Opportunities for issuers emerge amid evolution of syndicated loan markets

Sean Sykes, Commonwealth Bank’s Head of Loan Markets Origination, says this evolution is highlighted by three significant market shifts. The first is an expanding universe of active lenders — domestically and across the Asia Pacific — that now includes more banks and, increasingly, non-banks.

The broadening of the investor base has acted as a driver of the second and third shifts in loan markets — greater liquidity and the capacity to provide real duration over longer-term horizons. Sykes says the latter is evident with an increasing number of transactions delivering borrowers tenor (length of time remaining before a loan maturity) beyond the traditional five-year, with depending on the underlying transaction, tenor of seven to 10 years, or even longer, now being seen.

“Looking back, even three years ago, the syndicated loan market had a concentration of bank lenders and transactions where tenors tended to be limited to five years,” says Sykes. “Since then, we’ve seen a noticeable uplift in activity among onshore and offshore banks and, pleasingly, non-bank investors keen to add Australian credit to their portfolios in line with their investment mandates.”

He adds that having corporate bond and loan markets available to borrowers is helping to fulfil demand for debt funding across the credit spectrum. “This is providing more options for issuers seeking to diversify their funding sources and calibrate their targeted weighted average debt maturity profiles.”

Unlocking loan market liquidity and duration

As bond spreads have tightened, Australian dollar-denominated MTN issuance volumes have been tracking at record levels. This resurgence — and an absence of M&A activity — led to a relatively lower USD$62 billion in syndicated loan issuance in Australia and NZ in the first half of 2024.

“Looking at the year ahead, there are increasing signs of a rebound in M&A activity,” says Sykes. “The syndicated loan market is expected to be the market of choice for funding M&A, given its ability to provide the underwritten certainty required by both the acquirer and the target.”

However, the rates outlook, geopolitical issues and election uncertainty are just some factors that might make markets less certain in the second half of 2024. Sykes says this is where execution risk must be factored in for debt capital raising, irrespective of whether a borrower is evaluating a loan or bond market transactions. He notes that corporate issuers are increasingly assessing the offering of the syndicated loan market to provide real duration and liquidity through all macro market cycles, as well as competitive pricing.

“Alongside other debt markets that provide tenor, we’re seeing corporates looking to optimise their funding mix through traditional syndicated loans with alternative loan financing solutions,” says Sykes.

This includes what he refers to as ATL (Asian term loan) and ITL (institutional term loan) facilities, which are fully-drawn term loans that offer borrowers extended duration while attracting both Asian banks and institutional investors that might not otherwise participate in revolving facilities “due to their underlying cost of capital”.

The ATL and ITL markets have developed to fill a niche for borrowers looking for diversification and tenor and for both banks and non-bank investors to gain Australian corporate exposure. “That’s extended the liquidity pool and has allowed us to better align funding solutions with demand among issuers to diversify debt providers,” says Sykes.

ITLs, in particular, can provide even longer-term financing solutions and build on the liquidity generated by ATL market activity. “We have seen substantial investor interest in ITLs not only from Asian banks, but also non-bank institutions across Australia and Asia,” he says. “This includes life insurers, specialised credit funds and asset managers. For these investors, different mandates allow for longer-tenor financing out to 10 or more years, matching the duration of lenders’ longer-tenor liabilities. An ATL or ITL is attractive to borrowers as it extends WADM (weighted average maturity) and lowers refinancing risk.”

The attraction among issuers and investors is evident in the infrastructure, utilities and real estate sector issuance trends during the first quarter of 2024. Here, demand for quality credit remains high, during the first quarter of 2024. As seen in Figure 1, longer-dated loans featured prominently, with Sykes confirming that these were often distributed in the ATL and ITL markets.

Matching investor and issuer needs

Sykes says that during 2023, Commonwealth Bank’s Loan Markets Origination and Syndicate teams led more than A$12.5 billion in ATL and ITL issuance on behalf of Australian borrowers. This saw 93 banks and non-bank institutional investors from over 15 global jurisdictions participate in these transactions. This included Qantas’ 10-year ATL, where Commonwealth Bank acted as lead arranger and bookrunner for the deal, which closed in December 2023. Sykes says the transaction attracted substantial investor demand, leading to the deal being upsized from an initial launch volume of A$250 million to A$450 million.

“We worked with Qantas to put in place a structured solution designed to fund their mid-life aircraft,” says Sykes. “The facility was more than two times oversubscribed, and Qantas expanded the deal size and locked in its longest-dated funding line since the program began.”

Another transaction, which Sykes says reflects the syndicated loan market’s development is the recapitalisation of Team Global Express’ (TGE) senior and subordinated debt. “TGE required capital to support its next growth phase, and with non-bank investors looking for good-quality Australian paper, there was a resilient and identifiable liquidity pool to satisfy its needs,” he says.

“Over the past year, we’ve worked on more syndicated loan market transactions than any other bank in Australia and have unique insight into liquidity, pricing and how the market is evolving. Having been through many different market cycles, we can see that borrowers now have more optionality and flexibility than they’ve had before, and that’s expected to continue supporting healthy ITL and ATL activity alongside the traditional syndicated loan of up to five years,” says Sykes.