French corporates have again proved capable of raising aggressive funding this year, leveraging off the high liquidity in the market. But with the amout of ancillary business many French corporates have to offer, banks have been happy to play the relationship game.
The French loan market hit the ground running this year as Electricité de France (EDF) put the final touches to a Eu6bn revolver which began life at the back end of 2002. Signed in February, the facility highlighted the strong support that French borrowers have enjoyed in the loan market in 2003.
EDF was able to negotiate extremely favourable terms for its loan. This was in large part due to the government's stake in the company, its strong ratings and the promise of ancillary business. The final terms of the deal even took some bankers by surprise.
"The terms were hugely attractive for EDF," says one. "It was a large deal launched at a time when there were fears that utilities would prove to be the next telcos and EDF itself had big question marks over its pension liability provisioning, particularly in light of its privatisation expected in 2004."
EDF's loan was split into a Eu2bn 364 day revolver 'A' with an extension and term-out option, and a Eu4bn five year revolver 'B' with a euro and dollar swingline. The margin on tranche 'A' is 15bp over Euribor if EDF is directly or indirectly owned by the French government, 15bp if it is not but is rated Aa2/AA or higher, or up to 25bp for ratings lower than A2/A. For tranche 'B' the margin is 20bp unless EDF is rated A2/A or lower, in which case it pays 32.5bp.
But while bankers were pleased to see such a strong, fresh money loan being signed so early in the year irrespective of the margins on offer they were soon disappointed as the French market failed to live up to its early promise.
Total volumes in France to June 20 this year are up compared to the same period last year, from Eu31.7bn to Eu41.2bn according to Dealogic, but the nature of the market has shifted. Whereas refinancings accounted for 55.2% of the period in 2002 - and less than half of the full year's total - they account for 65.3% of activity this year.
Meanwhile acquisition facilities, which accounted for 12.6% of last year's total, have fallen from a 10.7% share of the period's volumes to less than 1% this year.
"The French market has been disappointing in the sense that is has largely been driven by refinancings," says one banker. "There hasn't been much sex appeal in the kind of business that we have seen."
That new money loans have been almost non-existent comes as no surprise. Corporates have continued to focus on strengthening their balance sheets, still putting right the problems resulting from the bear equity market that followed their M&A sprees. "Given that the economic cycle in France has slowed down, there has been a reduced appetite for new debt and we have not seen a huge growth in volumes from the country in the capital markets in general," says Julian van Kan, head of loan syndication at BNP Paribas.
However, a steady and growing series of deals over the year has ensured that loan teams have been kept busy.
"In terms of corporate refinancings, France has this year again proved to be an extremely strong market," says Steve Swift, head of European loan syndication at SG CIB. "We have seen high volumes, with major borrowers coming to the market and establishing what are European benchmark prices."
And like EDF, the levels that major French borrowers have achieved have been very attractive for the corporates involved.
"Given the extremely strong bank groups that these borrowers benefit from, with perhaps 15-20 relationship banks involved, they have been able to access the loan market on very competitive terms," says Swift. "At the end of last year we expected to see pricing perhaps rising, but French borrowers have traditionally been able to come to the market on very fine terms and that has continued this year, with structures and pricing getting even tighter in some cases."
Fergus Edler, co-head of loan capital markets at JP Morgan, agrees with Swift's analysis. "There aren't many deals that have struggled in France this year, and that's putting it mildly," he says. "Even those that have been tightly priced haven't had any problems getting done. Banks are very liquid and there is still a lot of pent-up demand out there."
But while loan bankers agree that French corporates have been able to keep margins at a minimum, there is no consensus on whether this is merely part of the wider continental European context of competitive pricing, or if the French are particularly aggressive.
"The difference is between the UK market and the rest of Europe," says Emmanuel Rémy, director, origination, syndicated finance, at HSBC CCF. "I don't believe that French pricing is very distinct within continental Europe. Pricing may be tighter than in the UK, but no more so than in Germany, for example."
