Companies still hold the upper hand in the European syndicated loan market, dictating terms and commanding razor thin pricing. Banks are wondering when ? or if ? the market will turn again in their favour and are rethinking their lending strategies. Charlie Corbett and Taron Wade examine how this is playing out in each of the big European countries, as well as in the Middle East and Africa.
France ? Mega-year rolls on
The French loan market continued its phenomenal growth in the third quarter of 2004. In the first nine months of the year $133.7bn of deals were signed, almost double the $69.3bn of deals in the same period last year.
Demand, however, remains incredibly strong among banks, which continue to feel under-lent. Covenants have all but disappeared, tenors have lengthened and pricing continues its downward spiral.
?Because we are awash with liquidity, 2004 has been the year of indiscrimination,? says Julian van Kan, head of loan syndications and trading at BNP Paribas in London. ?Banks' attitudes have been ?If there is an inkling of opportunity, go for it'. The emphasis is on what ancillary business borrowers can offer, and if it's juicy, that's when covenants start to loosen.?
Hypermarket chain Carrefour will pay just 17bp over Euribor for its $1.5bn five year revolver ? 8bp less than it paid for a Eu1.5bn five year tranche signed in June last year. The deal also has the increasingly popular five-plus-one-plus-one structure, whereby the borrower has two one year extension options, one after year one and the second after year two, effectively making the loan seven year risk.
However, it is not so much the fall in margins that has concerned lenders, but the dramatic drop in commitment fees. This fall will particularly hurt banks, since most loans remain largely undrawn, meaning this is the only fee they pick up. The Carrefour deal pays a commitment fee of just 5bp ? half the fee on its June 2003 deal.
?One of the major changes this year has been that commitment fee levels have increasingly become de-linked from the historical percentage of margin,? says Tim Ritchie, head of global loans at Barclays Capital in London. ?It was normal for a commitment fee to be 50% in the early 90s, but in the last 10 years that was reduced to the 40%-45% range and in the last 12 months they are down as low as 30%-35%.?
Few in the market can see an end in sight to the prevailing credit environment. ?It is difficult to put a floor on pricing,? says Chris Baines, head of European loan distribution at SG CIB in London. ?It will stop falling either when the next credit crunch comes, which I don't expect soon, or when ancillary business is either not forthcoming or proves to be disappointing for banks, meaning that it no longer makes sense for banks to lend on these terms.?
Germany ? Big hopes survive a thin quarter
Bankers are looking to Germany to provide a rich source of deal flow when, as many predict, the volume of business in the French market start to dry up next year.
The German market has been busier this year than last, and has experienced the same erosion of structures and decline in pricing as other sectors of the European loan market.
?The key theme this year has been the great amount of liquidity in the market chasing so few credits,? says Matthias Gaab, co-head of European loan capital markets at Deutsche Bank in Frankfurt. ?It took me by surprise, I would never have thought pricing would be as low as it is now and the speed by which it dropped over the last three to four months is astonishing.?
In the last quarter, however, German lending contracted dramatically. Twenty-five deals, worth a combined $17bn, were signed between July 1 and September 30 ? down from 44 loans totalling $46bn in the second quarter.
Bankers are hoping this is just a blip, and the last quarter has got off to an energetic start. Media group Bertelsmann recently signed a Eu1.2bn deal, while software company SAP is wrapping up a Eu1bn five year deal, led by ABN Amro, BNP Paribas, Deutsche Bank (bookrunner) and JP Morgan.
Energy and water utility RWE has a Eu4bn five year loan nearing the end of syndication and Germany's largest construction company, Hochtief, is approaching banks for the first time to borrow Eu1.5bn in a five year loan.
At least another five deals are in the hopper, including a jumbo refinancing for utility E.On and a Eu1.5bn deal for MAN Group, the truck and machinery manufacturer, which bankers believe is in the works.
Italy ? LBOs and smaller borrowers to the fore
Leveraged buy-out loans were prominent in Italy in the third quarter of the year. There was so much demand for the Eu758m all-senior debt supporting the recapitalisation of cheese and salami maker Galbani that arranging banks were able to set the original pricing 25bp tighter than for typical European LBOs. The deal still had a 100% hit rate and arranging banks BNP Paribas, Banca Intesa and Calyon did not have to launch it into general syndication.
There was also a Eu730m financing for Charterhouse's buy-out of Autobar, the vending machine and packaging company, led by Bank of Scotland, BNP Paribas and Deutsche Bank.
?There is usually only about one large leveraged deal per year in Italy,? says Chris Baines. ?Having two fair sized deals is very encouraging for the geographic diversification of the entire European leveraged loan market.?
The most notable investment grade financing during the quarter was the Eu1.2bn five year revolver for Finmeccanica, the aerospace and defence group, led by SG CIB and UBM. The deal refinanced a seven year revolving credit facility from 1997.
But other than that jumbo transaction, business was dominated by smaller borrowers such as pasta, sauce and bread maker Barilla Alimentare, leasing firm Banca Agrileasing and safety fastenings manufacturer Guala Closures Group.
Bankers said that in general the Italian syndicated loan market tended to be lumpy, with hard-to-predict deal flows, so it was a good sign that smaller borrowers were tapping the market because it could indicate a steadier flow of transactions.
?They typically don't use the syndicated loan market ? it is more usual for them to take out bilateral facilities or quietly tap local banks,? says one loan banker.
Barilla Alimentare signed banks into a Eu250m loan arranged by ABN Amro, Bank of America and HSBC, increased from its original size of Eu200m.
Banca Agrileasing used Royal Bank of Scotland and Sanpaolo IMI as bookrunners on its Eu369m seven year term loan, increased from a launch amount of Eu200m. And Banca Intesa was the sole arranger on the Eu266m senior loan for Guala Closures Group.
United Kingdom ? Man Group, Anglo American shine
The UK loan market has grown very little in 2004. Activity has been disappointing compared with the rest of Europe, largely because companies have plenty of cash and there have been few mergers or acquisitions to provoke deals.
Between July 1 and September 30, 73 deals worth $41bn were signed, down from 76 deals for $53bn in the second quarter, and compared with 42 deals totalling $61bn signed in France in the third quarter.
?UK industry is dominated by the service sector and has far less capital-consuming companies than in the rest of Europe,? says Ian Fitzgerald, head of distribution and syndication at Lloyds TSB in London. ?The UK market grows on the back of large mergers and acquisitions volumes.?
No large acquisition financings were signed in the third quarter, but there were several sizeable deals in the market.
Man Group, the hedge fund manager, signed a £2.275bn five year deal in early June. It was greeted with enthusiasm by an asset starved market and was increased from the original £1.75bn.
Mandated lead arrangers on the transaction, which paid 40bp over Libor, were ABN Amro, Bank of America, Barclays, Danske Bank, Deutsche Bank, Dresdner Kleinwort Wasserstein, HSBC, JP Morgan, Lloyds TSB and Royal Bank of Scotland.
Pearson, publisher of the Financial Times, signed a £1.35bn deal in July, increased from £1.25bn, and Anglo American, the formerly South African but now UK-headquartered mining company, signed banks into a £2.5bn self-arranged deal, also in July.
Anglo American's deal was one of many club style syndications signed in the UK this quarter, an increasingly popular technique among borrowers and lenders alike.
?The UK market is more club orientated,? says BNP Paribas' Julian van Kan. ?Banks that have entrenched UK corporate relationships tend not to want to share those relationships.?
Looking ahead, Land Securities, the property company, has recently mandated Barclays, Citigroup and Lloyds TSB on to a £1.5bn five year refinancing which is part of a radical overhaul of its debt structure, in which it will redeem all its outstanding bank debt, debentures and unsecured bonds and replace them with a new package of secured bonds and loans.
Two loans have been put in place for the acquisition of National Grid Transco's regional gas distribution networks.
Blackwater ?F', a special purpose vehicle set up to acquire the north of England gas distribution network, has mandated Barclays, JP Morgan and Royal Bank of Canada to arrange a £1.025bn loan.
Barclays Capital, Dresdner Kleinwort Wasserstein and Royal Bank of Scotland have launched a £1.237bn loan to support the Macquarie Global Infrastructure consortium's bid to buy the Welsh and west of England gas distribution network.
Nordic region ? Pricing squeezed tighter
Lending volume in the Nordic region was extremely strong during the first three quarters of the year and deal flow is expected to be even stronger in the fourth quarter, due to a heavy stream of refinancings.
