Malaysian loan market to enter new growth phase

Why a bottoming in domestic interest rates may signal renewed appetite for syndicated loans.

In the past, borrowers from the infrastructure related sectors dominated the Ringgit syndicated loan market, very much in line with the country's development. These project financing related loans tended to be fairly large in terms of size. Coupled with the strong credit appetite from banks pre Asian crisis, the syndicated loan market grew to its peak in 1997, with an outstanding amount of RM22.88 billion ($6 billion). As of March 2001, outstanding Ringgit syndicated loans stood at RM18.3 billion against the total loans in the banking system of RM417.3 billion.

The development of the syndicated loan market in Malaysia started to change course after the Asian crisis. Although there was surplus liquidity in the banking system, banks became more conservative with their lending and were selective in their choice of credits. These factors, coupled with pressure to meet the minimum of 8% per annum loan growth quota set by Bank Negara Malaysia, meant that most Ringgit term borrowings by good credit names were easily absorbed on a bi-lateral basis.

The Ringgit syndicated term loan market is consolidating in terms of growth, partly due to the low interest rate regime. Companies desiring long term fixed interest rates and particular those in the project finance sector, prefer issuing bonds to match their inflow of proceeds. As the cash flow of these projects has a long gestation period, banks are unable to provide long-term fixed interest rates compared to bonds. Pre Asian crisis, the majority of these project finance-related syndicated term loans were funded on a floating rate basis. As for fixed rate loans, in which end-investors predominantly participated, growth has somewhat declined because of competition from the domestic bond market.

Taking a broader outlook, the outlook for syndicated loan remains bright for other sectors of the economy. It is clear that the syndicated loan market remains attractive for borrowers which prefer to disclose their financials on a more private basis rather than to a rating agency in the case of a bond. The syndicated loan market also offers a quicker route for fund raising when time is of the essence

After the Asian crisis, Bank Negara Malaysia enforced a mandatory deadline for banks to merge, with the aim of stabilizing the financial system and preparing domestic banks for future competition. During these two years, syndicated activities of the banks were indirectly affected by the merger process when thirty-five banks shrunk into ten core banking groups.

Although capital and single customer limits of banks have increased, participation from banks is very much dependant on credit appetite and relationship. We witnessed this strong preference in the seven-year Kumpulan Guthrie RM1.5 billion Ringgit syndicated floating rate term loan facility, which attracted very large and good size participation from a few large banks, although the loan was used for acquisition of plantations in Indonesia. The same demand was seen in a recent share financing transaction for Usaha Tegas for RM741 million floating rate funding, which had a consortium of nine banks.

The offshore syndicated loan market still remains the exclusive preserve of good credit names, including sovereign and government related entities such as Tenaga Nasional, Telekom and Petroliam Nasional. However, some private corporate and financial institutions with strong credit standing have successfully secured syndicated term loans from the market. A few of the recent loans include a three-year US$200 million facility for Malayan Banking, a five-year US$200 million issue for RWB (Labuan) and the five-year receivables backed Lingui Development transactions. As always, all offshore borrowings must obtain prior consent from Bank Negara Malaysia.

Future development will depend on banks meeting the requirements of borrowers and the structures they can create. There is also an increasingly need for banks to bring moderate credit names to the market, a crucial role which banks must play to develop the market further.

In summary, the Ringgit syndicated loan market growth has been less robust during the past few years due to a confluence of factors. However, it is expected to pick up again in the near future due to the following factors:

(a) According to some market participants, the long "bull run" in the domestic bond market may be nearing its end, i.e. bond yields may be at or near the bottom and could start inching up. When this happens, issuers/borrowers may start turning back to the syndicated loan market (instead of the bond market) for fund-raising.

(b) The local banks are in the process of consummating their mergers, and have been distracted by merger issues. Once these are resolved, local banks are expected to step-up the tempo on lending activities, including syndicated loans.

(c) In the longer term, when the Malaysian economy recovers on a sustainable basis, more middle-tier corporations are expected to become "bankable" again, and be able to access the syndicated loan market.