Appetite for western European credits has been strong over the
past six months. Unlike the UK, margins have remained at similar
levels to those in 1997 - underlining the strength of traditional
bank/corporate relationships in continental Europe.
The recent wave of corporate restructuring, M&A and LBO
activity is also keeping the market buoyant. But participants
believe the western European market will start to go the way of its
UK counterpart over the next six months, as more and more banks
look to increase their returns and prepare for the arrival of the
euro. Toby Fildes reports.
The western European syndicated loan sector has had an
impressive run over the last six months. Volumes are up on the same
period last year and market players are predicting an even busier
The £780m four year term loan for Artémis to finance the
acquisition of Christie's International plc - which is being
arranged by Crédit Agricole Indosuez, Crédit Lyonnais and ING
Barings - will be syndicated over the next two months and other
similarly large financings are planned for September.
But, as in 1997, much of the volume so far this year is from plain
vanilla financings - the five or seven year term loans or revolving
credits for top tier borrowers.
More surprisingly, perhaps, the margins have remained the same. Top
tier continental borrowers have still been able to achieve 15bp or
17.5bp over Libor for five or seven year deals throughout the first
six months of the year.
It is an anomaly. UK and eastern European borrowers of plain
vanilla financings have experienced increases in pricing this year
and many observers predicted at the beginning of the year that
western European borrowers would also have to accept higher
But it has not happened. According to Rheinhold Berger, head of
loan distribution at Deutsche Bank in Frankfurt, the reason why
borrowers have escaped an upward surge in margins - so far, at
least - is because there are still high levels of liquidity
available to them.
"Some of the borrowers have been tapping the loan market for the
last 10 years," he says. "They have extremely strong relationships
with their close banks. These strong relationships can be worth
2.5bp or 5bp in margins as banks are anxious to keep hold of the
"What is also important is that the borrowers have strong
relationships with the participants. Therefore the arrangers can
agree to provide a cheap and competitive loan in the knowledge that
they can count on a strong syndication."
The DM1.25bn (increased from DM1bn) seven year revolving credit for
Merck KGaA, the German healthcare and pharmaceuticals
company, is a case in point. The loan, arranged by Deutsche and
Dresdner, carries a margin of 17.5bp over Libor throughout.
Syndication was a targeted affair with 25 banks joining, taking
between either DM30m or DM52m each. Of those 25 banks, 14 were
But many believe that the second half of 1998 will see, at long
last, an increase in pricing for western European borrowers. While
the top arrangers say they are still willing to provide rock bottom
priced deals for their favoured corporates, most observers believe
there will be fewer of these types of transactions in the second
half of the year.
The chief reason for this is that most of top tier continental
borrowers have already tapped the market for cheap pricing - Merck
again being a prime example.
"Most single-A or double-A type credits have taken advantage of the
cheap funds available over the past two years," says Ulrich
Mattonet, head of syndications at Bayerische Landesbank in Munich.
"They are locked in for five or seven years and are very happy to
Instead of the top tier credits coming to market, many bankers are
expecting a raft of second tier borrowers to approach the market
over the next six or 12 months - some of which have not tapped the
loan market before. And this may help to push pricing up. "They
have seen how the top tier credits such as Merck have been able to
win sub-20bp pricing and they will be expecting similarly cheap
facilities," says one Paris banker.
"But I doubt they will be able to achieve their desired pricing
levels. It is of course up to the individual lenders. But some of
them will be new borrowers. Lenders will not know much about them
and will be unwilling to provide cheap debt."
But some bankers believe pricing will go up as a result of a change
in attitude by western European syndicated loan arrangers and
providers. Indeed an increasing number of market players believe
the consolidated drive for better returns on equity by US and UK
banks has also been adopted by the continental banks.
"More and more European banks are re-evaluating their loans
business," says an Italian banker. "It is a relatively new
phenomenon - it was not happening at the beginning of the year and
has only been noticeable over the past four or five weeks.
"And it is not only the big players such as ABN Amro, Banque
Paribas, BNP, CFSB, Deutsche, Dresdner, ING and WestLB. It is also
the participants such as the German Landesbanks and the regional
"They are starting to demand higher pricing in certain deals. As a
result, I bet we will see certain deals sub-20bp struggle in
One way the banks can achieve higher earnings - without having to
push for it - is by supporting acquisition-related transactions.
And there have been plenty of opportunities for them to do so this
Over the last six months, there has been a vast increase in the
number of corporates embarking on restructuring programmes,
acquiring or divesting businesses - leading to a sharp pick in
equity placement activity.
Driving the M&A boom is a mass refocusing by corporates on
their core businesses and the looming deadline for the start of the
euro forcing company managements to get their houses in
"Corporates, and banks for that matter, want to be in the best
possible shape for the euro and everything that comes with it,"
says Dietmar Stuhrmann, senior manager and head of syndications at
Dresdner Kleinwort Benson in Luxembourg.
"There will be no hiding places for continental European companies
when the barriers come down. They will be have to be as strong as
possible to defend their market share, and themselves against
takeovers. So the strong trend of corporate restructuring and
acquisition and bank mergers will continue."
Don McCree, head of global syndications at Chase, agrees. "Times
are changing for companies," he says. "They increasingly need to
compete on a European and possibly global scale. They may be big in
their own country but there are comparatively small on European
"Therefore companies are focusing on core businesses. The regional
differences are reducing because of the knocking down of boundaries
and there will be no protection against takeovers and
McCree also believes that because of the euro, corporates are
changing their priorities. "They are also focusing on return on
capital, shareholder value and global competitiveness. CEOs and
boards are thinking about mergers that were inconceivable one or
two years ago. The Daimler-Chrysler merger is an excellent example.
In most CEOs' minds there is very much an element of can-do."
McCree might also have pointed to the Fortis acquisition of
Generale Bank, which is just one example of the wave of
restructuring that is sweeping Europe's financial services
JP Morgan, Banque Nationale de Paris, ASLK/CGER (facility agent),
Bank Brussels Lambert, Crédit Communal de Belgique, Deutsche Bank,
Kredietbank and Rabobank are arranging a Bfr135bn ($4bn) revolving
credit to support the purchase.
The loan has a 364 day maturity and will act as a bridge financing
that will be taken out in the capital markets, probably in October.
The facility carries a margin of 30bp over Libor, which increases
to 35bp on January 1 1999.
Within the western European acquisition financing sector are an
increasing number of LBOs. And the region has played host to some
of the most successful transactions so far executed.
One such transaction is the LBO of SEAT, the owner of
Italy's Yellow Pages. