Hong Kong: Barclays Capital is increasingly focusing its Asia activity on higher margin products such as structured lending and private loans to boost earnings in a market where cheap funding is plentiful.
The investment banking arm of Barclays, which competes in Asia with HSBC Holdings Plc. and Citigroup Inc. as well as local players, is also betting that Asian corporates will use more debt to finance growing acquisitions outside of the region.
“We are now more focused on the structured type of deals, of which leveraged loans is an important aspect. We have also moved into the mid-cap space and private loan space,” said Hans Fuchs, head of global loans in Asia, who moved to Hong Kong from London.
Leveraged finance is funding a company or business with more debt than normal and consist of loans with a high rate of interest to reflect a bigger risk posed by the borrower.
More Asian banks are courting smaller companies with innovative financing arrangements as competition squeezes earnings from traditional high-grade corporate borrowers.
In India, the average yield on loans to small- and medium-sized enterprises (SMEs) ranges between 9.5% and 11% a year, compared with about 7% for big companies and 7.5% to 9% on retail loans.
Improvement in Asia’s corporate fundamentals and increasing comfort with a higher debt load is also driving the shift in bank loan portfolios.
“As pricing continues to compress in high-grade loans, banks are having to look down the credit curve in order to achieve their yield targets,” said Justin Crane, director of global loans Asia at Barclays Capital.
A boom in mergers and acquisitions activity is also giving momentum to loan financing in Asia as corporate borrowers increasingly look to debt funding.
M&A volumes hit $105 billion in the first three months of this year, a record for the first quarter, driven by mega deals from Australia and India, according to data from Dealogic.
“Also in Southeast Asia, corporates are increasingly looking outside and are not uncomfortable putting leverage into the deal or into the acquired company,” said Fuchs.
Asia’s excessive reliance on bank lending had been partly blamed for escalating the region’s financial crisis 10 years ago, when foreign capital flight sent Asian currencies tumbling.
The dominance of loans in Asia has continued, given shallow bond markets and the greater flexibility on lending terms that Asian borrowers enjoy.
“The lack of depth in the bond market has resulted in loan tenors getting pushed out, a feature one does not see very often in the US and European markets,” said Crane, who joined Barclays from rival Citigroup in August 2006.
Courting hedge funds
On the investors’ side, Barclays is also tapping hedge funds’ appetite for fixed income investments.
Hedge funds have turned more of their attention to Asia in recent years, with investments exceeding $140 billion.
Hedge funds’ appetite for high-risk, high-return products complements Barclays’ push down the credit curve.
“Private loans are generally seen in credit-intensive situations,” Fuchs said, adding that the companies may be distressed or restructuring. “The returns in the business are obviously reflective of the risk.”
But the bankers are less upbeat about the Asian prospects for loan derivative products such as collateralised loan obligations (CLOs) and default swaps on loans, designed to transfer the credit exposure of fixed income products between parties.
Both products have become massively popular in Europe and the US, where non-investment grade corporate borrowers have increasingly turned to their bankers rather than capital markets for funding amid rising interest rates.
The global volume of default swaps on leveraged loans is about $52 billion, compared with $6.3 billion at the end of 2005.
Global issuance of CLOs, which are portfolios of loans that can be divided into tranches representing varying levels of exposure to defaults, in the year to date rose to $56.3 billion, compared with $42.4 billion in the same period last year, Dealogic data showed.
“The development of default swaps on loans and CLOs is constrained by the lack of a secondary market for loans,” said Fuchs.