Sub-prime mortgage woes put the brakes on fund raising
SINGAPORE) Spooked by sub-prime mortgage fears in the United States, and the uncertain market conditions, corporates seem to have pulled back on their fund-raising activities. Contrast this with the picture just a few weeks back, when markets were cheering record merger & acquisition (M&A) deal sizes and huge liquidity was sloshing around.
Syndicated loans - which are large loans provided by a group of banks - saw their volumes and numbers for the Asia Pacific region (excluding Japan) fall in July, from a peak in May and June (see table). Loan volumes and deals for August so far are also looking dim, according to data from Thomson Financial. Proceeds from bond issuances - which is also a measure of financing activity - have dipped in the month of July and August.
This credit squeeze has slowed the flood of debt financing that has driven the buyout boom for the past couple of years, said Thomson Financial. The months of May and June raised the most loan proceeds for the region but in July, the region experienced a 53 per cent decline in loan proceeds, with US$13.6 billion worth of loan proceeds and 62 deals done. So far, August has seen nearly US$3 billion worth of loans and four deals done.
Asia-Pacific bonds proceeds also reached record levels in May, with US$40.1 billion worth of bond issuances. But in July, bond proceeds dropped 58 per cent.
Perhaps this is symptomatic of the rising defaults on payments by sub-prime homeowners in the United States, leading to losses by hedge funds and banks investing in securities backed by these payments.
This has in turn driven up borrowing costs for companies and buyout funds, as creditors tighten conditions for lending and investors shy away from new debt issues.
Last month, US and European investment banks withdrew the sale of more than US$10 billion worth of loans needed to fund the private equity buyouts of US car-maker Chrysler and UK retailer Alliance Boots after failing to find buyers.
Industry watchers here say that the turmoil in the markets in recent weeks might be a temporary setback for financing activities.
'It could be that corporates are deferring their fund raising because credit spreads have widened,' noted Chua Hak Bin, an economist at Citigroup. 'Corporates and lenders don't like to go in when markets are still turbulent.' He said that markets will likely normalise in time. 'I think the sub-prime (problem) will probably not translate into a recession, but the problem could last maybe three to six months.'
Some bankers are still sanguine about the prospects, saying that the decline in loan volumes and deals were just a blip. 'M&A activity still continues to be very strong in Asia. Everybody is skittish, but we don't see any deals being pulled out,' said a local banker involved in loan syndication.
'There's still a lot of liquidity and the syndication market is still strong,' he noted.
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