The opening up of the French market has been one of the great success stories of the European syndicated loan market over the past three years. Once a country where borrowers rarely used the loan market and when they did they stuck closely to their domestic house banks, France has become one of the most important sources of business for European syndicated loans teams. Toby Fildes reports.
All variations of the loan product have emerged from France over the past three years, from highly structured leveraged financings to high profile jumbo acquisition financings; from plain vanilla revolving credits to complex tax-driven refinancings.
The growth of the French loan market has, of course, been driven by French borrowers' increased need for the loan product as they have looked to expand not only at home but also overseas through acquisition and restructure by selling off non-core assets.
This quest for growth by corporate France took off when the euro was introduced. "The arrival of the euro meant that all the companies in Euroland - perhaps big within their country's boundaries - became suddenly much smaller," says Christopher Baines, head of European distribution at SG. "French corporates were among the fastest to notice that a change of gear was needed. Many jumped on the acquisition trail armed with jumbo debt packages realising they had to move fast in order not to miss out and fall behind."
Many loans bankers who have worked in the French market believe that French corporates have been more audacious than their German counterparts, which is surprising as Germany was expected to lead the euro-fueled acquisition and restructuring charge. "While the introduction of the euro was an event that was felt across Europe, for the most part companies in France were faster out of the blocks than German corporates," says Julian van Kan, head of loan syndication and trading, Europe, Middle East, Africa and Japan at BNP Paribas. Indeed, while of course some German corporates did move - perhaps the most infamous being Mannesmann taking over Orange but then being swallowed by Vodafone as a result - the number of French companies which have changed their strategies to more aggressive ones by taking on enormous debt facilities is quite staggering.
"Right from the outset," Baines adds, "French CFOs and treasurers were more welcome to change and showed real willingness to compete and succeed in a changing environment."
Fergus Elder, managing director and head of debt products at JP Morgan in London, agrees that French corporates have had the jump on their German rivals: "When the euro was introduced, the French were ahead of other European countries, particularly with regard to aggressive acquisitions financed by the capital markets. The Germans, however, have increasingly pursued this strategy."
One French company that took part of this modern day gold rush is Pernod Ricard. Until the end of 2000, the wines and spirits company had never used the capital and credit markets. But when it became interested in buying part of Seagram's wines and spirits business for around Eu5bn, Pernod was faced with little choice but to go to market. JP Morgan and SG won the mandate for a Eu5bn facility which was launched into senior syndication in the first week of 2001. The arrangers were taking a few risks: Pernod had very few relationship banks to count on in syndication; the beginning of the year is always a volatile period for the loan market; and at 5.5 times Ebitda, they were asking the market to take on a new style of deal - a highly leveraged corporate-style acquisition financing. JP Morgan and SG's plan was to mitigate the risks with a headline margin of 132.5bp and a credible asset disposal scheme. The strategy worked and the co-arranger level was 100% oversubscribed by banks that were desperate to forge a relationship with a new name.
A new mindset
"Pernod Ricard is typical of the new mindset in France that has developed since the euro came into play," says Baines at SG. "The company was ready to take financial and operational risks in order to complete an acquisition that would transform it entirely."
Other companies that have fully embraced the loan product with jumbo facilities over the past three years include Air Luquide, Elf Aquitaine and of course France Télécom. The state owned telco has since 2000 raised almost $60bn under either its own name or overseas subsidiaries from the syndicated loan market. The bulk of this debt was raised in 2000 through a Eu30bn loan arranged by Barclays, BNP Paribas, Citibank, Credit Suisse First Boston, Morgan Stanley Dean Witter and SG that still stands as the largest deal in the Euromarkets. Despite its mind-boggling size, the loan raised an incredible Eu70bn at the co-arranger phase. And although the enormous oversubscription may have had more to do with the frenzied appetite for anything TMT that was prevalent at the time than the borrower's intrinsic appeal, the success was further proof that France plc had become one of the most dynamic users of the capital markets.
Along with, and in some cases perhaps a result of, the introduction of the euro, the gradual reduction of state ownership has driven a greater reliance on the capital markets by French corporates. "The sheer size of acquisitions meant that the state did not wish to provide the amounts required or this conflicted with privatisation objectives," says Elder at JP Morgan. "As the state has relinquished control, many once state owned are having to fend for themselves much more. And one of the first ports of call is the loan market."
|Top 20 mandated arrangers for French borrowers - 2002 (June 13, 2002)|
|Rank||Bank||Amount $m||No||Share %|
|5||Crédit Agricole Indosuez||1,493.08||7||5.88|
|12||Credit Suisse First Boston||1,074.01||3||4.23|
|14||Sumitomo Mitsui Banking Corp||1,056.73||2||4.16|
|15||Royal Bank of Scotland||1,031.11||5||4.06|
|17=||Dresdner Kleinwort Wasserstein||725.84||1||2.86|
|17=||Bank of Tokyo-Mitsubishi||725.84||1||2.86|
|Total eligible issuance||25,388.98||35||100.00|
|Source: Dealogic Loanware|
Also pushing French borrowers towards the syndicated loan market is the diminishing reliance on the billet de trésorerie market. French borrowers have not been exempt from the rating slide seen across Europe over the past two years. Many have fallen from double-A down to triple-B, which has severely affected their ability to use the local short term money market. "French corporates have always relied on the local short term money markets," says David Bassett, managing director and head of European loan distribution at Citigroup in London. "And while the billet de trésorerie market is still an important component of the French capital markets, as ratings fall the ability to access this market becomes harder. With liquidity falling in the short term money markets, the syndicated loan is fast becoming one of the best alternatives for borrowers."
Fees on the rise
The sheer size of deals and the move away from the short term markets has also meant that many French borrowers have had to pay up for their credit facilities, taking on pricing closer to UK or US levels. For international banks this is a welcome development, as for many years French borrowers enjoyed exceptionally cheap financing thanks to their cosy relationships with their house banks. This local liquidity made it almost impossible for foreign banks to break into the French market.
But local liquidity levels have fallen as a result of consolidation of the French banking sector and the adoption of tight return on equity targets by top tier as well as regional banks. Bankers estimate that French banks currently provide around 10% of the liquidity in the loan market - four years ago, they provided as much as 20%. "I would say now that France has no more local liquidity than anywhere else in Europe," says Baines at SG. "In fact there is probably less liquidity as France has seen more consolidation than many other countries and ROE targets are very stringent."
Elder at JP Morgan, the bank which is second on the lead mandated arranger league table for French borrowers for 2002, agrees. "Pricing has moved up as sizes have increased and pricing has come more into line with the rest of Europe as the number of non-French banks in the syndicate has increased," he says.
The disappointing performance of France Télécom's most recent loan goes some way to show that even the best French borrowers can no longer get away with unpopular structures or rely on local liquidity for successful syndications.
The jumbo Eu15bn refinancing was underwritten by a group of 18 banks in late 2001, a difficult period for the loan market following the terrorist attacks on September 11. Some of France Télécom's core banks were unhappy with such a large group and privately criticised adviser Morgan Stanley, which had decided not to lend to the deal, for adopting such a strategy.
However, the real problems started in general syndication when the bookrunners - Barclays Capital, BNP Paribas, Credit Suisse First Boston, Citigroup and SG - accused some of the mandated lead arrangers of advising junior syndicate banks not to join the loan in primary syndication but instead to buy the asset in the secondary market. To some extent, the borrower and its adviser were hit by events outside of their control. On January 7, the spread on France Télécom's 18 month FRN was 82bp. But after a month of turmoil as a result of the Enron scandal, Global Crossing's bankruptcy and fears over more names, the spread on the FRN had ballooned out to around 180bp.
"The performance of the loan was not so much a reaction against France Télécom but a result of the timing, the sector and the market as a whole," says Sue Mingay, head of primary distribution at BNP Paribas in London. "The market moved in the first few weeks of the year and France Télécom was the first big deal so there was a lot of people watching it. The FRN gapping out was a crucial factor."
However, what was of France Télécom and Morgan Stanley's own making was the syndication strategy: with so many banks at the top level standing best chance of securing the vital ancillary business, banks at the bottom of the pile in general syndication had little incentive to join the deal once the FRN spreads had gapped to levels more lucrative than what was available on the loan. "The top 18 banks will surely be the ones to pick up the ancillary business," said one banker at the time who subsequently decided to turn the deal down. "What have banks got to gain by joining at the lower leagues apart from terms and fees? And with France Télécom's other types of debt paying more at the moment, even the pricing loses its appeal. All banks, to a greater or lesser extent, are looking at return on equity more closely and even a name such as France Télécom is sometimes not enough to get the application through unless there is extra business in the pipeline."