Other bankers disagree. "The French borrowers remain the most price aggressive," says one. "They are still very heavily inclined to go for the lowest price and tightest conditions. When it comes to leading the way in terms of keeping pricing down, the French are right there ahead of everybody else."
What bankers are unanimous in their agreement upon is that French corporates are having to face up the new realities of relationships as much as those in any other country.
"The relationship returns are being looked at with increasing scrutiny and you have got to have these angles in order to be able to justify arranging transactions," says SG's Swift. "We won't arrange a deal if there is no relationship angle and a reason for us to be there other than the loan itself."
Many of the French corporates that have been approaching the market are exactly the types of borrower from whom much relationship business can be won. And aware of their attractions, such corporates are more than willing to play the relationship game.
"They exercise a big pressure on banks to come into their loans," says HSBC CCF's Rémy, "but at the same time they are aware that the quid pro quo for getting involved is that banks at least maintain or even expand the amount of ancillary business they are doing with them.
"That was blatantly clear with names like Carrefour and Banque PSA, which have every kind of ancillary business a bank can dream of and who managed to attract a lot of commitments from banks."
Banque PSA was able to increase its Eu2bn five year loan to Eu2.7bn at the beginning of June after attracting an oversubscription of Eu3.3bn. The mandated lead arrangers and joint bookrunners were BBVA, BNP Paribas, Crédit Lyonnais, HSBC CCF and SG. The loan pays a margin of 15bp and a commitment fee of 6.5bp.
Carrefour, meanwhile, kept its Eu2.5bn loan at the initial size, despite attracting Eu3bn. The mandated lead arrangers were BBVA, Crédit Agricole Indosuez, Deutsche Bank (joint bookrunner), HSBC CCF and SG (joint bookrunner).
The loan is split into a Eu1bn 364 day revolver paying a margin of 20bp and a commitment fee of 7bp, and a Eu1.5bn five year revolver, including a Eu300m swingline facility, priced at 25bp and with a commitment fee of 10bp.
Absent from the arranging group was BNP Paribas, which had been on the top line in Carrefour's syndicated facility in 2000. However, van Kan at BNP Paribas is relaxed about the bank's relationship with the company.
"We have always been very close to them, but Carrefour knows how to rotate its bank group very well," he says, "and what we have seen here is mandate rotation. While we may not be a mandated lead arranger on the loan this time round, we have been involved in a lot of the company's other capital markets business, so they know how to reward their banks and keep everyone happy."
Indeed van Kan cautions against banks being too hasty in their evaluation of relationships. "Banks are all conscious of the cost of capital and are therefore directing capital towards those companies that give the ancillary business and make loans worthwhile," he says. "But quite frankly you have to be quite careful not to throw out the baby with the bathwater. You can't just end a relationship solely because it is not paying today; you need to work on it. Also you have to understand that you are not going to be able to deliver everything to them because, of course, they are going to be rotating their business, and also you product might not be the right one for them at that point in time."
Another corporate with much to offer is Suez, which last month approached the market for a Eu2.5bn five year revolver. The mandated lead arrangers were Crédit Agricole Indosuez, Citigroup, HSBC CCF, JP Morgan, Royal Bank of Scotland and SG. The same six banks had already arranged a Eu4bn deal for the corporate in April
And aside from its loan activity, Suez has had a busy year in the capital markets. Between March and May it sold stakes in several companies through block trades, its shares in Fortis through a convertible, and arranged the flotation of Northumbrian Water. Then last month the utility raised Eu2.75bn through a three tranche bond issue.
Alongside the tightly priced facilities for the likes of Carrefour, Peugeot and Suez, the French market has also had its share of stressed credits. Foremost among these has been Vivendi Universal.
At the beginning of April the company launched a Eu2.5bn loan into the syndicated market, in the same week as it completed its Eu1.2bn high yield bond issue - the largest ever for a European corporate. Although the loan appeared tight compared to the level at which the bond issue was launched, it was secured on assets and the company also paid up for the facility.
