Nordic borrowers have been forced to accept that their loan market has changed. Banks' shareholders are demanding better returns from loan portfolios and the traditional discounts enjoyed by Nordic corporates are disappearing. At the same time, they are seeing financial covenants creeping into loan structures and maturities shrink from seven years to five. Ruth Lavelle reports on a market coming into line with the rest of Europe.
2002 began with a bang when the first Nordic deal to be launched, a Eu825m refinancing and CP backstop facility for Swedish lock and security firm Assa Abloy, was closed oversubscribed with an impressive Eu1.4bn raised.
The blowout success has set an upbeat tone for the year for a market that is hungry for stable credits after a nervous close to 2001. ABN Amro, BNP Paribas and SEB Merchant Banking arranged the deal for the newly A- rated corporate.
In line with the upward pressure on pricing, the successfully syndicated transaction carried a higher margin than Assa paid on its last deal, a Eu1.2bn revolver signed in 2000 that carried a margin of 60bp over Libor, and double the margin on its 1997 $500m revolver that paid between 20bp and 35bp.
Assa's new deal pays 40bp over Euribor for a rating of A- and 75bp if the rating drops to BBB-. The hike in pricing is a result of bankers insistence that Nordic borrowers adjust to meet broader European standards. "As a rule of thumb, pricing has doubled from 1996/1997 - which was a high point for the Nordic borrower - to 40bp/45bp now," says Ashu Khullar, a director of loan syndications at Citigroup/SSSB in London.
"Pricing in the Nordic markets has increased on average by three times compared to six years ago," agrees David Roberts, head of syndications at Nordea in Stockholm. "In 1996/1997, banks had not yet deployed economic capital models and were lending aggressively. There was not the same focus on return on equity ratio or Raroc models. Margins of around 20bp were destroying economic value."
Along with the hike in margins and upfront fees, Nordic borrowers have also been pressured to accept the inclusion of utilisation fees, pricing grids, stricter financial covenants and shorter tenors.
The majority of credit committees will no longer consider seven year facilities. Svenska Cellulosa Aktiebolaget (SCA), for example, is a borrower that has traditionally secured seven year deals, but signed a five year deal in 2001. Bankers say that the Volvo deal up for refinancing later this year will probably be signed for five, rather than the usual seven years.
Like the deal for Assa, the Eu150m five year multi-currency revolving credit for pharmaceutical company Gettinge, arranged by Commerzbank and Nordea in February, has a pricing grid. The margin moves between 60bp and 75bp over Euribor according to a debt to equity ratio.
"As higher pricing is now a trend in the Nordic markets, so are tighter covenants and more conclusive overall covenant packages," says Michael Dicks, deputy head of debt capital markets at SEB Merchant Banking in London. "Ratings and/or covenant grids, 364 with three to five year blended maturities that benefit from capital weighting gains of the shorter dated extendible maturities under BIS rules, and the use of utilisation fees are all becoming more acceptable to Nordic borrowers."
Nordea's Roberts is in agreement. "Financial covenants are definitely on the check list of participants," he says.
However, the process of persuading Nordic borrowers to accept covenants in their financing has not been easy. And some borrowers remain unconvinced as to their true relevance. But those borrowers that refuse to allow covenants to be engineered into their facilities, for flexibility reasons, for example, are increasingly finding that their relationship banks demand a much higher margin as compensation.
"Generally speaking, borrowers will pay up if they absolutely refuse to agree to covenants," says one banker at a regional firm. "But saying that, the Nordic borrowers are coming into line with the rest of Europe and the UK and are realising the importance of covenants as well as balance sheet tests and interest coverage ratios."
However, another banker strongly disagrees: "We do not trade off covenants for higher pricing, generally we insist on covenants - and we definitely insist for mid-cap borrowers."
Another banker had a less aggressive stance toward covenants.
"Strong BBB+ rated paper does not necessarily have financial covenants, unless it is an acquisition financing, although they are creeping in. But the lack of financial covenants is not compensated with pricing. A top tier name would not have to pay a premium for the lack of financial covenants."
As in the rest of Europe, the pull between the drive for higher pricing and tighter terms has in some cases been countered by the lack of business due to slow markets. "There is a division between banks that are being driven by the conscious need to improve overall returns to the extent that they will say no and exit relationships," says Dicks at SEB, "and those banks that that are aggressively pitching to increase market share."
Telcos: tighter pricing, tougher terms
Telecom operators and equipment makers are under ratings pressure and the telecommunications sector is still off limits for some banks. As a result, pricing grids have become fundamental to the success of loans for telecoms companies. Even Ericsson with a 30% market share of global mobile systems, a base of about 140m installed fixed telephone lines and listings in Stockholm, London, Paris, Düsseldorf, Frankfurt and Switzerland is not exempt from ratings pressure. Moody's Investor Services downgraded the company from Baa1 to Baa2 during syndication of its recent $743.676m structured deal arranged by Deutsche Bank, JP Morgan and Citigroup/SSSB.
Ericsson's downgrade was blamed on the plunge in consumer spending and the glut of capacity due to operators cutting back.
However, with a pricing grid worked into the deal, arrangers were confident that the downgrade would not affect syndication.
Tranche 'A' and tranche 'B' were priced according to a ratings grid. Tranche 'A' has a margin that begins at 125bp and moves between 75bp and 200bp over Libor according to Ericsson's rating. Pricing on tranche 'B' ratchets between 85bp and 225bp and sits at 135bp for Ericsson's rating of Baa2/BBB+. The margin on tranche 'C' is set at 275bp.
With a top all-in fee of 165bp for tranche 'A', pricing was attractive for a deal that matures in less than a year (December 27). Mandated at the end of 2001 when telco paper was, according to many participants, about as popular as toxic waste, arrangers were careful with the syndication strategy and held off until the start of 2002. Banks were also given a long time to reply. As a result, the syndication process was extremely successful, with the borrower securing an impressive oversubscription.
Ericsson's success in the loan market has given much needed confidence to the investment grade telecoms sector. However, optimism is not as high in the 3G sector. "Appetite for 3G limited recourse financing is scarce," says one banker working in the region. "And although rollouts could provide lucrative business in a fairly dry market, the deals could be a tough sell."
3G - only for the brave
The Nordic region has a plethora of 3G projects that will need financing over the next 12 months. In Sweden, incumbent Telia and operator Tele2 have a joint venture that will create a UMTS network supporting full coverage of Sweden. The venture will construct, own and operate the network and sell capacity to the two parent companies.
Telia has the most extensive GSM network in Sweden and has covered the most sparsely populated areas, while Tele2 has the second most extensive GSM network with a wide network of base stations. Their plan is to add base stations to more densely populated areas and overlay both of the two companies' 2G networks with a 3G network.
HI3G is the second consortia to have been awarded a licence in Sweden. It is a joint venture between Hutchison Whampoa and Sweden's Investor. Europolitan Vodafone and Orange have the third licence.
In Denmark, TDC Mobile International, Orange, Telia Mobile and HI3G have won licences.
Rolling out the licences could cost up to Eu10bn and some of this will be financed through the bank markets.
Bankers that are holding a verbal mandate, or are still bidding, have been careful not to give the details and strategy of their deals away.
"3G financing in the current market environment will need stronger and longer sponsor support," says Roberts at Nordea. "Deals will not be able to be done on a standalone basis. The syndicates will be small and club-like, containing banks that have strong relationships with the sponsor and understand the sector."
The unpopularity of the 3G sector and the limited number of lenders will mean that the financing will have to come from a selection of sources. "3G rollouts will be financed through a variety of products," says a banker from a European house. "Bridge loans underwritten by around five to six institutions will probably be taken out through a bond. The large arranger group syndicate that was used for H3G in Italy cannot be used in the Nordic region because of the limited universe of banks working in the region."
