It’s rare for a successful fundraiser for a reputable name to shed light on some of the deepest issues in the loan market. But some recent acquisition loans in Asia have done just that – and reopened the debate between syndication and club loans.
For Asian borrowers considering a new loan, the cash on hand now can be tempting to cut corners. Instead of a large syndication covering as many markets as possible, why not just quickly call up some grassroots relationship banks and start a self-organized club.
Borrowers taking this route and avoiding general syndication have many factors in their favor. For starters, they can get away with ultra-thin pricing, as top tier banks are sure to compete fiercely for a share of the stock. Ease and speed of execution are associated with lower cost. Syndications typically take at least 45 days to complete. Clubs are usually made and dusted within a month.
Another benefit for companies that choose the club route for their regular fundraising needs – general corporate purposes, working capital, or refinancing – is that there is less reputational risk. If a borrower got a less than stellar response to syndication, it could hurt their chances of re-entering the market to levels they like.
But there is a flip side. Over-reliance on a handful of relationship banks can disrupt a company’s long-term financing capacity. When times get tough, those relationships can be quickly redefined – and not in a way that makes the borrower happy.
Banks, too, have their own advantages and disadvantages when it comes to club lending or running a syndication. Not only does clubbing offer derisory returns, it also comes at the expense of lenders who cannot share credit risk between them. By opting for “take and hold” positions, the risk simply remains on the bank’s balance sheet without any selling opportunity.
On the plus side, clubs allow banks to build strong relationships with borrowers – which can be essential in securing ancillary activities that will allow them a reasonable return on their loans.
So too were all of those factors – for the most part balanced – that influence borrowers ‘and lenders’ decisions about how to approach the business. But now something is changing. Clubs are increasingly seen for more than ordinary funding.
This month, Chinese state-owned grain trader COFCO sealed a massive $ 3.2 billion self-organized club, of which $ 1 billion was used to fund its acquisition of a stake in Noble Agri . There was no problem securing funding: 11 banks stacked up in the deal. But it marked a change – worrying, to some – in the use of club loan proceeds.
Acquisition loans have typically been taken out by tier one banks before entering into a larger syndication – such as Gaw Capital’s recent $ 526 million loan through four MLABs, or the aircraft acquisition bridge. of $ 408 million from Air India headed by two.
Event financing of this type is only penetrating the market, and banks are therefore desperate to provide committed commitments. They usually earn a lot more for this than with regular funding, and so they fear that the club’s journey will inevitably drop prices below where they feel they are being paid well for the risk.
While they were prepared to tolerate borrowers wanting clubs for general funding, they are positively hostile to the idea that acquisition loans could go this route as well.
The COFCO deal certainly rocked some bankers, as did Vitol’s $ 2.05 billion self-arranged acquisition loan in May. The debate between clubs and syndication has now escalated. Issuers shouldn’t dismiss it as trivial noise as long as they get their funding.
With strategic funding, the certainty of smooth execution is more important than ever. In the long run, not caring about cultivating a deep investor base could come at a painful cost.