MONEY FOR NOTHING
Calling all creditworthy borrowers…please report to your nearest lending officer
By Jasper Moiseiwitsch

Hong Kong conglomerate Hutchison Whampoa pulled a E1.5 billion (US$1.6 billion) bond issue in turbulent markets last October - and marched straight back to take a E760 million (US$800 million) loan. Hutchison said that the loan, launched to syndication about one week after the bond's cancellation, was not a substitute for the bond issue. The company - and other blue chips - pulled its bond just as markets were reacting to the arrest of ex-Enron CFO Andrew Fastow. Nevertheless, the loan's ease of execution and favorable pricing - about 200 basis points cheaper than the proposed bond - could easily be seen as a substitute to borrowing in the bond market in thorny times.

They're Giving it Away

Asian CFOs have become fond of loans. Loans are cheap: key base rates are at their lowest levels in 40 years. Banks have also cut the margins that they charge over benchmarks such as LIBOR (London InterBank Offered Rate). Figures supplied by the Asian debt-market news service basis point show that Asian (ex-Japan) loan volumes have been falling, notwithstanding the low interest rates. The main lending houses find themselves flush with funds in Asia but with few creditworthy companies to lend to. The upshot: extreme liquidity and the cheapest credit seen in decades.

"Banks have been stumbling over themselves to get loan mandates," says Brice Minnigh, basis point Asia Pacific bureau chief. "They are willing to cut corners. They are willing to agree to dramatically low pricing and looser covenants just to park their money and make a bit of a spread on it."

Edmond Ip, general manager, finance for Hong Kong property conglomerate Cheung Kong Holdings agrees. "The fees, margins and absolute interest rates have all come down in recent years," he says. A number of recent deals bear this out. In December, the Scandinavian bank AB Spintab took a two-year HK$100 million loan for a sole basis point over LIBOR.

In September 2002, several banks launched a HK$3 billion loan for the mainland retailer China Resources Enterprise that paid a margin of 39bp over HIBOR (Hong Kong InterBank Offered Rate), or about half the margin it paid in a similar transaction in June 2000. Likewise, Dealogic, the internet corporate finance research group, reports that Cheung Kong took a HK$3.8 billion loan in April 2002 for an all-in (fees plus margin) of 40.5bp, or about one-third less than it paid for a similar, and smaller, transaction in 2000.

CFOs have greater scope to set banks against one another in their loan mandating, a power that has become ever more apparent in today's extra-liquid conditions.

"Banks that want to have a piece of the business [lending] will have to compete for it," says Lim Bee Ling, group treasurer for Singapore Telecommunications. Korea's financial institutions have been especially aggressive here. Following a pause in foreign currency borrowing during the Asian financial crisis, the Korean banks took on a lot of US dollar debt in 2000, at expensive rates. They have since been busy refinancing that debt in the loan market at increasingly lower rates, with top-tier banks borrowing one-year money for as little as 15bp all-in.

Bankers privately grumble about the Koreans' aggressiveness, noting that they barely break even, or even lose money on those deals. Basis point reported that, in January 2002, for example, the Export-Import Bank of Korea (Kexim) asked for a US$200-250 million loan on very cheap terms. All interested banks formed a unified bidding group in an effort to stand up to the pricing slide. Kexim countered by faxing a take-it-or-leave-it offer to each bank in the group, and all but one (HSBC) capitulated.

Your Banker, Your Friend

There has been another reason behind loan markets' collapsed pricing: banks are offering cheap loans to capture other business, such as custody, cash management or trade finance. These products spin off long-term profits for the banks, making loans a worthy, if costly, entry point into a company's business. Banks such as Citibank/Salomon Smith Barney, ABN AMRO, Barclays, BNP, HSBC and JPMorgan have followed this strategy.

