Sovereign borrowing unlikely to pick up

Peter Chan, head of DBS Bank''s syndicated finance group discusses sovereign borrowers and the bank''s Greater China strategy.

Will the loan market be more active this year than last, or about flat?

Chan: It will be flat. I don't see any particular trends that are going to drive more issuance.

Not perhaps greater sovereign issuance? For example, India has hinted at a $2.5 billion loan?

There is talk of this jumbo Indian deal but it may, or may not, happen. The Indian market is very special compared to others in Asia. India doesn't borrow a lot of money, so it is a rare borrower. On the other hand, the pricing expectations India has is different from what the rating agencies suggest. It is basically a BB country, which is similar in rating to the Philippines. But the Philippines sovereign will pay 300bp. And India wants much lower than that.

You have international banks with branches there that would be eager to support the loan. But that capacity is limited.

And if it is too expensive, India doesn't, in the end, need to borrow.

The decision to do a loan rather than a bond is due to cost?

Yes, but the common wisdom would be that a bond rather than a loan would be better received. This is a 10 year maturity and bond investors tend to be more receptive to longer dated paper.

So I am not sure if the loan is going to happen.

Are there any other major sovereign issuers you expect will do deals?

The Philippines have refinancing needs and so they come to the market each year.

Is there is still a lot of liquidity in the banks ready to be lent?

There is still a lot and there isn't enough supply. Similar to previous years there will be refinancing. But refinancings are somewhat affected by the fact that spreads for blue chips have already come down to 50bp-60bp. And banks have to look at their returns on capital. So I can't see pricing dropping any further, which suggests that there will be less refinancing - except in cases of 'real' refinancing, where loans are coming due.

Will there be much acquisition financing in 2003?

Every year we hope there will be, but every year there's never enough. This year we may see more deals in numbers. Economies have slowed for a few years so there is a better chance of a match on valuation. Privatization of government assets and divestment of non-core business by conglomerates will add supply for the hungry sponsors.

Is borrowing from China likely to grow?

China is growing pretty rapidly and there is more demand for financing. So the China market will pick up. But it's a matter of how big a role foreign banks like ourselves can play, because the local bank liquidity is very high.

Last year we did a property-related loan and loans for foreign companies manufacturing in China. That is a trend. Foreign banks like ourselves will put more emphasis on financing foreign ventures rather than purely domestic ones. They are easier to analyse than purely local companies.

And insofar as you are lending to manufacturing companies in Hong Kong, you are basically lending to China too.

Last year DBS had a major focus on leading syndications for the SME sector in Hong Kong. Will that continue?

We are one of the top five banks in Hong Kong. And a lot of these SME companies are focused on the manufacturing sector. So it's logical for us to focus there. The Hong Kong manufacturers are benefiting from the boom in China's exports, and many of our customers are expanding; and so this creates new opportunities. Then again, there is more risk in the SME segment. It requires more due diligence; and you have to avoid syndicating bad deals.

On the contrary, we tend to be more selective in syndicating blue chip corporate deals, because the added value is less other than for structured deals.

Our strategy has also been to do more in the telecom sector around the region. We were part of the Maxis deal, and did the Hutch 3G deal in Italy. Telecoms is a niche we like, especially because the returns are higher - because a lot of the global banks have hit their limits in telecoms.

In terms of the overall liquidity of the Asian loan markets, are the Chinese banks becoming more important than the Japanese?

Definitely. This is particularly true in Hong Kong, and they are also becoming more important in Singapore. It is a learning process for them, but they are becoming more active. For example, China Construction Bank has been getting involved in deals in Australia such as for Qantas.

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