The loan market of western Europe was characterised by oversupply of bank debt and undersupply of big-ticket dealflow last year, bringing the issue of relationships between borrowers and lenders to the forefront. While Deutsche Bank made the headlines when it pulled out of Volkswagen’s Eu10bn facility in May, that was just one example of a fresh assessment among banks of how they could manage their lending relationships. Adam Harper reports.
As in other capital markets, western European borrowers visiting the loan market in 2003 found themselves in the driving seat and were able to command pricing to a much greater extent than before.
The pressure on syndicated lending teams to agree to loans for tiny returns was caused by a simple imbalance in supply and demand. Loan volumes were lower than in 2002, although by deal size issuance rose slightly.
The six biggest markets in continental Europe — Germany, France, Italy, the Netherlands, Switzerland and Spain — raised $280.5bn from 440 deals in 2002. By December 1 last year, the same six countries had realised $281.3bn from just 348 transactions.
With mandates thin on the ground, bank liquidity in 2003 created some mind-boggling oversubscriptions, particularly for deals for high quality borrowers.
Examples of deals being chased round the syndication market by desperate bankers included the Eu1.8bn deal for BBB+ rated German engineering company Linde that raised Eu3bn; the Eu1.2bn debut transaction for unrated Dutch brewer Heineken that achieved a blowout oversubscription; and the $7bn loan for A1 rated German auto manufacturer BMW that drew $10.9bn from the market.
“It is tough to think of any large corporate deals that didn’t get done,” says Tim Ritchie, global head of loans at Barclays Capital in London. “As the year went on, lending discipline was eroded. This is partly because the credit environment improved and concerns about credit migration abated.”
While there continued to be much talk of highly targeted and stricter lending criteria being applied, making this a reality proved increasingly difficult with fewer deals coming to market.
Banks were forced to focus their attention on refinancing standby deals because, with a few notable exceptions, there was very little event-driven business about. Borrowers could see what was happening and drove pricing down and tenors out.
Blue chip companies such as BMW and Italian utility Enel successfully sought five year tranches for the first time last year. BMW also tested the low end of undrawn pricing, paying 5.5bp on its $2.5bn 364 day revolver and 8.5bp on its $4.5bn five year term loan.
This was half a basis point inside the already razor-thin commitment fees for rival Volkswagen’s Eu10bn 364 day and Eu5bn five year facilities.
Heineken’s deal offered the lowest five year margin seen among its peers last year — Euribor plus 22.5bp, as opposed to 25bp for BMW, Enel, RWE and Volkswagen. The tightness of this margin was all the more remarkable because the facility will be partially drawn for a while to support Heineken’s acquisition of Austrian borrower BBAG. The other deals were standby facilities, and therefore expected to remain undrawn.
How low can it go?
Loans bankers wonder how low the pressure to lend can drive pricing.
Bill Fish, global head of loan syndicate at Dresdner Kleinwort Wasserstein, believes the market is “bouncing along the bottom of investment grade pricing” and that levels will not fall any further. But other bankers are concerned that the contagion of aggressive pricing is spreading below the best quality borrowers.
Chris Baines, head of European loan distribution for SG in London, describes it as a process of evolution. “It began in 2002 and continued unabated without being questioned in 2003,” he says. “The buoyant market for corporates enabled BBB household names to secure aggressive terms that used only to be possible for strong single-A credits.”
Lenders find it hard to see the situation improving in the near future. “When deals stop being heavily oversubscribed and start squeaking by then pricing will have to come out,” says David Bassett, who was head of European loan distribution at Citigroup in London until early December when he moved over to become head of syndications at Royal Bank of Scotland.
“But as long as banks get scaled back and win ancillary business, there will certainly be no upward movement in price.”
Although bankers are under pressure to book assets, the realisation of ancillary business remains the acid test for any relationship. The further pricing falls, the greater the scrutiny of the client relationship within the lending institution. “People will continue to commit capital where there [are cross-selling opportunities],” says Dresdner’s Fish. “But they don’t make money from investment grade loans and there is only so much pain they can take.”
Deutsche Bank evidently felt it had taken enough pain when it chose to withdraw from Volkswagen’s Eu10bn 364 day facility in May. Deutsche had been overlooked as a bookrunner for VW’s Eu4.5bn multi-tranche bond a few weeks earlier.
