What’s next for Taiwanese banks and businesses?
The severe impact of the COVID-19 pandemic on the global economy continued through 2020 and 2021, and the Asia-Pacific region (APAC) was no exception.
Despite the many current challenges, justified optimism and robust business activity exists in the APAC lending markets, particularly in certain regions and types of transactions.
For Taiwanese banks and businesses looking for opportunities, here’s some information on where to focus your attention in the coming months.
Robust activity pockets for APAC transactions
Currently, APAC deals appear robust, although slower than in Q3 2020, when a combination of factors including a build-up of delayed deals, initial economic recoveries, fiscal and monetary policies accommodative and more openings for foreign capital – drives APAC transactions on the rise.1
During the first quarter of 2021, trading activity in the region remained relatively more subdued. The increase in COVID-19 cases with new variants, the slow roll-out of vaccination, and strict travel restrictions in many countries have all posed challenges for on-site due diligence and fair pricing of assets.2
In the APAC loan market (excluding Japan), the values ââof syndicated and club loan agreements fell about 15% year-on-year to $ 332.5 billion in 2020, as COVID-19 dampened l ‘activity. This was especially true in the first half of 2020. However, unlike the overall decline in loan values, the M&A lending business had a good year in APAC, during which the value of unsupported M&A transactions ( excluding Japan) increased by 27%. to 39.1 billion US dollars in 2020.3
At the same time, APAC transaction volumes have already started to rebound in the first half of 2021. During this period, the total value of inbound and domestic transactions in Southeast Asia increased to $ 30.2 billion. , while the total value of outbound transactions in Southeast Asia rose 9.2 percent to $ 17.3 billion.4
A boost to mergers and acquisitions for APAC credit activity
Unlike 2020, when the COVID-19 pandemic struck a blow to M&A activity in APAC and the overall economy, 623 M&A deals in APAC (excluding Japan) generated 119.4 billion US dollars in the first quarter of 2021 (as of March 22, 2021).5
Across APAC, M&A loan numbers have been boosted by mega-deals, such as the Indofoods / Pinehill transaction and Charoen Pokphand’s acquisition of US $ 10.6 billion of Tesco supermarkets in Thailand. and Malaysia announced in early 2020, which was funded by a US $ 7.24 billion bridging loan. .6
This increase in major M&A loan issuance came amid a decline in 2020 in the number of M&A deals in APAC, which fell 7% year-on-year to 4,130 deals.7
APAC’s outbound mergers and acquisitions to the United States – historically a key source of opportunity for Asian banks – have been particularly hard hit, with deal values ââfalling from US $ 75.5 billion in 2019 to $ 41 billion. , US $ 7 billion in 2020.8
On this basis, most lenders will continue to hope that domestic and outgoing APAC M&A activity will pick up, providing more lending opportunities in the market, and vaccine rollouts and travel restrictions. more flexibility will make it easier for traders to conduct future transactions. At the same time, APAC’s outbound activity to the United States could remain difficult, especially in light of growing tensions between the United States and mainland China over M&A transactions and acquisitions. financial and stock market regulations.9
Rebound in private equity activity in APAC
Private Equity (PE) sponsored deals are also making a comeback, especially exits, supported by more generous valuations. In the first quarter of 2021, PE outflows in 33 transactions generated $ 19.2 billion, the highest quarterly value since the third quarter of 2018. In addition, 90 PE buyback transactions were recorded for 18 , $ 7 billion, 25.4% more than in the same quarter in 2020 (although below the levels recorded in all other quarters of 2020).ten
PE continues to be a staple of M&A activity across APAC, with a particular focus on Japan and India.
There is no shortage of liquidity in APAC, as US and European investors seek higher returns around the world. APAC companies can attract US and European capital on flexible terms, especially for transactions with an American or European angle and / or a strong credit history.
With record fundraising by private equity firms for use in APAC, one might expect to see aggressive conditions for leveraged buyouts (LBOs) in the near future, particularly among private equity funds. leading investment. At the same time, the many large private equity firms that deploy debt and equity capital continue to create a very liquid mezzanine capital market for APAC LBOs.
Alternative capital providers as an important source of finance
Alternative capital providers, including private credit funds and asset management companies, have provided significant funding for high levels of APAC transactions, particularly in North Asia. The main factors driving the increase in transactions with alternative capital providers in the APAC likely include the impacts of the recent deleveraging in mainland China and Chinese banks looking for safer options, as well as the number growing number of transactions in special situations since the start of 2020.
Significant amounts of corporate debt became due for refinancing in 2020 in North Asia, particularly in mainland China, as a result of significant levels of corporate debt fundraising in the three years leading up to the start of the year. the pandemic. Alternative capital providers frequently seek out troubled transactions, where the underlying assets and businesses remain strong, adapting innovative new financial solutions.
As a result of this and other factors, alternative capital providers may in the near future become an established primary source of funding for mid-sized companies across APAC.
Loans for renewable energies and sustainable offers
Prior to the onset of the current pandemic, estimates showed that electricity consumption in ASEAN countries was increasing by around 6% per year.11 This growth is likely to resume when manufacturing and industrial activity, urban expansion, transportation and other factors return to normal. Although the increased use of fossil fuels (especially petroleum and coal) has fueled much of the growth in electricity generation for industrial expansion and development over the past two decades, many countries APAC are now planning transitions to a future of sustainable energy generated by renewable sources.
A better understanding of the public health risks of fossil fuel use and the strategic value of reducing dependence on imported fuels motivate these commitments to renewable energy and sustainable projects. Meanwhile, APAC loans are responding to and accompanying this focus on renewable energy and sustainability, as the volume of sustainability-related loans has increased in APAC’s syndicated loan markets.
To reflect this trend, the Asia-Pacific Loan Market Association has revised its Sustainability Lending Principles (SLLP) and related Guidelines on Sustainability Lending Principles (SLLP Guidance). Several of the changes aim to tighten up the language regarding the selection of key performance indicators (KPIs) and the scope of sustainability performance objectives (SPTs) in order to provide greater clarity. The changes also require independent external audits of a borrower’s level of performance against each SPT for each KPI. They are also adjusting the SLLP to align with the ICMA Sustainability Bond Principles, with the aim of bringing a consistent approach to sustainability related financial products across APAC debt markets. .
1 Mergermarket, Summary of Asia-Pacific trends Q1 2021.
4 Mergermarket, Deal Trends S1 2021, South East Asia.
5 Mergermarket, summary of Asia-Pacific trends Q1 2021.
10 Mergermarket, Summary of Asia-Pacific trends Q1 2021.
11 Investing in ASEAN (2021/2022) by the Association of Southeast Asian Nations.