For Asian borrowers mulling a new loan, the liquidity available right now can make it tempting to cut corners. Instead of a broad syndication covering as many markets as possible, why not just give some core relationship banks a quick call and wrap up a self-arranged club.
Borrowers going down this route and shunning general syndication have many factors in their favour. For starters, they can get away with razor-thin pricing as top level banks are sure to compete fiercely to get a slice of the action. Hand in hand with the lower cost comes ease and speed of execution. Syndications typically take at least 45 days to wrap up. Clubs are usually done and dusted within a month.
Another bonus for companies going 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 were to get a less-than-stellar response in syndication, it might hurt its chances of coming back to the market at levels that it likes.
But there is a flipside. Excessive dependence on a handful of relationship banks can disrupt a company’s long-term fundraising capacity. When times get tougher, those relationships can quickly be redefined — and not in ways that will make the borrower happy.
Banks, too, have their own sets of pro and cons when it comes to lending as a club or leading a syndication. Not only does clubbing offer paltry returns, but it also comes at the cost of lenders being unable to spread the credit risk between themselves. By going for take and hold positions, the risk simply stays on the bank’s balance sheet without any sell-down opportunities.
On the positive side, clubs allow banks to establish strong relationships with borrowers — which might be critical when it comes to securing the ancillary business that will allow them a reasonable return on their lending.
So has it ever been, with all these — mostly balanced — factors feeding into borrowers' and lenders' decisions on how to approach the business. But now something is changing. Clubs are increasingly being considered for more than just run-of-the-mill funding.
This month Chinese state-owned grain trader COFCO sealed a chunky $3.2bn self-arranged club — $1bn of which went towards funding its acquisition of a stake in Noble Agri. There was no problem with securing the funding: 11 banks piled into the deal. But it marked a shift — worrying, for some — in the use of proceeds of club loans.
Acquisition loans have typically been underwritten by top level banks before going into broader syndication — like Gaw Capital’s recent $526m loan via four MLABs, or Air India’s $408m aircraft acquisition bridge led by two.
Event-driven financing of this sort is only trickling into the market, and banks are therefore desperate to provide underwritten commitments. They typically earn much more for this than they do on ordinary funding, and so they worry that the club route will inevitably push pricing down below where they feel they are being adequately compensated for risk.
If they were prepared to tolerate borrowers wanting clubs for general funding, they are positively hostile to the idea that acquisition loans might go this way too.
COFCO’s deal has certainly shaken some bankers, as did Vitol’s self-arranged $2.05bn acquisition loan in May. The debate between clubs and syndication has now gone up a notch. Issuers should not dismiss it as mere noise that is of little importance as long as they get their funding.
With strategic funding, certainty of smooth execution is more important than ever. In the long run, not bothering to cultivate a deep investor base could carry a painful cost.