Chilly Scandinavia has offered loan bankers an unexpected source of warmth this year as long-absent credits joined new Nordic names in tapping the market for funds. It is lucky that they did - competition for business is hotting up with non-local firms such as Merrill Lynch and private equity houses such as CVC opening up the market. In the midst of this activity, however, relationship banking has come under the same level of scrutiny as in the rest of Europe. Taron Wade reports.
The first half of the year in the syndicated loan market for the Nordic region was extremely busy, with volumes nearly equalling the total amount syndicated during 2002. In fact, year to date, Nordic borrowers have raised $29.7bn, exceeding the $27.5bn total raised in 2002.
But in step with the wider loan market, there was little event-driven financing - most of the activity was composed of refinancings of backstop facilities.
While they were refinancing these existing facilities, borrowers took the opportunity, however, to refine their relationship groups typically through an expansion of the mandated lead arranger group and an overall reduction of relationship banks - often after a long absence from the market. "There was a very conscious decision by each of these issuers to limit the bank group," says Ashu Khullar, director and head of Nordic loan origination at Citigroup in London.
"Companies suddenly realised that they didn't want all these banks calling on them," adds Michael Dicks, head of debt capital markets at SEB in London. And lenders were anxious to secure a spot on those syndicates to capture sought-after ancillary business as the number of large corporates in the region is limited.
For example, Swedish holding company Investor AB came to the market in February with a $1bn refinancing of a facility arranged in 1996. That existing facility had one mandated lead arranger, SEB, while the new loan has an expanded group of four: HSBC, Citigroup, JP Morgan and SEB. The borrower also reduced its relationship group to seven co-arrangers in addition to the four mandated lead arrangers. In contrast, the 1996 facility had a total of 15 banks below the top arranger level.
Likewise, Finnish paper manufacturer UPM-Kymmene refinanced an Eu894.761m facility from 1997 and expanded its group of mandated lead arrangers from two to five. Bank of Tokyo-Mitsubishi, Citigroup, HSBC, Nordea and Svenska Handelsbanken arranged the refinanced Eu1.2bn loan. The mandated lead arrangers on the previous facility were Citigroup and Merita Bank. There was a total of 26 banks on the refinancing, as opposed to 32 banks on the previous loan.
Finnish metals and technology company Outokumpu also expanded its mandated lead arranger group to five banks from three when syndicating an Eu875m loan in May.
This reshuffling of bank groups fits within the rationalisation of lending relationships, which is a theme of the European loan market as a whole. "It fits the overall evolution in the market of the way banks measure return on capital," says David Bassett, head of European loan distribution at Citigroup in London. "There is a need for banks to put assets on their books, but there is at the same time a reluctance to participate if a firm does not have an established relationship with the bank," says Nils Emilsson, head of corporate banking for the Nordic area at HSH Nordbank in Copenhagen.
Pressure on investment banks
On the other hand, bankers also note the pressure for those institutions that receive the benefits of ancillary business to participate in transactions, pointing out the presence of US investment banks Merrill Lynch and Morgan Stanley in the UPM-Kymmene deal. "We have seen more investment banks being required to commit," says Charles Griffiths, vice president in the syndications group at Bank of Tokyo-Mitsubishi in London.
A surge of deals this year came from Finland, challenging the stronghold of Swedish companies in the market. In addition to UPM-Kymmene and Outokumpa, Finnish energy company Fortum took out a Eu1.2bn refinancing, Nokia came with a $2bn revolver and forest products company Stora Enso completed a Eu2.5bn revolver. "Sweden used to be the biggest, but this year Sweden and Finland have vied side by side," says BTM's Griffiths. "We saw power, telecoms, steel and paper companies in Finland - you get the feeling that the market really drained itself."
Sweden had a few prominent deals as well. In addition to the $1bn facility for Investor AB, Swedish mobile operator TeliaSonera raised Eu1.4bn in the market and Scania, a heavy trucks and buses manufacturer and engine maker, raised $1bn in the market.
Pricing on transactions in the Nordic region was much wider than on previous facilities, but this is generally because from about 1996 to 1998 borrowers were able to secure extremely tight pricing.
Since that time, pricing has begun to move more in line with the rest of Europe. "I think we've reached a fairly firm level in the Nordic region for pricing - levels for tier one borrowers have firmed up to 30bp-40bp," says David Roberts, head of syndications at Nordea in Stockholm. Investor AB, with a rating of Baa1/AA-, was able to tap the seven year market at a margin of 11.5bp for years one to four and 12.5bp for years five to seven in 1996, compared with a margin of 35.25bp for its five year revolver. Pricing on the new deal is also linked to a ratings grid.
A trend seen over the past few years is that Nordic companies have begun to borrow on terms similar to those available to other borrowers in Europe. It is less common, however, to see financial covenants. "It is a general trend that borrowers are taking a more responsible attitude toward them - there are one or two borrowers that have given financial covenants this year when they previously did not," says Roberts at Nordea.
In terms of deal structure, bankers say that borrowers can be put into three camps, although they note that there are many exceptions based on individual borrowers. Single-A or better rated companies can typically get deals done without financial covenants or material adverse change clauses (MAC). Baa3/BBB- to A3/A- rated borrowers need to give either financial covenants or MAC clauses to lenders, whereas sub-investment grade rated corporates are likely to need to give both.
