Lending to Nordic borrowers may be increasing, but pricing has fallen sharply as companies have refinanced their loans. The pressure is also being felt in the growing leveraged loan market. Philip Moore reports.
First, the good news. Syndicated lending to Nordic borrowers in the first half of 2005 surged to a record Eu51bn, compared with Eu30bn in the same period in 2004. That volume, say bankers, was driven principally not just by refinancings, but by refinancings of refinancings, as borrowers throughout the region grasped the opportunity of renegotiating existing facilities at much more favourable terms.
The bad news is that the seemingly unending downward spiral in pricing is making the loans arena a very unprofitable one for banks. "I believe that the Nordic market is probably one of the most aggressive and tightest priced markets in Europe and most facilities are now clearly being priced well below the levels that banks need to meet their return requirements," says Jonas Lind, head of loans at Nordea Markets in Stockholm.
"Margins today are very close to the levels we saw during the previous trough in 1996 and 1997, but commitment fees are considerably lower," Lind adds. "And although we are seeing very favourable terms and lighter covenant structures for the stronger credits, in relative terms I would argue that the weaker credits are enjoying even more of an improvement in their cost of funding in the loans market."
Other lenders agree. "The mid-cap sector in the Nordic region is increasingly aggressively bid," says Michael Dicks, head of syndicated loans at SEB in London. "We've had to rework some of the pitches we were working on before the summer because clients have come back to us saying that our competitors are quoting prices well below ours. We're not talking here about giant multinational companies but about borderline investment grade companies industrials with an annual turnover of Skr4bn-Sk10bn. Some of our competitors have been offering these companies five to seven year money in the low 20s with razor-thin fees, which is stunning."
Some lenders say that, for the time being at least, they can see little light at the end of the loan pricing tunnel in the Nordic region. Dicks says that in the 20 years he has worked in the sector, loan markets have moved in fairly reliable cycles.
"Traditionally, we would see three or four years of this sort of pricing pressure, but then banks retreated, fees and margins came back and covenant packages strengthened," he says.
"But this time round borrowers are in much better financial shape, having been divesting rather than acquiring, which means that their balance sheets are much stronger. At the same time, there is still huge overcapacity in the bank market and many of those that retrenched a few years ago are firing on all cylinders again."
Putting a brave face on things
If that all makes for a grim picture for the leading lenders in the market, Nordea's Lind, for one, is putting a brave face on things. He believes pricing has now stabilised, and that upward pressure is more likely than further erosion in pricing. A pick-up in acquisitions in the Nordic region, he says, will increase borrowers' demand for loans.
The supply-demand argument gains support from a number of other bankers. "I don't think we will see the same continuous erosion of pricing that we have experienced in the last 18 months because we won't have the same volume of refinancing coming through the market," says Nigel Tuck, executive director, loan syndications at ABN Amro in London. "With most of the bigger borrowers having now locked in five or even seven year refinancing at aggressive levels, the nibbling away at margins that has occurred each time a borrower comes back to the market will hopefully have come to an end."
Lind argues there is a limit to how long banks will wait for ancillary opportunities to filter through. "Banks that have been given less ancillary business than they may have hoped for will, to an increasing degree, reconsider the value of supporting their clients with cheap money," he says.
That would suggest a retrenchment not just by some of the more peripheral players in the market but also by some of the smaller Nordic banks.
Perhaps. But it is not just at the investment grade end of the market that competition has led to the emergence of such a buoyant market for borrowers. With private equity funds increasingly turning their eyes to the potential of the Nordic region, the market for leveraged loans in the region has also sprung to life.
"The period between early 2000 up until about a year and a half ago was very quiet. But in the last 18 months, there has been a noticeable increase in M&A and buyouts, with a growing number of private equity companies involved," says Michael Rosenlew, partner and chief executive for Sweden, Finland and Germany at Industri Kapital. "But up to now the main players in the market have mainly been the mid-sized local and European private equity houses. Although we hear rumours about the bigger American funds targeting the market, I haven't yet come across the likes of KKR in any of the deals I've looked at."
The influx of deal-hungry private equity funds has inevitably exerted considerable upward pressure on leverage multiples.
The build-up of cash at private equity houses is also turning companies of all shapes and sizes into potential targets.
Recent rumours, for example, have circulated about the vulnerability of the Danish telecoms company, TDC, to a private equity bid, causing a spike in the spreads of its bonds and credit default swaps.
Dicks, however, does not believe that further bids for listed Nordic companies are necessarily fanciful. "I think any major company which is either languishing in terms of its strategy, under-leveraged with strong cashflows, or sitting on a lot of under-utilised cash will be a target for private equity buyers, which have piled up so much funding and can achieve such un-precedented leverage."