FinanceAsia: What is the outlook for loan issuance in the second half of the year?
Nathani: From June onwards, we do have some potentially large fundraisings from Singapore, such as StarHub.
In Korea, there are some corporate financings such as LG Chemical which are due to come to market. In fact, LG is looking to mandate a group of banks soon. In addition Kia, Hyundai Motors etc are looking for potential fund raising. So corporate activity out of Korea may be a little better than we thought a few months ago. And the bank financings will continue.
There'll be quite a drop in issuance in Hong Kong. Last year volumes in the Hong Kong loan market were around $28 billion to $29 billion. This year it's expected to reduce to around $15 billion. Australia will be steady - there's a standard $25 billion that comes out of Australia every year.
China is interesting. We have three of these petrochemicals projects, which are being funded in local currency as well as hard currency. YouÆre looking at roughly $3 billion to $4 billion for these, which is relatively sizeable. So China will show an increase in volumes.
Taiwan will be steady. India is relatively quiet mainly due to withholding tax issues. We do expect some deals mostly on the convertible side to come to the market. Malaysia is doing better than last year and could see volumes of around $3 billion. WeÆve seen the Maxis refinancing, which is $700 million, and we are looking at some bank refinancings. I donÆt think Tenaga or Telekom or Petronas is likely to tap the loan markets, although they have talked about it. MISC could be a large deal.
Will this Ratchaburi deal in Thailand be done through the local loan markets or through the bond markets?
It's unlikely to be a hard currency transaction, and I think it will go to the local bond market. If you look at the last 12 months, Thailand has not done much on the dollar side, either in the loan or the bond market. Even if you look at the pipeline, you are talking about $500 million to $1 billion from the MOF, in both US bonds, Samurai and loans. ThereÆs also a financing from Shin Satellite. But Thailand will not be a big market. On average it has raised $300 million per annum on the dollar side over the last three years.
ArenÆt the likes of Bangkok Bank and Thai Farmers bank getting more aggressive again in lending to corporate Thailand - hence their interest in Ratchaburi?
They are, because there's no demand for new money. ThatÆs why the interest rates and the availability of funds is very good. The same is also true in Malaysia.
With Hong Kong having done all the refinancings last year, how much will it be down?
Hong Kong will be down by around 50%. Last year it was $28 billion to $29 billion and this year it is expected to be $12 billion to $15 billion.
Do you think issuance will down for Asia as a whole?
Yes, by approximately 30%, which implies around $50 billion to $60 billion.
Does this mean there is more pressure on arranger fees because the same number of banks are chasing fewer deals?
Yes. If the volumes are down by 30%, the fee wallet will be down 50% or more. You can see that the pricing in some of the markets is at record lows - itÆs even lower than prior to Asian crisis levels.
Is that the pricing or the fees?
Both. Look at the Korean bank pricing and the Malaysian pricing. ItÆs incredible.
Just after the crisis, the government of Malaysia did a fundraising in Christmas 1998 and paid Libor plus 300bp. They did a deal last Christmas, signed in January at Libor plus 64 bp to 65 bps. Other similar examples - MayBank borrowed money earlier this year in the 50s. In Korea, some houses are doing one-year deals for the banks, with the stronger credits pricing at Libor plus 30bp. Or even lower in some cases.
ItÆs because there arenÆt enough deals in the market. ThatÆs partly a function of the bond market. The more easily you can tap the capital market, the less pressure there is on the loan market. If the bond markets were not so robust, some of the borrowers would potentially consider the loan market. We have recently seen very successful bond issues like the Malaysia and Philippines sovereign.
What will the fee wallet be this year?
In a good year it is $400 million to $500 million. This year it will go down to $200 million to $225 million.
The top houses like Citi would take a big chunk?
If we have a market share of 10% on the volume side, then that tends to translate into wallet market share of around 15%. ThatÆs because the plain vanilla deals like the Korean bank financings and the Hong Kong corporate loans donÆt generate enough fee revenue for arranging banks. We tend to target a mix of higher margin deals as well as plain vanilla corporate deals.