The decision angered the borrower, but VW was able to bring in three new banks to fill the gap in less than two hours.
Elsewhere, Dresdner Kleinwort Wasserstein was notably absent from DaimlerChrysler’s Eu13bn deal and Deutsche Bank did not participate in the $366m annual refinancing for Swiss oil trader Vitol, having led its deals since 2000.
The Deutsche-Volkswagen episode brought the question of overall return on capital into the limelight. “Many people felt Deutsche Bank may have been precipitous in exiting its relationship with Volkswagen, but it has sent a strong signal to its own market that says, ‘we are not just your house bank — we need to be fed as well’,” says Julian van Kan, head of loans syndications and trading at BNP Paribas. “I wish more people were bold enough to make this step.”
“We are prepared to say no if it is the right decision,” says Declan McGrath, head of syndications for UK and Europe at Royal Bank of Scotland in London. “There has to be a real business case for us to lend, unlike in the past where cheap money was provided on a promise.”
In these market conditions, bankers do not expect many houses to withdraw from major relationships, but they will make their cross-sell requirements clear to borrowers.
Loan Volume from Western Europe's Six Biggest Markets, 2001-2003*
“Banks have become much more sophisticated at determining what they have to forego when entering a lending relationship,” says Bassett. “For example, what is lost in committing to the loan rather than writing credit default swaps. They ask: ‘Am I going to get enough ancillary business to make up this deficit?’”
Most banks will not exit a relationship that is not immediately profitable, Bassett adds, but will see membership of the bank group as an opportunity to win other business.
Discussing his company’s distribution of ancillary business, Norbert Mayer, head of corporate finance at BMW, says: “We operate worldwide and our banks are international. That aspect was decisive when we put together the syndicate. We believe we can involve all the bank group in other business to a greater or lesser extent.”
Mayer adds that BMW’s selection of banks was not opportunistic. “When we picked banks it was relationship driven. We look for a broad range of products and a long term relationship. Ancillary business is a question of quality of product and pricing. It is to do with being part of the core BMW bank group.”
Product use redefined
Viewing the syndicated loan market as back-up for the luxury car manufacturer’s commercial paper programme rather than a funding instrument in itself, Mayer says that raising an oversubscription was not BMW’s objective. “We wanted to define our bank group and achieve $7bn, and we are very pleased to have done this.”
BMW took the opportunity of favourable conditions to raise an extra $2bn in liquidity on top of its outstanding $5bn in debt. It also brought two new banks into the mandated lead arranger group. ABN Amro and SG joined Barclays Capital, Deutsche Bank, Dresdner Kleinwort Wasserstein and JP Morgan at the top level.
But borrowers did not necessarily have it all their own way in 2003. One of relatively few new entrants to the market last year, German retailer REWE, showed that borrowers still have to pay a premium if they do not have either a wide range of existing relationships or an instantly recognisable name. REWE is Europe’s fourth largest retailer, but is not listed or rated, has a complex co-operative structure and is not well known to bankers outside Germany.
The company paid handsome margins of Euribor plus 75bp, 85bp and 95bp for the one, three and five year tranches of its Eu1.5bn loan respectively. Bankers saw REWE as an investment grade company with an implied rating of BBB or BBB+, which meant its deal paid well above similar credits such as Degussa and Linde, whose five year tranches paid between 30bp and 50bp.
“Most banks don’t lend against ratings, they use their own criteria,” says Martyn Powell, global head of loan markets at ABN Amro in London. “If a company doesn’t have a bank group, it will have to pay. If there are no relationships, it comes down to price to attract portfolio interest.”
Although bankers believe that the credit environment is increasingly benign and do not expect any more corporate horror stories on the scale of Enron (although Parmalat could scupper their expectations), their willingness to pile into finely priced deals is confined to well known quality names. “People still prefer better credits” says Matthias Gaab, co-head of European loan capital markets at Deutsche Bank in Frankfurt. “They are more prepared to compromise on pricing than credit quality, and are still very aware of risk.”
Competition for the right mandates was naturally at fever pitch during 2003. In particular, commercial banks with big balance sheets at their disposal made inroads into foreign markets. German utility Energie Baden-Würtemberg (EnBW) mandated three non-German banks — Citigroup, Royal Bank of Scotland and SG — to arrange its Eu3bn revolver. WestLB, which had been a lead bank for the borrower’s previous deal, lost out.
Crossing the border
“Banks will seek to grow their presence in foreign markets because it creates diversity in their lending portfolios,” says BNP Paribas’ Van Kan. His colleague Sean Boylan, head of transaction management in loan syndications and trading at BNP Paribas in London, believes that French borrowers have developed their own approach to dealing with the amount of banks clamouring for attention: they rotate the mandates.
Boylan sees deals for Charbonnages de France and Lafarge as examples of this policy in 2003. Supermarket chain Carrefour is another case. It mandated BNP Paribas, Barclays Capital and Citibank to arrange a Eu1.5bn deal in 2000. When it came to the market for a Eu2.5bn refinancing in June, the mandated lead arrangers were BBVA, Crédit Agricole Indosuez, Deutsche Bank, HSBC CCF and SG. But the lead banks from 2000 joined as arrangers and continue their relationship with Carrefour.
Van Kan attributes this trend to a different corporate mentality in France. “You can talk to borrowers about a mandate,” he says. “In other countries you often just get told what you are going to do. Communication is open and transparent. While this can sometimes lead to a slow process, you do at least know where you stand.”
Mandated lead arranger groups are nonetheless becoming larger in France, bankers say, because relationship banks are becoming more insistent on mandated lead arranger status. Ba2/BB rated Rémy Cointreau appointed SG as sole lead for its 2000 deal, but had six mandated lead arrangers for its Eu250m deal in June. Retailer Casino had only two mandated lead arrangers for its 2001 deal but also used six for its Eu800m refinancing in November.
Lenders to French borrowers will be relieved that the number of self-arranged deals is not increasing, as it is in the UK. “I don’t see the number of self arranged deals growing,” says Jean-François Balay, head of origination and structuring for Europe in loan syndications at Crédit Lyonnais in London.
“For best efforts deals for better quality borrowers, the margins and fees are already quite tight relative to the UK — the difference in pricing a borrower could achieve would not make it worthwhile.”
While the French market produced the Eu900m loan supporting the acquisition of SchlumbergerSema by French IT services company Atos Origin, the Eu15.5bn Olivetti/Telecom Italia loan was the clear highlight of another quiet year for mergers and acquisitions.
The popular merger deal was the Euromarket’s biggest syndicated loan in 2003; even more impressive, bankers say, because of the complexity of the deal and the fact that many lenders already had exposure to the name.
In Spain, Banco Sabadell, Deutsche Bank, La Caixa and SCH were bookrunners for the Eu700m loan financing supermarket chain Caprabo’s purchase of Alcosto.
The Eu6.3bn acquisition facility funding Gas Natural’s proposed takeover of Iberdrola also created excitement in the market, but the deal did not meet with regulatory approval and fell away, much to bankers’ disappointment.
Although researchers at CSFB argue Europe is reaching the same point at which M&A picked up in the mid-1990s, and bankers are increasingly optimistic, 2003 itself was more about restructurings.
Fallen angels Ahold, Alstom and HeidelbergCement all relied on their relationship banks for rescue loans, with their closest banks then leading the loan elements of restructuring packages.
The Eu500m high yield bond and Eu400m rights issue elements of HeidelbergCement’s restructuring plan gave comfort to loans bankers. “It was good news for the client and for the banks,” says Deutsche’s Gaab.
“Heidelberg no longer had to rely solely on banks for funding. For the bank group, it shifted liabilities and increased economic returns.”
At the end of the year, bankers became increasingly intrigued by the risk and return analysis for the Eu300m and $1.45bn credit facilities that will form part of retailer Ahold’s restructuring.
Having been rocked by Europe’s biggest accounting scandal of 2003 — at least until Parmalat — Ahold is offering banks a margin of Euribor plus 275bp.
“Restructurings command a premium,” says Dresdner’s Fish. “Without much M&A activity, that’s where the juice is.”
How banks will receive the deal is not yet clear, but its performance might be an indicator of whether European lenders are in more of a mood to take risks in 2004.