Margins have fallen rapidly over the past year and borrowers are keen to take advantage of the favourable conditions.
For a five year revolving credit, triple-B borrowers are able to achieve margins in the low 40bp range over Euribor, while high triple-B companies can pay margins in the 30s ? about 10bp less than they would have paid a year ago.
Top-rated borrowers have been able to cut their pricing too. On average, single-A rated companies can achieve a 27bp margin, compared with 35bp in 2003.
Scania, the A- rated Swedish truck and bus maker, priced a Eu500m five year revolver at 27.5bp in July. This compares with a Eu600m five year revolving facility for A3/A- rated Vattenfall that was syndicated last autumn with a 35bp margin out of the box.
?I wouldn't be surprised if we saw pricing below 20bp for single-A names this year,? says David Roberts, head of syndications at Nordea in Stockholm.
Fees have fallen as well. The average participation fee has dropped to 12.5bp from 15bp earlier this year. A year ago the average fee was 17bp.
The third quarter is typically quiet in the Nordic market, since lending slows down in July as people take their holidays. In August banks spend their time visiting clients and pitching for the deals that start to trickle out in September.
The highlight of the quarter was a Eu516m equivalent pre-IPO loan for Dometic, the Swedish refrigeration group.
Post-IPO facilities are more common but choppy equity markets led Dometic to postpone its IPO in December 2003 and Mizuho (coordinator), Nordea and Svenska Handelsbanken arranged the facility with security for lenders in the form of share pledges. The deal paid a juicy margin of 137.5bp out of the box, ratcheting based on a net debt to Ebitda grid.
Near the end of September, ABN Amro, HSH Nordbank, Nordea, SEB and Swedbank were mandated to lead a Eu840m facility for Boliden, the Swedish copper and zinc mining group.
The deal marked the beginning of a flurry of activity and as the third quarter ended, banks launched syndications of a Eu300m facility for Finnish fibre-based material company Ahlstrom and a Eu150m loan for Eco, the Norwegian utility. Also, Swedish timber company Södra Skogsägarna launched a self-arranged $200m revolving credit facility.
Netherlands ? Philips looks for seven years
In the Dutch market this quarter all eyes have turned to Philips, the consumer electronics giant, which is planning to refinance a Eu3.5bn deal and will push its maturity out to seven years.
In a further sign of the exceptional borrowing conditions in the European loan market, Philips has stretched market convention and mandated banks for the first straight seven year maturity for a deal of that size since the late 1990s.
Bankers showed no surprise at the possibility of an extended tenor.
?Lenders have given up covenants, loosened pricing and structures; mandated lead arranger roles have been diluted to the extent that there are almost more MLAs than participants ? what else are they going to give up?? says Julian van Kan at BNP Paribas.
However, there was some comfort for lenders in the expansion of lending volume in the third quarter, after a disappointing first six months to the year. Fifteen deals worth a combined $12.8bn were signed between July and September, compared to 11 deals totalling $4.5bn in the same period of 2003.
One of the bigger deals of the quarter was for the European Aeronautic Defence and Space Co (EADS), the French-German-Spanish multinational registered in the Netherlands, which signed banks into a Eu2bn revolver in July, led by BNP Paribas, Deutsche Bank and JP Morgan.
LeasePlan, the car fleet lessor that ABN Amro has sold to a consortium of Volkswagen and two Middle Eastern investment groups, also approached lenders for a debut Eu2bn one and two year loan. ABN Amro and JP Morgan led the transaction, which was signed in early October.
The Dutch market looks set to remain busy until Christmas. As Loan Market Review went to press, employment services company Vedior had mandated BNP Paribas and ING to arrange a Eu750m five year deal.
Media group VNU had signed a Eu1bn deal oversubscribed through mandated lead arrangers ABN Amro, BNP Paribas, JP Morgan, ING and Rabobank. The deal raised over Eu1bn from the market and is likely to be increased.
This is separate from the Eu1.5bn loan to back the buy-out of VNU's telephone directories business, World Directories, which mandated lead arrangers Bank of America, Credit Suisse First Boston, Goldman Sachs and JP Morgan launching into syndication imminently.
Spain ? Tolls, wind and gas
In the Spanish syndicated loan market the third quarter of 2004 was characterised by a slew of infrastructure and energy project financings.
