Asia-Pacific loan trading on track to top $10b

Hong Kong: Loan trading in the Asia Pacific is much more active than bankers and traders had expected, with annual trading on track to top $10 billion this year in the first survey of activity in the opaque market by Thomson Reuters LPC.

While volume is small relative to more developed markets, trading has picked up as medium- and small-sized Asian banks have resorted to the secondary market to acquire assets for their balance sheets as the financial crisis subsided last year.

The inaugural Thomson Reuters LPC loan trading survey showed $5.67 billion of deals from 407 trades for the first half of the year, bigger than earlier estimates that trading for the entire year would total just $1-5 billion.

No secondary market

The Asian loan market has been dogged by doubts about its ability to develop a secondary market, lacking active institutional investors and being splintered across so many countries and currencies.

"I think this will put an end to comments that there is no secondary market in Asia. Yes, it's small compared to Europe and the US, but the Asian market is definitely there," said Rafael Valbuena, global head of secondary loan trading at Standard Chartered Bank.

By comparison, in the first-quarter alone European trade totalled 18.6 billion euros ($24 billion) and US trade was $85 billion.

Bankers and traders believe the catalyst for further secondary trading in Asia will depend on the same factors that drove trade in the US and European markets — an explosion in leveraged financing lending.

"What constitutes the bulk of secondary trades in the world is leveraged finance," said Atul Sodhi, head of loan syndications for Asia Pacific at Credit Agricole CIB.

The leveraged buyout market briefly flourished in Asia between 2004 and 2007 but then disappeared as the financial crisis mushroomed.

If Asia is ever to see a secondary market similar in size to its global counterparts, it needs substantial growth in leveraged buyouts, bankers said.

LBOs require jumbo loans, and that means support not only from banks but institutional investors.

"Institutional investors provide capacity, but they need to be able to get in and out [of loans] quickly," said one Hong Kong-based head of leveraged and acquisition finance.

That mindset leads to loans structured to enhance tradeability, but is in stark contrast to Asia's loans market, where the emphasis on relationship lending dominates, and banks tend to keep loans on their books through to maturity.

Cash-flush banks

"Traditionally, a lot of these jurisdictions, Taiwan, Japan, South Korea, they are awash with cash, and they just hold to maturity, whether the credit improves or not," said Paul Martin, a London-based loans trader with WestLB.

Most bankers do not expect an imminent return even to the leverage finance volumes seen in 2007 on the eve of the crisis. As markets took a hit, so did Asia's emerging leveraged finance market.

But coming out of the crisis, Asia's cash-flush smaller banks have been driving loan trading far more than expected.

With primary loans in short supply, and dominated by the bigger banks, Asia's smaller local banks have been forced to put their supplies of cash to work in the secondary loan markets — driving the boom in trading.