So thatÆs what I see the wallet as being, and I canÆt foresee any event that will lead to an improvement in pricing or fees for this year.
Not even a PCCW-style acquisition event?
Even if that happened, the only issue is that the current pricing levels are so low that you could comfortably raise a couple of billion of dollars and pay only a small premium. Hong Kong credit X might be priced at 50bp and if they came to market today, and borrowed $2 billion they might pay 65bp to 75bp over Libor for it.
A major jump would only happen if there were a series of M&A events or a major downturn. This is very unlikely to happen - since the sentiment in most Asian countries is improving and spreads are tightening. With the Telkomsel bond deal in Indonesia we even saw international investors putting their money into the issue.
At Citi and Salomon youÆve merged your loan and bond business. How has this improved your cost base, your profitability and the way you do things?
It has helped us substantially. We started doing this formally in the latter part of 2000. We co-located the two groups and since then weÆve been able to bring any issuer, a lot of ideas and options. The way it has benefited us is that in the past there would be a loan officer and bond coverage officer and both would call on the same name 12 times a year. Now they call together around 12-18 times a year. So the quality of the calls has gone up and the cost has gone down.
What is more interesting for us is to give them the option of a bridge loan that can be taken out by a bond. ThatÆs where we have brought advantage to customers. Last year we did a loan for Kepco and took it out in the bond market. And also for SingTel.
Do these merged loans and bonds divisions spell the end for the old monoline investment banking model?
Before we answer that question, the logical question is, 'can monoline investment banks without capital be as effective as they were in the past'? In my opinion, and that of the market, firms without capital are likely to face a challenge and will have a problem. They will face really strong competition from ourselves, JPMorgan and HSBC. The second thing I would point to is what's happening in Europe. If you looked at the European loan market in the old days prior to 2000, it was largely a medium to long term one. Since then it has become a very short term market, and a true interim provider of capital. A lot of loans are now acquisition-related one-year plus one-year deals, and will be repaid out of asset sales and the residual portion will come from long-term funding in the bond or equity markets.
Now look at Asia. ItÆs following Europe, although at a lag because there isnÆt same amount of M&A activity.
But look at the Korean or Australian market where there used to be five to 10 year transactions. All of those are being refinanced; some are being refinanced on a 12 month basis and then being taken out in the capital market or in the three to five year loan market.
So as M&A takes off more and more in Asia, you think AsiaÆs loan market will resemble Europe's?
Absolutely. The loan market gives you a lot of flexibility in terms of size, and the certainty of funding. We can make a firm commitment to a client for a large acquisition financing and built in struture and flexibility which is required for such acquisition deals. So on acquisition financing the loan market will always be advantageous.
In terms of profitability, how does it compare when a client wants to borrow three year money; versus a client that wants to do a one year bridge and then take it out in the bond market?
The latter is much more profitable. Supposing you have an advisory; then you have a bridge; then a bond or equity. The least profitable part is the loan, and the most profitable is the advisory or equity and then the bond.
But M&A professionals say advisory fees are under pressure?
ItÆs a function of volume. There are very few deals right now. If you were charging $6 million in fees, youÆre now looking at $3 million.
And look at the bond market. The fees being paid there are very competitive.
Is Asia overbanked?
In the next 12 months, you will see banks answering this question. First, Asia is overbanked. Secondly the loans business on a standalone basis is not a highly profitable business. You make very little as a solo loans house.
I keep giving the example of pure bank deals out of Korea. Doing these you are very far from recovering your costs, let alone making any profits. Revenue per transaction from these deals is less than $10,000 per arranger. That is gross revenue.
Who is doing this business, the Korean banks?
No, itÆs not the Koreans. It is the foreign banks. But how long can this last? There is not going to be any money in pure vanilla loans in the next 12-24 months in my opinion.