers & Investors Forum, North Asia.

Held in Hong Kong on Thursday, the conference revealed poll results that illustrated a heavier preference for bond financing (59%) versus loans (41%), and for obvious reasons: the former is able to offer companies access to deeper pools of liquidity – depending on the currency – and funding at longer tenors of more than five years. The sweet spot for loans is around three years, highlight experts.

Although bonds are much preferred and more expensive, corporates have begun to realise that these instruments can mutually play a roll in reducing their overall cost of funds.

The main reason is that once a company has raised a certain amount of bonds, this reduces its need to access the loan market. In doing so, loan bankers will be more compelled to offer far more competitive pricing to win the corporate’s attention back to bank financing, say panelists.

“When issuing long-term bonds, bondholders will also look at bank financing to see if they’re willing to offer cheaper three-year loans to the same creditor [when compared to the bonds],” said Albert Yau, chief financial officer at Chinese property real estate company CIFI Holdings in the panel entitled ‘Financing options – what’s on offer and how are corporates managing funding requirements’.

A fellow corporate treasurer from the audience agreed.

“Whilst a bond may be more expensive than a loan, the fact that you are doing that bond means you are reducing your supply in the loan market and allows you to drive a better deal in the loan market,” said Peter Davis, head of treasury for BOC Aviation, who was seated in the audience. “So across the whole funding portfolio on a weighted average, you actually get better results.”

The tug-and-war battle between the loan and bond markets have been in existence in the West for a long time, but have become more apprent in Asia shortly after the 2008 financial crisis when it led to the rapid development of the region's fixed income market.

This is because Asia's heavy reliance on bank financing began to diminish when Western banks started pulling out from the region as a consequence of the crisis. 

Extensive deleveraging from European banks has caused a dramatic scaling back of bank financing in Asia, falling $119.5 billion from the peak in 2007 to $1.26 billion at the end of 2011, according to data from the Bank of International Settlements (BIS).

European financial institutions were looking to shore up capital in their country of origin in order to meet incoming Basel III requirements. This, as a result, led to a decline in bank financing.

Hong Kong (-6.1%) and Singapore (-6.2%), the two largest financial centres in Asia ex-Japan, were the hardest hit by the pullback, adds BIS.

But this is now different, say panelists. Liquidity has improved in the region, especially as the economic conditions in both the Eurozone and US improve, and as financial institutions from both these regions seek to re-establish their footprints in Asia.

“In 2008/2009, the loan market froze and the bond market took off in Asia,” said Phil Lipton, head of loan syndications, Asia-Pacific at HSBC on the panel. “Come Summer 2013, there was a huge move in the bond market where we saw a big period of volatility, and borrowers start to, once again, consider the loan market.”

“But it’s the borrowers’ interest to depend on both products and not just on one product,” he added.

From 2012 to 2013, the total volume of Asia ex-Japan G3 loans have almost doubled from $98.8 billion to $178.4 billion, according to Dealogic data. As for Asia ex-Japan G3 bonds, the increase was not as dramatic – growing 6.4% from $139.6 billion in 2012 to $148.6 billion.

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