The dawning of the new millennium brings to mind two lines from the popular song of the 1960s:
"Where have all the flowers [Japanese banks] gone?" and "When will they ever learn? When will they ever learn?"
But first the Japanese banks.
The biggest concern among borrowers and the major players in the loan markets in the early to mid 1990s was the dominance of the syndication market by the Japanese banks. While the bankers loved the large banquets of sushi and sashimi, not to mention the dim sum and the satay at the opening of yet another regional Japanese bank branch in Asia, they dreaded the fact that they couldn't have a successful syndication of yet another finely priced deal without 60%-70% of Japanese banks participating.
The Japanese banks' presence in Hong Kong peaked in 1997 at 83 institutions. There were the city banks, the long term credit banks, the trust banks, the regional banks and even the agricultural cooperative banks. That number is now down to 45 - and as the result of consolidation will probably be in the 30s by the end of next year.
Surprisingly, the impact of the departure of the Japanese banks was minimal. Smaller European banks have emerged and larger European and American banks with resurgent balance sheets and larger appetites have re-emerged. Deals much bigger in size than during pre-crisis days are getting done effortlessly with little or no Japanese participation.
The second quarter has seen the big Japanese city banks re-entering the market. With new money from the government, they are back doing what they were doing before - trying to buy market share with lower pricing. First in their own backyard, with two very large deals being done at Libor + 12.5bp and sub-Libor respectively.
So much for BIS ratios. The Japanese banks' attitude seems to be: 'The Sugar Daddy, the government, is always there to bail us out. In the meantime we need to build up our balance sheets so that when we all come together we will be the biggest and get the best jobs.'
Bigger deals, lower spreads
Larger deals with larger takes at lower spreads brings us to the other line in the song "When will they ever learn?". As banks and borrowers emerge from the debris of the Asian financial crisis, a gradual trend of lower pricing, longer tenor and fewer covenants seem to be surfacing again, particularly in markets such as Hong Kong which have quickly bounced back.
Spreads are almost at the pre-crisis level, and yet every single deal gets over-subscribed - the argument being that the next deal is going to be even lower. The borrowers' carrot to the banks is "do this deal at an all time low price and I might reward you by giving you another deal at an even lower price".
A street hawker in Hong Kong would not accept a similar deal - "Sell me the fake Armani shirt at a very low price and I will buy some more at an even cheaper price." You know what the hawker would say. Yet banks buy this line and celebrate getting yet another mandate.
This is what led to banks writing off billions of dollars following the Asian crisis and here they are doing it again. This year it's Hong Kong, next year it will be Indonesia. The unfortunate part is that in the long run it does not even benefit the borrower.
With some exceptions, look at the countries most affected during the crisis - not a single "blue chip" company escaped unscathed, not even the "professionally-managed companies" such as Siam Cement in Thailand or Astra International.
Yet here we are again in the second quarter of 2000 with memories of the crisis still fresh in our minds, and the cycle is starting all over again. Another crisis in 2004 or 2005?
When will we ever learn?