Currently, Asia’s loan structures are optimised for bank investors and unlike the US and European markets, structured lending is still relatively underdeveloped. To increase the attractiveness of the loan market for NBFIs, some key developments would need to take place.
Firstly, there is a maturity mismatch between term loan financing and tenor requirements of the borrowers. Some companies may only be able to raise short term bank loans, whilst actual financing needs are longer term.
Financial institutions could endeavour loan structures that match the companies’ requirements for longer-tenor financing and also match NBFIs’ needs for higher yields.
Secondly, the borrowers in Asia are typically unrated - in contrast to the US loan market where loans frequently are. Further, evolving regulation and legal framework in emerging countries deter potential NBFI investors in the region.
Substantial regulatory and legal framework reforms geared towards ensuring the integrity and resilience of financial systems are vital to build and instil investor confidence. Lastly, there is a relative lack of secondary loan market activity in the structured finance space.
NBFIs’ typically prefer to hold liquid assets (i.e. bonds over loans), which allow them to mark to market on their investments. Hence, a more liquid secondary loan market could attract NBFIs’ funding in the loan market.
With various loan financing structures from project finance to high yield loans in the Asia market, the opportunities for NBFIs to finance Asia’s growth are abundant.
With different risk appetites and investment profiles, there are two types of loan financing options which could be attractive for the NBFIs - the acquisition finance and project finance transactions.
NBFIs with higher price expectations and return requirements may prefer leveraged finance transactions such as limited-recourse financing structures.