BBVA, Royal Bank of Scotland, Santander Central Hispano and SG CIB arranged a Eu522.1m facility for the Ocaña la Roda toll project, which was launched into the market in July.
?The deal is important because it is quite large for a structured project financing and garnered support from both local banks and international lenders,? says Baines at SG CIB.
The Spanish Egyptian Gas Co (SEGAS) mandated banks in August for a $600m five year credit facility to support the development of a liquefied natural gas facility near the city of Damietta on the Mediterranean coast of Egypt. There was also a Eu192.32m 13 year financing for wind farm operator Acciona Eólica de Galicia.
A group of small refinancings were also completed in the third quarter. Leisure group Aspro Ocio signed BBVA and HSBC into a Eu70m refinancing. Retailer Coronel Tapioca completed a Eu24m five year financing. And Unión Española de Explosivos signed banks into a Eu24m deal, split between a two year term loan and a five year term loan.
A trend that began in the third quarter was a shift towards larger leveraged buy-outs. As the quarter ended, Permira won an auction to purchase Ahold's Spanish supermarkets, which carry the brand name Superdiplo, for Eu685m. Bank of Scotland, Caja Madrid and SG CIB are arranging acquisition facilities, which will total about Eu600m, including senior and mezzanine funds.
Spain usually produces only one or two LBO driven loans a year and they are mostly small. But besides the Ahold transaction, sponsors are also bidding for a potential public-to-private sale of travel company Amadeus, which could cost up to Eu5bn.
There are also rumours of another Spanish buy-out that could be even bigger, perhaps as large as Eu8bn, which will come out in the fourth quarter or early next year.
Belgium ? Euroclear jumbo dwarfs the rest
On paper, the Belgian loan market had a good third quarter, with $6.5bn of deals signed between July 1 and September 30 ? $2bn more than last year.
But no less than $5.7bn of that was the six month facility for Euroclear, the Brussels-based securities settlement system. The deal was arranged by Deutsche Bank and has been rolled over every six months since August 2001.
Apart from that, the salient deal was for Befimmo, a property investment company, which signed a Eu350m five year deal led by ABN Amro and Fortis.
The last quarter of the year looks set to be a busy time. As Loan Market Review went to press, supermarket chain Louis Delhaize had signed a successful Eu800m deal, led by Calyon and Fortis, and pharmaceutical company Omega Pharma had signed a Eu350m five year deal led by Bank of America and BNP Paribas.
Both transactions were well received by the market and increased from their original amounts.
Omega Pharma's deal was a rare event-driven transaction; it was executed to replace the Eu200m bridge facility Omega used in June to support its Eu135m acquisition of 60 European drug brands from Pfizer.
Switzerland ? Top borrowers, big deals
The Swiss loan market was buoyed in the third quarter by several large transactions. In June, mining and commodities firm Glencore signed banks into a $5.34bn revolver, led by bookrunners Barclays Capital, Deutsche Bank and SG.
Swiss Re, the reinsurance company, has tapped the loan market twice in the last three months. In July, it obtained a $2bn letter of credit facility through Barclays, Commerzbank and San Paolo IMI and in late September it returned to the market for $4bn.
The six year deal was well received by lenders. It was signed in early October oversubscribed and increased from the original $3.5bn. Bank of America, Barclays Capital, Commerzbank, Dresdner Kleinwort Wasserstein and HSBC led the deal, which partially refinances the $6bn 364 day facility Swiss Re signed in October 2003.
Nestlé also returned to the market with a Eu2bn deal arranged by sole bookrunner Citigroup.
Middle East ? New banks expand the market
The Middle Eastern loan market has grown consistently this year, helped by the fact that more Middle Eastern banks than ever have come to the market.
In the third quarter 24 deals were signed, worth a combined $6.7bn, as compared with 21 deals worth $4.9bn in the equivalent period in 2003. Most of the borrowers, as usual, were financial institutions.
Borrowers are increasingly stretching the maturities on their deals from the usual three years out to five. Bank of Bahrain and Kuwait signed a $125m five year deal through Arab Banking Corp, Barclays, Citigroup, National Bank of Kuwait, SMBC, Mizuho, RZB and Wachovia in July.
Burgan Bank and Doha Bank have also approached lenders for five year money in the last three months, both doing deals for about $150m.
