Loans Make A Comeback As Bonds Fade in Asia

June 27, 2013, 2:01 p.m. ET

Loans Make A Comeback As Bonds Fade in Asia

PRUDENCE HO And FIONA LAW

Loans, once the preferred fundraising tool for Asian companies, are back in favor.

Asia’s loan market took a back seat to bonds last year, as investors seeking yield at a time of low interest rates piled into emerging-market bond funds. Now, with interest rates heading up, raising money with bonds is getting expensive and bankers say companies are looking to loans instead.

For their part, Asia’s cash-rich banks are more willing to lend than they were in the wake of the European debt crisis. Many of the European banks that retreated from emerging-market lending two years ago are coming back as lenders in the region.“There is a very healthy level of liquidity in the Asian loan market. Some companies which were originally looking at issuing bonds are now considering tapping the loan market as an alternative source of funding,” said Therese Esperdy, co-head of banking for Asian-Pacific corporate and investment banking at J.P. Morgan ChaseJPM +1.24% & Co.

Not counting Japan, there were $43.8 billion in loans issued in euros, dollars and yen in Asia between April and now, the first time for any quarter since early 2012 that loans reached the same level of issuance as bonds. Bonds began overtaking loans in terms of total volume in the region at that point.

The total amount of bonds issued in Asia, excluding Japan, in the so-called G3 currencies—the dollar, yen and euro—hit record highs of $140.61 billion in 2012, according to Dealogic. Companies took to issuing bonds in response to strong appetite globally among investors for high-yielding emerging-market assets.

Bond issuance continued to break records in the first four months of the year. The three Chinese state-owned oil giants—China National Petroleum Corp., Cnooc Ltd.0883.HK +0.47% and China Petroleum & Chemical Corp. 600028.SH +0.24% — alone raised $9.5 billion in April and May.

But Federal Reserve Chairman Ben Bernanke’s signal last month that the central bank’s stimulus measures could be scaled back has taken the heat out of the Asian bond market: Almost no bonds have been issued in the past month. Mr. Bernanke’s comments have sparked a rapid rise in bond yields, driving up funding costs.

Bond prices move inversely to their yields.

For instance, the average yield of an Asian bond Wednesday was 5.48%, according to the J.P. Morgan Asia Credit Index, up from 4% in early January.

In contrast, the average margin in Asia’s loan market, as defined by the interest spread that banks charge, is coming down.

During the second quarter, the average margin fell to 2.14 percentage points, from 2.38 percentage points in the fourth quarter last year, according to Thomson Reuters LPC. For instance, the yield for a one-year U.S. dollar loan could be 2.82%, based on the current one-year London interbank offered rate, or Libor, the interest rate banks charge one another for short-term borrowings.

“Bank liquidity is in a good shape at the moment. Pricing has come down and the tenor is getting longer with three-year to five-year deals as the norm currently. We clearly see that loans are an extremely attractive financing option in the current scheme of things.” said Atul Sodhi, head of Crédit Agricole‘s ACA.FR +1.46% loan-syndication operation for the Asian-Pacific region and chairman of the Asia Pacific Loan Market Association. The group aims to promote growth and liquidity in the region’s lending market

Chinese real-estate firms that issued junk bonds amid the Asian bond boom are among those looking into loans.

The latest cash crunch in China and a shortage of funding onshore has added to the impetus to find new sources of funding for these companies, many of which have bonds that need rolling over.

“We see a lot of Chinese real-estate companies taking onshore guaranteed loans from banks for offshore refinancing in these two months, since the bond market is effectively shut,” said Vivian Lam, partner at law firm Paul Hastings.

In this kind of lending, an onshore company pledges its assets or cash to mainland banks, which in turn ask their offshore branches or subsidiaries, usually located in Hong Kong, to extend U.S. dollar loans to the company.

This popular lending pattern is typically used to fund the companies’ investments overseas. “But now, many companies are forced to use this lending to either roll over their offshore financing or to service any possible redemption needs, and on a much larger scale, which is unprecedented,” Ms. Lam said.

Sellers of longer-dated bonds of between 10 and 30 years may have a tough time attracting investors wary of the risk of rising interest rates, said Duncan Phillips, head of Asia-Pacific debt syndication at Citigroup Inc. C +1.41%

Asian borrowers took advantage of the market boom earlier this year to lock in long-term funds. Some companies even issued so-called perpetual bonds, which theoretically don’t ever mature, though most are bought back by their issuer. They usually have a provision that pushes up the yield after a certain time period to give the issuer an incentive to redeem them.

Bank appetite for longer-term loans, on the other hand, has gone up this year.

The average tenor of an Asian loan outside Japan so far this year is now 49.2 months, or just over four years, according to Thomson Reuters LPC, up from 46.3 months in the same period last year.