Mohsin Nathani, Citibank/SSB's head of global loan products for Asia Pacific, admits to marketing loans like hamburgers - juicy entrees that get the customers through the door. "It's the McDonald's concept. Every product doesn't make money. On a fully loaded cost basis we lose money [on loans]," he says.

Banks are also talking of a "convergence" of their bond and loan desks. The two departments are being brought under one roof - on the bond trading floor - such that banks can use the relationship they establish in their corporate lending to bring the same clients into a bond deal. In such an arrangement, loans might be offered as a bridge to a pending bond deal. Nathani says such lending was common in the European market during the 1998-2000 telecom bubble, when banks used loans to bridge telcos to other forms of acquisition financing.

Asia has seen fewer of those deals, although Pacific Century CyberWorks was noteworthy in funding its acquisition of Cable & Wireless Hongkong Telecom by taking a US$12 billion syndicated loan in April 2000. Much of that loan was later refinanced in the bond and equity markets. SingTel likewise raised a A$3 billion (US$1.54 billion) bridge loan to fund its acquisition of Australia-based Optus in 2001. Citibank/SSB provided that bridge, and was then chosen as joint book runner in the issue of a US$2.3 billion SingTel bond, which refinanced the bridge. In most cases, banks made their money in the deals that refinanced the loans.

Call it convergence or relationship lending, it is the same trend: loans being used as entry points to other forms of corporate business. Companies have always taken lower lending rates from their relationship bankers. But in current markets, bankers have focused their lending on the best, brightest and most well known corporate names, which has given relationship lending a new momentum.

Borrowers have been using this "relationship" to squeeze banks on pricing, typically by dangling the prospect of future transactions in front of the institutions. Korean banks, once again, have been particularly aggressive in that game. The Korean institutions will advertise, for example, that they plan a bond deal, and then let the international banks position themselves for the bond with cheap loans.

"Most of these banks are not making money on these loans. It's the prospect of the more lucrative bond mandate that draws them in - they tell us this off the record," says Minnigh.

Martin Cubbon, group finance director of Hong Kong conglomerate Swire Pacific knows that strategy, but says most CFOs in the region are not aggressive with it. "We don't try to trade off future business for lower loan pricing - it would be difficult to make a balanced judgement as to what was in our best interest," he says.

Bonds or Loans?

For all the cheap loan capital out there, bankers these days have been advising bonds over loans. Loans - which are generally smaller than bonds, have shorter tenors and more restrictive covenants - are almost always cheaper than bonds. Nevertheless, the "converging" of bond and loan spheres described above has seen a convergence of spreads between markets. A loan done at a spread of 65bp in the loan market might - all things being equal - find a margin of 80bp in the bond market. As the markets merge, so does their pricing.

Citibank/SSB's Nathani says the very low interest rates seen in current markets suggest that CFOs should refinance into bonds, which tend to be fixed rate and can lock a lender into today's cheap financing. "Even if [interest rates] go down a little more, maybe 20bp or thereabouts, the probability of interest rates going up over the next three years is very high. So CFOs now will be very keen to look at long-term fixed-rate funding," says Nathani.

Cubbon of Swire disagrees, noting that there is a well-developed swap market for fixed and floating rate instruments. All things being equal, he says, it costs about the same to take a fixed-rate bond as it does to swap a floating rate loan. "The only difference is that there is a lot more liquidity in the Hong Kong dollar loan market compared to the domestic bond market," says Cubbon, speaking of Swire's Hong Kong dollar borrowing.

Cheung Kong's Ip says there can be small swings in funding costs between bond and loan markets, which he will look at on a deal-by-deal basis and simply opt for the cheapest route. Pointing to the fungibility and flexibility of the debt market, Ip says Cheung Kong has, in recent times, issued bonds and then swapped its obligations into a floating-rate instrument. "The cost has been generally lower than bank loans," says Ip. It all makes for the cheapest capital seen in a generation.

Jasper Moiseiwitsch is a Contributing Editor - Hong Kong for CFO Asia.