The mandated arrangers were Citigroup, Goldman Sachs, Royal Bank of Scotland, BNP Paribas, Crédit Lyonnais with Crédit Agricole, Natexis Banques Populaires and SG. Banks committing in syndication were ABN Amro, Bank of America, Barclays Capital, Credit Suisse First Boston and JP Morgan.
The banks involved in the loan were split into two groups: those that were already lending to Vivendi and therefore had a vested interest in ensuring that the company's position improve; and those that could base their decision whether or not to get involved on a pure risk/reward basis.
"Vivendi is a strange animal because of course the banks that were already involved were looking to protect what they had already leant the company," says an official at one such bank. "Ancillary business was almost an afterthought. But having said that, as arrangers we certainly did get an awful lot of other business, simply because we happened to be there and were part of the solution."
Those banks that did not already have a lending relationship with Vivendi were in a position of more power. "The higher margins were a recognition of the fact that although the credit may be improving and be ultimately alright, the loan still had to be sweetened to keep the existing banks there that had not seen the ancillary business," says an official at one bank that had not been involved in Vivendi's earlier loans. "We were one of the banks that Vivendi wanted in there because the banks at the top wanted further selldown, and they needed to make it sweet for us as well.
"And if we were going to help reduce the other banks' positions, we wanted to be sure that we were going to have our fair share of ancillary business, too.
"In such a situation, you can play hardball much more than you otherwise might because you are less concerned about the relationship."
While large transactions such as Vivendi have grabbed the headlines this year, the French market has also been kept busy by smaller, but in many cases just as interesting credits.
One such borrower is Rémy Cointreau, the French wines and spirits group. The corporate approached the market in May for a Eu400m five year loan via mandated arrangers Bank of American, Crédit Lyonnais (bookrunner), HSBC CCF (bookrunner), Natexis Banques Populaires and SG (bookrunner). The deal was to refinance a Eu400m facility arranged by SG in 2000 and for general corporate purposes.
But due to a strong response from the mandated arrangers and other banks, the facility was 48% oversubscribed and increased to Eu500m. The facility was split into two tranches, a Eu250m amortising term loan and a Eu250m revolver. The initial margin is 120bp and can ratchet on a net debt to Ebitda grid, with a commitment fee of 50% of the applicable margin.
"Rémy Cointreau was an extremely successful transaction," says SG's Swift. "It's a speculative grade company, but has always had significant access to the loan markets at very good terms."
Swift sees the deal as a strong example of how the French market is ready to absorb smaller and more complicated credits. "Rémy Cointreau is a bit out of the ordinary, but it worked very well," he says. "It underlines the message that the loan market in France, perhaps more so than elsewhere in continental Europe, is very open to looking at unusual transactions and structures."
Smaller French corporates have also been more active users of the capital markets than some of their European peers. Rémy Cointreau, for example, was one of the first corporates to enter the European high yield market.
"Their other activity in the capital markets makes the smaller French names attractive to international banks," says Swift, "because they do look at the international capital markets as an alternative to direct funding from banks, which is not necessarily true in all European countries."
Rich pickings to be
While bankers see no impediment to continued success for French corporates looking to access the loan market in the remainder of the year, few expect large volumes or any groundbreaking transactions.
"There does not seem to be great potential in terms of further refinancings," says JP Morgan's Elder. "A lot of the refinancings that were expected this year have already been done, so the pipeline for the second half of the year does not look great.
"But having said that, France is a big place and there could be some M&A activity or the like that nobody is aware of now but will suddenly make the market burst into life."
However, bankers are not holding out too much hope of an M&A wave. "It would be premature to expect that," says HSBC CCF's Rémy. "We are not over-optimistic about the recovery in the French economy and although we would never say never, we are not counting on any M&A boom to meet our targets."
Bankers are more optimistic about the potential for leveraged activity to pick up. "We are seeing a lot more of the small ticket leverage and acquisition business," says van Kan at BNP Paribas. "It is not industry specific, but a general trend as the large companies spin off divisions to strengthen their balance sheets or focus on their core businesses. There are many examples of that going on, and this should provide rich pickings for venture capitalists ."