European corporates are enjoying some of the best borrowing conditions for over a decade. But, although they are queuing up to refinance their loans at discount levels, they are sceptical when it comes to potential acquisitions. Charlie Corbett, Nick Briggs and Taron Wade report.
The Eu12bn loan for Telecom Italia in early January promised more than it delivered. Bankers hoped the loan was about to herald a new era of consolidation across Europe.
But no such luck.
And the deal, which supported the firm's purchase of 44% of Telecom Italia Mobile (TIM), was heavily oversubscribed in syndication meaning banks' allocations were scaled back.
Put simply: 2005 has started very much where 2004 left off, characterised by a steady flow of cheap refinancings.
Sanofi-Aventis set the ball rolling in January when it replaced the Eu5bn tranche of its Eu16bn acquisition-related loan. BNP Paribas and SG CIB led the deal, which had a margin that was slashed from Euribor plus 40bp down to just Euribor plus 10bp. It has since refinanced the other two tranches with loans of longer tenor and tighter margins.
And on other deals margins are steadily falling or tenors have been extended. Gaz de France has approached banks for Eu3bn to refinance a Eu2bn deal signed in August 2002. The deal, which has a straight seven year tenor, pays a margin of Euribor plus 13bp for years one to five and 15bp thereafter. The original transaction paid 15bp over Euribor for a five year tenor.
Soon after Gaz de France's deal, Electricité de France (Edf) broke the 13bp barrier by mandating banks on to its Eu6bn refinancing at a price of 12.5bp over Euribor. Once again the tenor was pushed out to seven years — and this despite EdF's rating having slipped over the last three years from Aaa/AA+/AAA to Aa3/AA-/AA-. BNP Paribas, Calyon, Citigroup and Royal Bank of Scotland are the bookrunners.
Lately bankers have been talking about a possible levelling out in pricing. But as one head of loans put it, "only because margins can't get any lower".
Similar picture elsewhere
It is the same story in Germany. Telecoms equipment maker Siemens mandated banks on to its Eu5bn revolver in late February at a margin of Euribor plus 15bp over seven years. Its previous deal paid 22.5bp over Euribor for five year risk.
Similarly German pharmaceutical company Bayer cut its margin by a third compared to its previous deal, when it mandated banks on to a Eu3.5bn loan in late February.
The Netherlands, however, provided a brief ray of light for lenders in January. Mittal Steel mandated ABN Amro, Citigroup, CSFB, Deutsche Bank, HSBC and UBS to arrange a $3.2bn loan with an out-of-the-box margin of Euribor plus 35bp. It was one of the biggest new money deals to hit the market so far this year and the first time that the Rotterdam-based company has borrowed since it was created in December.
|Leveraged buy-outs: abundant liquidity|
The leveraged buy-out market, much like the corporate borrowing market, was awash with liquidity during the first quarter of 2005.
Although some deals were said to struggle, such as the Eu1.502bn facility for French electrical parts distributor Rexel and the Eu925m recapitalisation for German crane and industrial machinery company Demag Investments, both were completed in syndication and portions of them were oversubscribed.
Many bankers and investors say that they cannot see an end to the liquidity for transactions. US investors are as hungry for paper as they were last year and banks are desperate to keep buying for their balance sheets.
But from both the buy-side and the sell-side there is also a sense that the situation may reverse quite soon.
"While the business risk qualities of companies which have been taken private via LBOs has improved in recent years, there are some people who are deluding themselves that the credit environment will stay as it is," says David Wilmot, managing director at Babson Capital Europe.
"The market is not going to trundle along with high leverage multiples when the macro-economic climate turns. There will undoubtedly be deals where real problems occur."
Recapitalisations have been a recurring feature of a market with so much cash available. The trend, which started last year, has continued and the dividends that equity sponsors are paying themselves — sometimes only months after the company has been bought — are increasing in size.
On the recap of battery company Saft, which was launched at the beginning of February, Doughty Hanson took out 160% of its original investment. The deal, led by Mizuho, was oversubscribed in syndication and was signed at the end of February.
Investors are willing to look at recaps, but some are concerned when suddenly the private equity sponsor has already taken out all of its original equity investment along with a tidy profit.
"You have to decide that the uptick in performance was of a recurring nature and not just a one-time windfall," says Colin Atkins, director at The Carlyle Group. "You also have to believe that the enterprise value of the business contains a significant equity buffer post-recapitalisation. As long as the private equity sponsors still see an upside, then it is okay to invest."
Matthew Craston, a director at European Capital Management in London, points out that recapitalisations happen because private equity sponsors sometimes do exceptionally good deals. "For very early recapitalisations we look at them carefully and need to be convinced that it was a very smart purchase in the first place."
Whether management stays in the deal is often one of the deciding factors for funds. "It is important that management hasn't taken out all their money so they are still incentivised," says David Forbes-Nixon, chief investment officer and head of European operations at Alcentra in London.
But it is important to remember the context for recapitalisations — they are not only driven by the amount of bank and fund capital available. "Recaps have grown because of increased liquidity but also because businesses are harder to exit," Wilmot says. "Sponsors have had to look at alternative exit routes."
The pipeline for jumbo transactions in the second quarter looks weaker than it did at the beginning of the year.
The big transaction the market is waiting for is the buy-out of Spanish travel booking company Amadeus. Another large deal set for an imminent launch is the buy-out of Travelex, which will have about £1bn of debt supporting it.
Other deals that are still at the bidding stage include E.On's gas and electricity metering subsidiary Ruhrgas Industries, Enel's telecom unit Wind and the cable manufacturing business of Pirelli, the Italian tyre, cable and systems company.
The company, which is the product of a merger between Ispat International and LNM Holdings, has agreed to acquire the US-based International Steel Group for $4.5bn.
In the UK, volumes have been steady but no jumbo deals have been mandated. The London Stock Exchange (LSE) continues to play hard to get with its continental suitors, Euronext and Deutsche Börse. Euronext looks to be the favourite to win the bid — if it ever gets awarded — after Deutsche Börse's chairman Weiner Seifert suffered a rebellion from a large minority of his own shareholders against the potential acquisition.
Euronext has not tendered a formal bid yet but has mandated ABN Amro, Barclays, BNP Paribas, Calyon, HSBC, Morgan Stanley, SG CIB and UBS to arrange the debt financing. Deutsche Bank and Goldman Sachs are supporting Deutsche Börse's bid.
Emerging markets settle down, heat up
New pricing benchmarks have been the order of the day in the opening quarter of 2005 in the emerging markets as well. And three highly competitive mandates — for which banks had been bidding since last year — were finally awarded.
Banca Comerciala Romana chose Bank Austria, Calyon, Citigroup and WestLB to arrange its $400m five year loan. The deal pays a margin of 72.5bp over Libor, well under the 200bp that the bank paid on its $200m five year facility from March 2004.
Meanwhile Bank Austria, Calyon, Mizuho and WestLB won the mandate to arrange a Eu160m three year loan for HBOR. The Croatian Bank for Reconstruction and Development, as it is otherwise known, will pay a margin of 35bp over Euribor.
And Bank of Tokyo-Mitsubishi, BayernLB and ING are arranging Slovenian Abanka Vipa's Eu100m five year loan, for which the borrower will pay a margin of just 23bp over Euribor.
Banca Comerciala Romana's deal was struggling slightly during syndication in late March, but HBOR's deal did not require a general phase and Abanka was signed in March for Eu115m.
That is likely to encourage Banka Celje and Nova Kreditna Banka Maribor, two other Slovenian financial institutions that put out requests for loans during the first quarter.
Elsewhere in eastern Europe, Hungarian oil and gas company Mol and Polish telco TPSA set large refinancing deals in motion.
Mol is looking to raise around Eu450m of five year debt, which includes two one year extension options, in a deal that bankers predict will pay a margin in the high 20s, while TPSA signed a Eu900m five year club loan that attracted commitments from 18 banks.
While deals in eastern Europe have appeared only sporadically, in Russia new facilities have been hitting the market regularly.
Bank of Moscow launched a $150m two year loan through ABN Amro, Depfa Bank and Deutsche Bank, while Gazprombank and Vneshtorgbank both have $300m three year deals in the market.
Gazprombank will pay a margin of 150bp over Libor compared with the 180bp it paid on a $275m 364 day loan signed last year, and Vneshtorgbank will pay 120bp over Libor.
Deals for pipeline companies Sibneft and Transneft are also in the market.
Better times for Africa and Middle East
Loans bankers involved in Africa are optimistic for 2005. "Africa is the last frontier," says Hiren Singharay, a managing director and head of loans syndications at Standard Chartered in London. "Banks are seeking yield in emerging markets, but not at any cost, unlike in the roaring 1990s. All that changed in 1998. Now, keeping their eyes open, banks are looking at well structured deals in Africa and the number of new entrants in syndicated loans in 2004 was remarkable.
"The year has started well. We will see a lot more local currency transactions across Africa, tenors will go out, and alongside corporate deals we may also see some M&A activity."
Guinness Cameroon has a $30m deal in the market though Standard Chartered, while Industrial Development Corporation of South Africa picked Bank of Tokyo-Mitsubishi, Calyon, Investec, Standard Bank and Standard Chartered to arrange a split tranche dual currency facility totalling around $200m.
Kenya Power & Lighting Company also sent out requests in February.
In the Middle East, loans bankers who at the end of last year predicted a glut of financial institution deals there have been proven right.
"It's been a very active start to the year," says Raouf Jundi, head of origination for Middle East and Africa loan syndications at Bank of Tokyo-Mitsubishi in London. "There are a number of financial institution deals on the horizon and we could see more project deals this year than last — and perhaps more corporates, too."