Bank lending to emerging markets drops by 20% in 2012

Bank lending to emerging markets fell by $67bn in the year to end December 2012 as western banks continued to reduce their overseas lending, says Cordiant, an emerging markets private debt fund manager.

Citing Bank for International Settlements data, Cordiant says $276bn of new syndicated loans were made to emerging markets businesses in 2012, a 20% fall from $343.2bn in calendar 2011.

Even Asia, the area that has traditionally attracted the lion’s share of developing markets bank lending, saw a 14% fall in new loans, from $141.8 bn to $121.6 bn.
David Creighton, President and CEO of Cordiant, says the gap between demand for bank finance from emerging markets companies and supply from Western banks continues to widen as the Eurozone banking crisis grinds on.

“Recent volatility triggered by events in Cyprus show that the European banking sector is not yet out of the woods. Regulators will continue to pressure Western banks to keep their balance sheets under control and politicians will pressure banks to use any spare lending capacity within their home markets.”

It may be years before Western banks return to their position as a reliable source of funding for emerging market businesses, he added.

Cordiant says that whilst lending from Western banks to the emerging markets has been weak, demand for bank finance continues to grow. “From the number and quality of loan requests that we are getting from emerging market businesses, the demand is definitely there,” says Creighton. “That means that spreads on emerging market loans have remained high – exceptionally high given the corresponding fall in yields on emerging market bonds.”

“Spreads on private loans are at least 200 basis points higher than in 2008 whilst emerging market bonds have moved in the opposite direction – with yields compressing so rapidly that many investors are concerned that bond yields are overheated.

The increase in issuance of emerging market bonds over the last 12 months has had little impact on the vast majority of emerging market businesses, as bond investors tend to focus on the well known corporates. These bond issuers have also been concentrated in the energy, mining and telecoms sectors.

“The boom in emerging market bonds has attracted a lot of fast moving funds that have reduced the cost of borrowing for a small slice of emerging market companies,” explains Creighton. “This has done little for the majority of large and medium sized emerging market companies that are reliant on bank lending.

Founded in 1999, Cordiant pioneered the creation of emerging market corporate loan funds that invest in partnership with International Financial Institutions. The firm has raised $2.1bn from some of the world’s largest institutional investors in three emerging market loan funds; the ICF Debt Pool; and one private equity fund, the Canada Investment Fund for Africa.

It has made investments in nearly 200 companies in more than 50 countries, with exposure to all major sectors, including a large number of infrastructure investments. Cordiant is a signatory to the UN Principles for Responsible Investment.

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