February 1, 2019 / 9:44 AM / 19 days ago

Asia loan pricing rebounding

* Loans: Frequent borrowers face higher borrowing costs

By Chien Mi Wong and Prakash Chakravarti

HONG KONG, Feb 1 (LPC) - Loan pricing in Asia is starting to rise as experienced repeat borrowers in China, Hong Kong and India pay higher margins to attract lenders faced with rising funding costs of their own.

Higher loan pricing suggests that the era of cheap money and low borrowing costs could be coming to an end in Asia.

“The territory has enjoyed a lot of cheap liquidity for a long time,” a Hong Kong-based loan banker said.

Asian lenders are finding it particularly expensive to fund in Hong Kong and US dollars in recent months after a jump in interbank rates.

“In the last two months, costs of funds for both US and Hong Kong dollars have gone up so the banks cannot continue to lend at the same pricing as last year, or at lower pricing,” a Hong Kong-based banker at an international bank said.

Companies including Hong Kong real estate giant Sun Hung Kai Properties, Chinese financial services company Far East Horizon, Indian state-owned energy conglomerate NTPC, Indian Oil Corp and State Bank of India are offering higher margins on new loans in 2019 than on existing deals.

SHKP taps Hong Kong’s loan market annually and is paying a 10bp premium on a HK$5bn (US$641m) five-year borrowing this year, compared to a HK$21bn five-year deal signed last March.

The company’s self-arranged five-year loan offers top-level all-in pricing of 85bp based on an interest margin of 75bp over Hibor.

“Sun Hung Kai sets the annual benchmark for the market and the fact that it is paying up this time is a sign of the rising cost of funds in Hong Kong dollars,” the Hong Kong-based loan banker said.

This year’s deal marks the end of a six-year streak in which SHKP’s borrowing costs have more than halved.

Pricing on SHKP’s annual borrowings peaked in March 2013, when it closed a HK$15.2bn five-year club loan with top-level all-in pricing of 158bp with a margin of 138bp over Hibor.

COUGH UP

More companies are expected to have to pay up to maintain access to the loan market. Fierce competition and the implementation of new accounting standards IFRS 9 pose additional challenges.

“Overall, I think pricing will increase this year,” the Hong Kong-based banker at an international bank said.

On December 18, the three-month Hong Kong dollar interbank offer rate, the rate at which local banks lend to each other, touched 2.44%, its highest in the past decade. Hong Kong banks hiked their benchmark rates for the first time in 12 years last September after the Hong Kong Monetary Authority raised its benchmark interest rate by 25bp, mirroring a move by the US Federal Reserve.

Although three-month Hibor dropped to 1.72% last Thursday, it could rise again if Hong Kong banks follow the Fed with another rise.

Interbank rates are expected to stay high as the markets brace for more volatility in 2019 given geopolitical factors including the US-China trade war, China’s slowing economy and higher US interest rates.

INDIA AHEAD

Loan pricing has already been trending up in India, as the country’s financial sector grapples with deteriorating sentiment after high-profile fraud cases and rising default rates.

A US$1.3bn loan for state-owned Indian Oil Corp is offering top-level all-in pricing of 114bp, based on a margin of 100bp over Libor and an average life of 4.75 years.

This represents a premium of 23bp on the company’s previous all-in pricing of 91bp on a US$300m refinancing in December 2017. The margin is also 30bp higher compared to 70bp at that time for an identical 4.75-year tenor.

State Bank of India, the country’s largest lender, is also advertising significantly higher pricing on its current US$500m five-year loan.

The deal is offering a 38bp premium with all-in pricing of 128bp, compared with 90bp all-in on a US$750m three-year loan last July, which received a weak response from the market.

NTPC is also expected to pay higher pricing on an upcoming US$300m-equivalent 10-year yen-denominated Samurai loan than a previous ¥39.42bn (US$370m) Samurai completed last April.

India is expected to see more offshore loans and bonds after the Reserve Bank of India issued new rules in January allowing all borrowers to raise overseas debt with tenors of three years. The minimum maturity for most Indian companies was previously five years.

The potential surge in supply comes amid weakening sentiment among offshore investors towards India’s financial institutions after a surge in bad debts and revelations of a massive banking fraud at state-owned Punjab National Bank in January last year.

Defaults at non-banking finance company Infrastructure Leasing & Financial Services in September are also adding to the perception of rising risk in the sector.

“The Indian FI [financial institution] space is facing headwinds with IL&FS collapsing and the RBI forcing the three top banks – which are still reporting losses – to change their CEOs,” a Singapore-based syndicated loans banker said. “This has pushed up pricing.” (Reporting By Chien Mi Wong and Prakash Chakravarti; Additional reporting by Apple Lam Editing by Tessa Walsh and Vincent Baby)

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