Syndicated lending to Spanish companies has not been as big this as year as last, but 2005 was a bumper year and the underlying trend in the market is still very strong. Big takeover battles like those for Endesa and BAA have dominated the action, but just as important have been the busy M&A in Spain's real estate market and borrowing by mid-cap companies.
The syndicated loan market in Spain hit the ground running this year, and the pace has not let up.
On February 10 Telefónica signed the £18.5bn acquisition facility that it had launched in November to fund its acquisition of UK mobile phone company O2, the largest acquisition financing loan of the previous five years.
The deal was split into a £12.33bn 364 day portion, extendible to 2-1/2 years, paying a margin of 32.5bp, and a £6.17bn three year term loan paying an initial margin of 37.5bp before moving according to a ratings grid.
Bookrunners Citigroup, Goldman Sachs and Royal Bank of Scotland launched general syndication in January, after sub-underwriting in November. "The syndication has easily gone as well as the sub-underwriting phase several months ago — around 12 more banks have joined," said one banker involved in the financing.
Two days before Telefónica's deal was signed, Spanish infrastructure company Ferrovial announced that it would bid for BAA, the world's biggest airport operator.
After bidding against a consortium led by Goldman Sachs, Ferrovial won the bidding for the UK company for £10.1bn in June.
In July Calyon, Citigroup, HSBC, Royal Bank of Scotland and Santander launched the financing package for the Ferrovial-led consortium, Airport Development & Investment, which also included Canada's Caisse de dépôt et placement du Québec and Singapore's GIC Special Investments.
The £8.97bn loan is split into a £4.72bn senior term loan, a £2.25bn senior capital expenditure and revolving credit facility, and a £2bn junior second lien piece, all with five year tenors. The second lien piece was included to help the company secure investment grade ratings.
"The company is taking on a lot of debt, but the second lien will absorb some of the new debt blow and keep it at its target of triple-B," said one banker close to the deal. "Other senior debt like the refinancing of BAA's convertible bonds will help as well."
The loan was finally signed in October, just as the saga of another M&A battle that started in 2005 was taking its latest twist.
In September last year, Gas Natural had launched a Eu7.8bn loan to fund a Eu22.9bn takeover bid for Endesa. That two year deal, with a one year extension, was arranged by La Caixa, Société Générale and UBS, and paid an initial margin of 30bp before moving according to a ratings grid.
Gas Natural's bid got bogged down in the courts and Germany's E.On then pounced on Endesa with a Eu29.1bn offer. A record-breaking Eu32.1bn acquisition facility for E.On was then trumped by the German utility itself when it increased the loan to Eu37.1bn in a facility arranged by BNP Paribas, Citigroup, Deutsche Bank, HSBC, JP Morgan and Royal Bank of Scotland in mid-October.
E.On sweetened its offer because Spanish infrastructure company Acciona had in September bought a 10% stake in Endesa and claimed that it could buy up to 25% of the company, backed by a syndicated loan arranged by Santander.
At the time this report was going to press, E.On's syndicated loan was the largest ever acquisition facility. It comprises a Eu24.7bn one year facility paying a margin of 22.5bp over Euribor and a Eu12.3bn three year facility paying a margin of 27.5bp.
Whether this amount will be trumped is uncertain. Spain's national energy commission, CNE, had placed 19 conditions on E.On's bid for Endesa and the German company is now appealing against that to the Ministry of Industry, Tourism and Commerce. The European Union has already declared the conditions illegal. If it gets the go-ahead, E.On must then go to the stock market regulator, the CNMV, to get another green light.
Gas Natural can then decide whether to raise its bid, and Acciona may make its full intentions clear.
Gas Natural's original bid for Endesa had involved an asset sale of some Eu7bn-Eu9bn to Iberdrola. With most of Spain's utilities and energy companies tied up in the protracted process — Repsol, for example, is Gas Natural's biggest shareholder — and even some construction companies involved, the saga has put a brake on other M&A deals in Spain this year.
However, bankers are optimistic that when the situation is finally resolved it will be the catalyst for an M&A chain reaction that can only stimulate syndicate lending.
