- Published on Wednesday, 20 June 2012 00:00
- Written by AMADO P. MACASAET
By A Web design Company
Giant corporations borrowing billions of pesos have spawned a thriving loan syndication business for banks.
It allows borrowers to get the huge amount they need and at the same time enable banks to observe the single borrower limit and spread risks.
Aurelio Montinola Ill, president and chief executive officer of the Bank of the Philippine Islands, said that loan syndication was brisk in the first five months of the year.
Low interest rates are encouraging big corporations to borrow and banks are more than willing to accommodate them. Cash is available and investors are willing to buy debt papers.
At present, a commercial or universal bank will come close to violating the single borrower’s limit if the loan sought is P1 billion or more. Under the rules, a bank is not allowed to lend to a single borrower more than 25 percent of its paid-up capital account.
A corporation needing a huge sum goes to a financial intermediary which, in turn, puts together a string of lending banks to syndicate a loan.
The effect is each member of the syndicate lends much less than if it were to take up the loan all by itself.
The value of the loan of, say, P5 billion is spread among the members of the syndicate. Each bank lends very much less but the borrower lays its hands on the amount he needs.
Montinola told Malaya Business Insight that the first five months of the year saw banks banding together to accommodate reputable corporations borrowing more than PI billion.
Below that amount, Montinola said, loans are granted by banks on a bilateral basis.
He pointed out that loan syndication reduces the risk of a member of the syndicate in the sense that the amount lent is distributed among many banks in amounts smaller than sought by the borrower but the borrower ends up getting all of his financial requirements.
According to Montinola, the intermediary that organizes the syndicate is paid either by the members of the lending group or by the borrower himself, or both.
He explained, “The first five months of 2012 has seen a robust domestic debt market as the government and private corporations capitalized on the favorable interest rates, prevailing liquidity and investor appetite for alternative investment instruments such as corporate notes and bonds which are in effect on a syndicated basis.”
The corporate need for amounts bigger than P1 billion indicates that banks have remained cautious in lending big amounts. Lending through syndication not only complies with Bangko Sentral rules but also minimizes the risks of each member of the syndicate.
The banks have historically preferred real estate as collateral for both bilateral and syndicated loans. The Bangko Sentral, Montinola said, allows as much as 80 per cent of the value of the property to secure the loan regardless of location.
However, he said, the BSP does not meddle with the internal policy of banks regarding real estate collaterals. He pointed out “it is in the appraised value of the property where the differentiation lies since valuation is based on location.”
He said “the loan value of property is the same for any location.” It is the fact of the BSP allowing the bank its own discretion, but presumably the value of the property cannot exceed 80 per cent.
The tenor or repayment period depends on the requirements of the borrower. In the case of BPI, Montinola said the average tenor of loans exceeding P100 million but nowhere close to the single borrower limit is approximately 30-90 days.
Montinola pointed out that the appetite for loans – syndicated or bilateral – is whet up by unusually low prime lending rates which he said may be sustained for a longer period.
He explained that rates change daily “but trend may be sustained for longer period as they have been low for the past five years. The movement (of the rates) is sideways, according to Montinola.
He said “movement can be caused by overall liquidity, domestic economic condition, monetary authority’s market operations and global business environment.
The Bangko Sentral cut mildly its forecast for gross international reserves in recognition of the continuing financial troubles that have become close to a plague in the eurozone.
Loans are syndicated primarily to avoid violating the single borrower limit. What seems to augur well for business is the fact that corporations are borrowing big through syndication.
This may indicate capability that is largely determined by the syndicate of banks with the help of professional advice of the financial intermediary.
Montinola did not forthrightly say so, but he was suggesting that the low interest rate regime and the declining rate of defaults (non-performing loans) may have established a close bond between borrowers and lenders.
This might have been proven or at least indicated by the fact that, according to Montinola, using figures of the Bangko Sentral, “loans of universal and commercial banks to the services sector grew 32.2 per cent year-on-year to P1 .54 trillion.”
He explained the “services sector pertains to ... wholesale and retail trade, transportation, storage and communication; financial intermediation, real estate and business services; public administration; education; health and social work; other community, social and personal services; hotels and restaurants.