loans to French borrowers - 1999-2002
|Borrower||Currency amount (m)||Signing date||Maturity date||Mandated arrangers|
|France Télécom||Eu30,000||31 Jul 00||26 May 01||BarCap, BNPP, Citi, CSFB, Morgan Stanley, SG|
|Elf Aquitaine||Eu18,000||31 Aug 99||31 Aug 00||BNPP, CAI, Goldman Sachs, Morgan Stanley|
|France Télécom||Eu15,000||14 Feb 02||14 Feb 03||AAB, BoTM, BarCap, BNPP, Citi, CAI, CL, CSFB, DB, DrKW, HSBC, ING, JP Morgan, Mizuho, RBS, SG, SMBC, WestLB|
|Air Liquide , BOC Group||Eu4,300||13 Sep 99||10 Aug 00||BNP, CAI|
|Seita, Tabacalera||Eu6,500||26 Mar 99||26 Mar 06||SG, JP Morgan, Argent|
|Lafarge||Eu3,950||9/Mar/00||9 Feb 01||BNPP, DRB|
|Lafarge||Eu3,600||18 Apr 01||Feb 02||BNPP, DrKW|
|Axa||Eu5,000||14 Dec 00||18 Oct 01||BofA, Chase Manhattan, SG, UBSW|
|Pernod Ricard||$4,621||28 Mar 01||28 Mar 06||JP Morgan, SG|
|Axa||Eu3,000||6 Jul 00||6 Jul 05||BarCap, BNPP|
|Banque PSA Finance||Eu3,000||27 Jul 00||27 Jul 05||CAI, CSFB, DB, RBS, SG|
|Sodexho Alliance||$2,807||29 Jun 01||6 Apr 02||SG, CITI, Goldman Sachs|
|Vivendi Environnement||Eu3,000||13 Mar 01||13 Mar 02||DB|
|Thomson CSF||Eu1,650||29/Mar/00||13 Jan 01||CSFB|
|Vivendi Universal||Eu3,000||15 Mar 02||15 Mar 07||BarCap, Balaba, BNPP, CAI, CL, DB, SG, SMBC|
|Vivendi||Eu2,500||3 Nov 99||3 Nov 04||SG|
|Suez Lyonnaise des Eaux||Eu2,500||19 Nov 99||19 Nov 00||Chase Manhattan, CAI, CL, Natexis Banques|
|Beghin-Say||Eu2,850||28 Sep 01||26 Jun 02||BNPP, Mediobanca, SG, UBM|
|Imetal,English China Clays||$2,312||18 Jun 99||31 Mar 06||SG|
|Peugeot,GIE PSA Tresorerie||Eu2,400||5 Mar 01||5 Mar 06||BNPP, CL, HSBC, ING, JP Morgan|
|Source: Dealogic Loanware|
France Télécom got what it wanted - a Eu15bn refinancing at the price agreed - and the top tier banks managed to whittle their underwritings down below Eu500m. In this respect, the loan was a success. But the five bookrunners had hoped that their final positions would be Eu412.5m after syndication and for a borrower of France Télécom's standing, their final takes were viewed by many as disappointing.
But what of the future of the French loan market? Opinions vary as to how active the market will be over the next six months. Some bankers predict a quiet second half of the year, in line with much of the rest of western Europe. Others believe France could be one of the most active sources of big-ticket financings, including M&A deas, in the third and fourth quarters. Van Kan at BNP Paribas highlights a new acquisition facility his bank recently won for Atos Origin. The French IT service provider is buying KPMG Consulting in the UK and the Netherlands and has signed up BNP Paribas and ABN Amro to arrange a Eu950m facility.
"We hope the Atos deal will kickstart the second half as it has been a quiet first period due to the fears of recession that are being felt right across Europe and the parliamentary and presidential elections in France... But now that the elections are over we expect to see more corporates come to market with M&A deals," he says.
As well as more M&A deals, some bankers expect to see more of the basic loan products in the market for the final half of the year. France's neighbour Germany has played host to two large corporate deals over the past four months - a Eu15bn revolver for Volkswagen and a $3bn revolver for Siemens. Proceeds for both facilities refinanced existing debt and backed CP programmes.
According to bankers involved, Volkswagen and Siemens realised that there remains plenty of liquidity for top tier corporates that can offer a wealth of ancillary business. "Yes, pricing has gone up across Europe over the past six months, but for the right corporate appetite is undiminished," says Baines at SG. "If you are a single or double-A company, have a strategy that people can understand and manage your ancillary business then you can still secure fine terms. Volkswagen and Siemens have proved this."
Baines expects to see French corporates coming to the market in the second half of the year for long tenors on refinancings or bilateral replacements. "The message is that there is a willingness to work with international companies which can offer global ancillary business and that now is the time for borrowers to secure competitively priced syndicated loans." *