What next for Taiwanese banks and businesses?
The COVID-19 pandemic’s severe impact on the global economy dominated news headlines through the first half of 2020. Many commentators believe that Asia-Pacific’s financial markets–which already started to look overstretched in late 2019 before the pandemic began–are due for a prolonged, painful downturn.
In fact, syndicated lending in much of Asia-Pacific declined precipitously in 2020, as most nations struggle to recover from the pandemic. Many banks currently focus on preserving capital and supporting their clients with cash accumulation, bridge financing and supply chain assistance, leaving reduced appetite for new corporate loan transactions. Debt repayment and refinancing continue to serve as primary drivers of lending activity, while major M&A lending markets, such as Taiwan, suffer significant declines. At the same time, there are areas of resilience, assisted to a degree by changing foreign direct investment (FDI) laws in Southeast Asian countries, which may succeed in attracting increased FDI.
This article considers the current position of Asia-Pacific lending markets and offers insights for Taiwanese businesses on where regional credit activity may focus in the coming months.
Disruption and narrowed transaction scope
The Asia-Pacific loan market suffered significant disruption during the first half of 2020 and beyond. One example showing the depth of this downturn is the Hong Kong syndication market’s 75 percent decline in the first half of 2020, compared with the same period in 2019.8
Confidence drained away as governments unleashed unprecedented economic stimulus efforts, attempting to shore up regional economies. These efforts, coupled with a number of well-reported adverse events, such as the uncovering of commodities finance fraud at Hin Leong in Singapore and the bankruptcy of a number of high profile businesses regionally, depressed lending activity. Asia-Pacific syndication transactional activity for the first half of 2020 dropped 23 percent compared with the same period in 2019–with all key markets quieter (except Australia).9
As markets worsened during 2020, Asia-Pacific banks understandably reduced underwriting capacity and tightened their focus on supporting key clients in their core businesses. This had the ancillary effect of narrowing the purposes of completed transactions. Recent bank lending transactions in Asia-Pacific primarily include refinancings, new facilities made available to assist borrowers in building their cash reserves, and a run of margin calls and covenant resets. All of these are typical of a market encountering difficult conditions.
Corporate finance aside, a number of other key drivers of financing transactions have subsided, putting further downward pressure on deal volume and size.
Most significantly, private equity activity–which has powered finance deals regionally as the size of Asia-Pacific’s private equity market blossomed–was already declining before the market experienced any effects of the COVID-19 pandemic. Private equity fundraising in Asia-Pacific was lower in both 2018 and 2019 than in the record 2017.10The contraction was also reflected in a drop in private equity deal volume in 2020.11Together with a decline in the use of leverage, as creditors demonstrated a more conservative perspective, this has reduced opportunities to deploy credit in private equity-driven acquisitions.
Sources of resilience for future lending
While all of the above factors increased downward market pressures, areas of resilience remain.
A number of sectors throughout Asia-Pacific have enjoyed a surge in investor sentiment due to the pandemic. In a recent survey by LEK Consulting, 22 percent of private equity participants responded that healthcare transactions on which they were active in Asia-Pacific during the pandemic had received a “significant positive impact” from the COVID-19 crisis. The outcome was even more strongly positive in relation to deals in the education sector, with 27 percent of respondents seeing benefits from the pandemic.12
These hotspots are too narrow to drive a market-wide recovery by themselves, particularly as other sectors have suffered long-lasting damage from the pandemic and the actions taken in response to it.
However, these areas of optimism suggest that some sectors where Asia-Pacific has historically had a strong track record may offer robust performance through the crisis, and that this may drive deal activity for the remainder of 2020 and into 2021.
Future demand for Asia-Pacific lending transactions may also come in the form of pent-up financing needs from private equity firms and other borrowers seeking to deploy leverage on M&A transactions that closed during the…