?Banks in the Middle East want to lengthen the maturity of their funding in order to narrow the mismatch with their assets,? says Raouf Jundi, vice president in syndications at Bank of Tokyo Mitsubishi in London. ?They are also taking advantage of the very favourable borrowing conditions at the moment.?
Saudi American Bank (Samba) has approached lenders for a debut Eu500m five year term loan through mandated lead arrangers Arab National Bank, BNP Paribas, Citigroup (bookrunner), Deutsche Bank, Gulf International Bank, JP Morgan (bookrunner), Qatar National Bank and Standard Chartered.
The deal pays a discount margin of Libor plus 37.5bp and syndication was being wrapped up as Loan Market Review went to press.
In a further sign of banks' enthusiasm for the region, Arab Banking Corp has mandated its biggest ever group of lead arrangers ?14 ? on to a $400m five year transaction. The margin on the facility is 37.5bp over Libor for years one to three and 40bp over Libor thereafter.
Turkey ? You've never had it so good
The top tier of Turkish bank borrowers completed the first of their two traditional yearly rounds of refinancings in the third quarter, with dramatic oversubscriptions on their loans and cheap margins.
As usual, all the loans were for one year, but pricing has been squeezed yet again.
Garanti Bank set the standard by signing a Eu450m loan in mid-July, increased from Eu375m. The deal paid an aggressive margin of 55bp over Libor, setting the benchmark margin for Garanti's competitors.
Akbank signed its biggest ever loan on August 3. The $500m deal, increased from $375m, attracted the support of 62 banks. Most of the capital was raised at the mandated lead arranger level, with the 37 lenders that joined in the general phase jointly contributing $125m.
Forty-four banks joined Koçbank's deal, which was increased to $325m from the initial $250m, and is its biggest loan to date. Its last deal, signed in December, was for $200m. Is Bank signed a $400m facility in August in which 46 banks participated. It was oversubscribed and increased from $315m.
Continued economic and political stability, combined with optimism about possible EU membership, has encouraged international investors, and there are signs that Turkey's corporate loan market is stirring into life.
?People were sceptical earlier in the year about Turkey's corporate market taking off this year,? says Michael Emery, a director of syndicated debt for emerging markets at ABN Amro in London. ?Experience has proved otherwise.?
Dogus Otomotiv, the car parts maker, was one of the highest profile corporate borrowers of the quarter. It signed a $140m letter of credit in late June, led by ABN Amro, and increased from the original $80m.
Electronics company Vestel Elektronik also recently closed a $150m deal, increased from $80m, led by ABN Amro and Deutsche Bank.
Industrial conglomerate Dogus Holding signed a $100m self arranged deal in September.
As Loan Market Review went to press the second round of Turkish bank refinancings was days away from being mandated. Bankers expect the benchmark pricing for the top tier banks to fall as low as 45bp over Libor.
?The market for Turkish risk has opened up,? says Emery. ?There will be further compression of pricing and I can see the lead Turkish banks possibly going out to 18 month tenors or attempting dual tranche approaches.?
Africa ? Canny Sarb saves 20bp
The vast majority of international syndicated loans for African borrowers this year came in the third quarter. Eight deals were signed between July and the end of September, worth $4.62bn, as compared to four deals worth $470m in the second quarter.
The South African Reserve Bank (Sarb) signed a $1bn three year deal in July with a margin of just 47.5bp over Libor. That was a 20bp discount to its $1bn deal last year and a 37.5bp discount to the loan the new credit will partially refinance, signed in 2001.
?Sarb is a very astute borrower and played an intelligent game,? said one banker at the time, who had spent months in tough negotiations. ?If you want a presence in South Africa, you can't afford not to be involved.?
Elsewhere on the continent, Sonangol, the Angolan oil and gas company, successfully signed its annual $2bn five year loan in July through mandated lead arrangers Barclays, Calyon, Commerzbank, Deutsche Bank, KBC, Natexis Banques Populaires, Royal Bank of Scotland and Standard Chartered.
The Ghana Cocoa Board also signed an $850m one year loan. The deal was 64% oversubscribed and increased from the original $700m, with lenders scaled back. Barclays, Natexis Banques Populaires, Royal Bank of Scotland, SG CIB and Standard Chartered led the deal, which paid a margin of 40bp over Libor with a commitment fee of 20bp.