Term Loan B (TLB) structures are offering borrowers in Asia an additional way to access capital and are growing across the region, where the market is less developed than in Europe and America. Historically low borrowing costs are making the loans more affordable and their relatively strong yields are luring investors to places that were once off the TLB radar.
High yield borrowers in Asia are seeing the benefits of the instruments as they gear up in the wake of the pandemic. Their appeal among Asian borrowers and lenders is growing as the regional recovery from the pandemic downturn has gained earlier and swifter momentum than in other parts of the world.
TLBs are senior-ranking term loans1 with bond-like characteristics, but are placed with institutions and actively traded. They are often issued in conjunction with revolving loan facilities and lent to speculative-grade companies. The proceeds are used to leverage corporates, but also for capex and growth.
The popularity of these instruments is growing among investors because they offer higher yields and good risk-adjusted returns. The secondary market isn’t very liquid, although risk appetite within it does ebb and flow.
“In the constantly evolving capital markets, Term Loan Bs open up opportunities for issuers and investors to access a multi-tiered capital structure which doesn’t really exist yet in Asia,” says Molly Duffy, Head of Financial Markets Europe and Americas at Standard Chartered. “This means they are enabling better price discovery for investors and reducing cost of capital for issuers.”
Australia leads the way
Until recently, the use of Term Loan Bs in the Asia region2 was confined largely to Australia. Now, investors seeking higher yields are being pushed toward new markets and they’re also becoming more comfortable with the regulatory stability of emerging markets3, especially Singapore and Korea.
One of the attractions for borrowers is the flexibility of the TLB. They have fewer safeguards to protect lenders and offer an alternative source of capital in jurisdictions with smaller, less liquid public markets.
Asia is expected to follow the path of Europe, which lacked a cohesive legal code to give institutions the confidence to invest. However, Europe modelled its regulatory approach on UK law – there is no equivalent in Asia. Some loans have been agreed according to precedents set in Europe and the US.
Growing investor ease
Good investor communications and strong assessments by ratings agencies can help promote TLBs to a wider range of investors in Asia. Other enhanced features, like building covenants into investor packages, could help address concerns about credit quality. They could also help make investors more comfortable with TLB products from emerging markets that are considered to come with higher risks.
There are signs of growing investor comfort with these products, and this has been underscored by recent successful deals.
Singapore ride-hailing and food delivery firm Grab raised USD2bn4 from a term loan this year. The five-year senior secured loan was increased from the initial USD750m after the company secured commitments from a wide range of international institutional investors.
India-based hotel and rental platform OYO secured a USD660m loan5, in a deal it said was oversubscribed by investors. The company initially secured the agreement in May, but then increased it due to investor demand.
GEMS, a for-profit private education provider in the UAE, recently added6 USD150m to its USD750m TLB, in another deal that underscores the growing popularity of these loans.
“Term Loan Bs are attractive to investors because they’ve come to occupy a good, solid space in terms of corporate structures,” says Ms. Duffy. “They also offer better risk-adjusted returns than other forms of corporate credit. While they’re well adopted in Europe and America, as a pool of liquidity they could offer Asian companies affordable ways to access capital − and the investor appetite is certainly there.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.