"If Endesa is acquired by E.On then that will not directly affect the Spanish market," says one loan banker in London, "but they will probably have to sell very significant amounts of assets. And if it is acquired by a Spanish company or consortium, then the same will be true for regulatory reasons, and there will also be the Endesa financing.
"So whichever way it goes there are definitely going to be a lot of companies looking to raise financing after the saga is concluded."
While takeover activity in the utility sector may have hit a hiatus, M&A has been almost non-stop in other sectors. In the real estate market, in particular, barely a month has passed without a bid or counter-bid emerging.
Metrovacesa — which itself took out one of the biggest loans of 2005 — is the subject of a takeover battle between its chairman, Joaquin Rivero Valcarce, together with the Soler family, and private equity firm Cresa, which is Metrovacesa's biggest shareholder. This led to Metrovacesa's shares being suspended from the Ibex 35 in September.
And as Colonial, Urbis, Fadesa and Parquesol have also all been involved in M&A at the same time as more property companies are being listed on the stockmarket, the sector's face is changing rapidly. "If you look at the companies that were quoted on the Spanish stockmarket last year and again now, the landscape has changed dramatically," says one coverage banker in Madrid.
The effects have also been visible in the loan market. "The most active sector in terms of the number of deals has been construction and real estate," says one loan banker in Madrid. "Those two sectors have been very important for the Spanish economy in recent years and this is also reflected in the loan market.
"That is why from 2002 to 2006 most activity has been concentrated in these sectors."
Continued activity in the property sector has helped ensure that M&A has stayed centre stage in the Spanish loan market.
"The refinancing activity that started in 2004 and 2005 seems to be reaching its end," says Jose María Sagardoy, global head of syndicated loans at Banco Bilbao Vizcaya Argentaria in Madrid. "It is being replaced by financing needs derived from corporate acquisitions."
The greater prominence of event-driven transactions compared to refinancings in the Spanish loan market has also partly been the result of stable pricing conditions.
"Nearly all the refinancing exercises to benefit from the lower pricing in the market were done in previous years," says José Antonio Olano, head of syndicated loans for Spain at Société Générale in Madrid. "Everyone had more or less refinanced by this year and prices have not decreased much further since the end of last year, so there was no need to refinance again."
That M&A has driven the Spanish loan market is borne out by the numbers.
Acquisition finance in some markets, such as France and the UK, has suffered as the result of a drop-off in the number of takeover bids by companies in those countries, the Spanish market has held up well, even if it has not seen the growth that Germany, the number one bidder, has.
Still, the volume and number of Spanish syndicated loans is lower than last year. By mid-September, there had been only 70% as much lending and 81% as many deals as in the same period of 2005.
However, 2006 has been a good year if one takes into account the fact that volume in 2005 was exceptional.
"In 2005 Spanish [loan] volumes hit about Eu100m in a European market that was Eu750m," says one loan banker in Madrid. "This year it is back to around 10% of volumes, which is nevertheless still quite high."
The smaller relative size of Spanish loans this year illustrates another trend. "An important area of activity this year is the medium sized corporates being quite busy," says a loan banker in Madrid. "Not so much the mid-caps, but the companies just behind the top dozen names that are known internationally. That is also why the deal size has decreased versus last year, when we had all the huge M&A deals."
Liquidity lifts M&A
Pricing in the syndicated loan market for Spanish companies is expected to remain stable, for reasons that are true for the whole of Europe and also some that are specific to Spain.
"The downward trend in pricing levels seems to have bottomed out, since slight increases in margins are already taking place," says Sagardoy at BBVA.
And the readiness to lend that has helped to drive down margins in recent years and supported the M&A boom may in future not prove quite as forthcoming.
"Liquidity is still available in the market, although there have been a significant amount of corporate acquisitions in 2006 that have partially drained it," says Sagardoy. "The increased financing needs that have resulted from these acquisitions have reduced the attractiveness of 'relationship' deals.
"These, when launched too tight, are more difficult to place."
Another feature that a banker at one international bank says is notable in Spain is that occasionally tenors are are longer than elsewhere in Europe. "Tenors have lengthened to the sort of seven year bullets that have generally been available to good companies in Europe in the past couple of years," he says, "but there are also some 10 year transactions. Spanish banks seem to find our resistance to going out beyond seven years for a good company quite strange."