SEB's Dicks doubts the Nordic market will ever really change to be more in line with the larger market. "Not in my lifetime," he says. "Everyone keeps saying it's going to change, and we do get slightly tighter docs and better pricing, but as soon as the market expands, pricing comes back in."
"There is just way too much competition." BTM's Griffiths adds. "Although the pricing, covenants and structure are trending towards the rest of Europe, the market still trails behind the UK."
But bankers can agree that they were pleased with the ease of syndicating these deals, in contrast with the UK, where there were several deals that struggled in syndication. Likewise, the market did not see difficulties like those in Germany, where there was friction as banks pulled out of long term relationships with blue chip borrowers.
"In 2003 the majority of deals have been a success and most of them raised substantial oversubscriptions," says BTM's Griffiths. Bankers point to the $1bn deal for Scania, which raised a 50% oversubscription in syndication but was not increased, as well as the Eu2.5bn Stora Enso transaction, which raised Eu3bn in syndication and was increased from its initial size of Eu2bn.
The Nordic market has been extremely quiet when it comes to acquisition finance. Swedish engineering group Trelleborg is in general syndication with a Eu500m bridge facility for its acquisition of UK precision seals maker Polymer Sealing Solutions (PSS), which is being arranged by relationship banks Danske Bank, Handelsbanken and Nordea. But other than that recent deal, event-driven financing has hardly factored.
Bankers are more hopeful for the final quarter. "There are some signs that confidence is returning to the equities market," says Nordea's Roberts. Most bankers point to potential divestitures from troubled power and technology company ABB as a potential source of acquisitions, for both trade buyers and private equity sponsors. Another potential mine for acquisitions is the disposal of non-core assets by companies controlled by governments, bankers say.
SEB's Dicks believes that most of the financing for these types of trade buys will be done using existing facilities or through bridge financing to the bond market. "The bond market is very liquid and the companies are very strong. Banks will be willing to put up a lot of money as long as it is short term," he explains.
Dicks also expects that there will be strong acquisition activity in the mid-cap sector. Since those companies are not large enough to tap the bond market, they are likely to seek financing from one or two banks which may be taken out in the loan market.
Lenders reserve the most optimism, however, for the leveraged buy-out sector. "There were at least four deals in the Eu500m-plus range in the past two years, which shows the market is gaining importance in Europe," says Richard Howell, head of leveraged capital markets at Lehman Brothers in London. "Investors are comfortable with the region from a security perspective. It is an area of increasing interest." Bankers note that markets such as France or Italy do not have bankruptcy laws that are as favourable to lenders.
The prominent deals this year were EQT's buy-out of cable television company Com Hem from TeliaSonera with Eu93.345m in senior debt, Nordic Capital's buy-out of Maersk Medical, Banc of America Equity Partners' secondary buy-out of Paroc Group with Eu164.5m in senior debt and CVC's buy-out of Danske Traelast, which involved the senior syndicatioin of Eu733.73m of senior debt.
The ABN Amro Private Equity-led buy-out of Global Garden Products is another deal in the works. CIBC and Royal Bank of Scotland are arranging the syndication of the senior debt supporting the purchase.
That means that three private equity houses not based in the Nordic region have been involved in recent deals. "Nordic houses have dominated in the past, but in the last two years that has started to change, which shows that the Nordic market is no longer so protected," says Simon Wakefield, global head of acquisition finance at SEB Merchant Banking in London. "There is a growing awareness of how active the market is. As local banks become more sophisticated they start pricing and structuring deals closer to the international benchmark. The whole market is becoming more transparent and regional variations are being reduced."
In addition, the presence of two large buy-outs of Danish companies - Danske Traelast and Maersk Medical - was notable. In the past Swedish and Finnish companies dominated the market. "Denmark has always been an active market for small cap deals," Wakefield adds. "But now larger transactions are being seen in Denmark. The reason for this is the same as elsewhere, ie industrial consolidation and competition creating pressure to sell off non-core businesses."
Complementing the desire to spin off non-core businesses and consolidate is the increasing amount of private equity money that needs to be invested. "We are going to see an increasing amount of private equity-led acquisitions," says Nordea's Roberts. "The stock markets are getting more buoyant, companies are able to be re-floated and private equity funds need to show some returns."
This is also one reason why Nordic buy-outs are getting larger. Private equity houses have amassed such a large amount of capital that the successful funds are now multi-billion dollar money managers. "They are able to buy larger companies and the view is that large companies are also easier to sell," says SEB's Wakefield. Additionally, the amount of work involved in completing a large deal is about the same as that involved in doing a smaller deal. "There is a focus on the return for time spent," Wakefield says.
The buy-out market in the Nordic region is going through the same growing pains as the rest of the European market, bankers say. As regional banks consolidate, liquidity is starting to decrease and the collateralised debt obligations are increasingly buying debt in the market. "Although the number of banks wanting to be lead underwriter has not changed, it is more difficult to find end purchasers," says Wakefield. "The depth of the local market is occasionally being tested."
But generally prices are going up in the market as the changeover from banks to institutions occurs. Traditionally, regional banks have supplied debt more cheaply than global banks, which is now changing, as the market becomes more of a focus of international banks and institutions.