Also being considered is non-recourse financing. However, Dicks at SEB believes pure project financing could be difficult to sell to investors. "Non-recourse could be tricky," he says. "But blended with limited recourse and other support mechanisms should be safe."
Simon Alloca at BNP Paribas in London agrees. "With little or no access to alternative capital markets, greenfield 3G operators will find it very difficult to finance rollouts on a non-recourse basis," he says. "The recent H3G Italy deal with some tranches having recourse to shareholders may well become the norm. Existing operators with strong 2G cashflows are not likely to be affected in the same manner, but aggressively priced or structured deals will find liquidity in short supply."
Although bankers are aware of the market's negative perception of 3G risk, the licences in Sweden and Denmark were sold for much less than those in the UK, France or Germany.
"It is important to note that the cost of UMTS licences in Scandinavia was very low," says Ann-Christine Hagelin, European corporates analyst at Moody's in London. "Sweden, Finland and Norway awarded the licences through beauty contests, and only charged a symbolic fee. Denmark held a closed bid auction, which resulted in a higher price, but not compared to the amounts in the UK or Germany. The low cost of the licences may mean that there is not the same pressure for the operators to make as fast a return as some European peers."
Looking ahead: utilities fuel M&A
2001 saw M&A business decrease across all sectors in Europe. However, bankers expect pan-Nordic M&A in the old economy sectors to fuel loans business in 2002.
The utilities sector will be a hotspot with consolidation in the Norwegian electricity market, Nordic utilities expanding into northern Germany, Poland and other eastern European countries, and E.On and Eléctricté de France buying into the Nordic region. The Eu1.2bn term loan that financed Fortum's purchse of the City of Stockholm's 50% stake in Sweden's Birka for a cash offer of Skr14.5bn in February is proof that the sector is buzzing. Fortum has also raised cash for the acquisition from the sale of shares to Germany's E.On.
Barclays Capital, Citigroup/SSSB, Dresdner Kleinwort Wasserstein, JP Morgan and Nordea arranged the club loan.
Bankers also expect Sweden-based Vattenfall's reassesment of its corporate structure to result in divestments.
Corporate activity in the pulp and paper sector will also drive pan-Nordic M&A.
"Quality earnings trends in UK, Germany and the US will drive confidence and get the market back on the acquisition trail," says Dicks at SEB. "And the winners will definitely seek to pick off the weaker players."
The announcement in the middle of March of Denmark's Group 4 Falck's $573m acquisition of US security firm Wackenhut, is a sign that not only Nordic but also global M&A is starting to stir.
With equity funds cash rich and searching for suitable investment opportunities, leveraged buy-outs will also increase, although, the price expectations of sellers are high and economic fundamentals are still weak in many sectors. "Equilibrium needs to be established in the Nordic leveraged market," says one market participant. "At the moment buyers are resisting the prices on offer and sellers are resisting the offers put on the table by the sponsors. As soon as the buyers and sellers are more realistic in their expectations then we will see more deals."
Market participants hope an upwards shift in leveraged margins will begin soon as the cosy club of bank syndicates that have financed Nordic leveraged deals in the past have struggled to sell the highly leveraged and lowly priced debt into the larger European market. As a result, they have been left shouldering large chunks of risky debt. However, as the focus on return on equity ratio becomes sharper and Raroc models are more keenly followed, local banks will be less willing to lend at sub-market levels - especially on leveraged deals where the risks are much greater. Instead they are beginning to insist on UK and European levels of pricing.
With regional banks more careful about the amounts that they underwrite they will need to turn to international banks to share underwriting risk. These international banks - in the past put off by the low returns available - have begun to show an interest, thereby adding to the liquidity in the Nordic leveraged market. *
|Top 10 mandated arangers in Scandinavian countries (January 1, 2001 to March 18, 2002)|
|Rank||Bank||Amount $m||No of issues||Share %|
|3||Skandinaviska Enskilda Banken||4,130.86||15||9.06|
|Total of items used in the table||45,592.23||108||100.00|
|Source: Dealogic Loanware|