There are hopes that a rebound in economic growth in the Asia-Pacific (APAC) region, coupled with the provision of COVID-19 vaccines and calmer US-China relations under a new US administration will help to support a revival in loan and high yield bond transaction volumes.
Club deals and refinancing drive loan activity
Looking at the loan market specifically, syndicated and club loan deal values in APAC (excl. Japan) fell approximately 15% year-on-year to US$332.5 billion in 2020, as COVID-19 put the brakes on activity, particularly in H1 2020.
Club deals and refinancings accounted for the bulk of loan issuance. Club deal loan value was up slightly year-on-year, to US$149.7 billion, versus a significant drop in syndicated activity to US$189.3 billion—down almost 25% from the year before. Club loans made up just under half of volume in 2020, up from 37.6% in 2019, according to Debtwire Par. Refinancing loans, meanwhile, were down 10% on 2019, versus a decline of approximately 20% year-on-year in new money deals, as lenders and borrowers opted for loan extensions.
Loan markets in mainland China, Hong Kong and Singapore were hit particularly hard by pandemic disruption. Debtwire Par data shows loan value in mainland China dropping by around a quarter in 2020, year-on-year, to US$79.2 billion, while Hong Kong and Singapore saw declines of approximately 15% and 30%, respectively.
The slide in loan activity in mainland China saw the country lose its position as the largest loan market in the region to Australia, which posted a 1.1% rise in loan issuance to record a total of US$97 billion for the year.
Australian loan activity was supported by notable syndicated deals including a A$1.85 billion equivalent (US$1.38 billion) syndicated loan provided by 31 lenders to data center operator NEXTDC, and a facility worth A$1.4 billion (US$1.02 billion) provided by 29 lenders to construction contractor Downer EDI.
Indonesia was one country in the APAC region where the loan market looked particularly healthy in 2020, with issuance up 11.5% year-on-year to US$15.37 billion. Indonesian figures, however, were skewed slightly by a US$2.05 billion loan raised by Indofood Sukses Makmur to help finance its US$3 billion acquisition of instant noodle maker Pinehill.
M&A boost for loans
In contrast to the overall drop in loan value, M&A loan activity had a good year in APAC, with value for non-sponsored M&A (excl. Japan) up 27% to US$39.1 billion in 2020.
M&A loan figures were lifted by mega-deals such as the Indofoods/Pinehill transaction mentioned above and Charoen Pokphand’s US$10.6 billion acquisition of Tesco’s Thailand and Malaysia supermarkets announced early in 2020, which was financed with a US$7.24 billion-equivalent bridge loan.
The rise in headline M&A loan issuance came in the face of a 2020 fall in Asian M&A deal numbers, which dropped 7% year-on-year to 4,130 transactions.
Outbound M&A activity from Asia into the US—historically a key source of lending opportunities for Asian banks—was especially hard hit, with deal value falling from US$75.5 billion in 2019 to US$41.7 billion in 2020.
Lenders will be hoping for a recovery in domestic and outbound M&A activity to bring more lending opportunities to market. Vaccine rollouts and loosening travel restrictions will make it easier for dealmakers to transact, but outbound activity from APAC into the US could remain challenging. This is particularly true after a year of rising tensions between the US and China over M&A transactions and financial and securities regulations.
In November 2020, US President Trump issued an executive order barring US persons from transacting in publicly traded securities and certain related securities in certain Chinese companies. In December 2020, the US House of Representatives passed legislation that was subsequently signed into law by President Trump, which would ban a company from having its securities traded on a US stock exchange if the Public Company Accounting Oversight Board is unable to inspect the company’s public accounting firm for three consecutive years. This was widely considered to primarily target Chinese companies listed or seeking to list in the US. These developments followed bans on social media apps TikTok and WeChat, owned by China-based ByteDance and Tencent, respectively, which were announced by the Trump administration earlier in the year.
It is widely anticipated that the new US administration may not be as overtly aggressive toward China, but any Chinese investment into the US and in US companies is expected to continue to face close regulatory scrutiny, among other potential obstacles, posing headwinds for a revival of outbound M&A from APAC into the US.
Asian lenders will be more optimistic about improved buyout loan figures. Buyout firms put deals on hold for the first half of 2020 to focus on supporting existing assets through the initial pandemic uncertainty. This saw buyout deal count fall by almost a third year-on-year, with values dropping from US$19.6 billion in 2019 to US$10.3 billion in 2020.
The second half of 2020, however, showed signs of buyouts returning to market, with buyout loan issuance more than doubling from US$1.4 billion in Q2 2020 to US$3.6 billion in Q3. This momentum bodes well for buyout loan activity going into 2021.
APAC high yield bond markets looking for rebound
After a challenging year for APAC’s high yield bond markets, there are hopes of a 2021 recovery.
The APAC high yield USD bond primary market saw a 28.5% year-on-year decline in issuance from US$125.8 billion in 2019 to US$89.9 billion in 2020. Putting this decline into perspective, 2019 saw the highest value and volume of high yield bond issuance in APAC (excl. Japan) since 2015, when Debtwire began recording this data. Issuance in the Chinese real estate sector, the largest contributor to high yield activity in the region, was down 15.2%.
In contrast to the APAC loan market, where stable H2 2020 issuance provided a degree of confidence going into 2021, high yield bond issuance dropped by almost a fifth in Q4 2020 from Q3 numbers, following a rise in bond defaults in mainland China and a tightening of the credit environment by Chinese regulators.
Despite these domestic headwinds, the Chinese high yield market and the key Chinese real estate space accounted for the bulk of issuance across APAC (excl. Japan) through the year.
Close to two-thirds of total APAC high yield issuance came from Chinese property developers, according to Debtwire Par, with only 22.4% of activity originating from issuers outside of mainland China and 12.2% coming from non-property issuers based in mainland China. This compares to a market composition in 2019 of 54.8%, 20.2% and 25%, respectively.
Indeed, Chinese real estate issuance, although down 15.2% from 2019, has proven more resilient than other market segments. High yield bonds raised by local government financing vehicles in China, for example, suffered a much larger dip, falling 65% year-on-year. Activity from issuers in the region outside of China, meanwhile, fell 36.4% year-on-year.
In a volatile year, the relative stability offered by Chinese real estate borrowers—repeat issuers familiar to the market—has seen investors coalesce around these credits. Notable Chinese real estate high yield bond issues include Sunac China Holdings raising US$1.5 billion across three deals in the summer of 2020, as well as Kaisa Group Holdings securing US$1.3 billion from four deals and Country Garden Holdings closing a US$1 billion issue.
The gaming industry in Macau, although directly impacted by travel restrictions and lockdowns, has also benefitted from a long track record of repeat issuance. Wynn Macau, for example, closed the year with a US$750 million offering in December having already tapped the market with a US$850 million issue earlier in 2020.
Melco Resorts and Studio City Finance also enjoyed successful issues, raising US$850 million and US$1 billion, respectively, in 2020.
Outside of China and real estate, mining and natural resources issuers in India accounted for the bulk of non-China issuance. Deals in Q4 such as Vedanta Resources raising US$1 billion and JSW Steel securing US$750 million saw issuers from India account for more than a third (34%) of non-China issuance in 2020.
Notwithstanding market disruption related to COVID-19, and a fall in annual issuance in China, high yield bond issuance in APAC (excl. Japan) remained robust in 2020.
Borrowers and lenders will look to build on this performance and hope for a more stable and active market in 2021.
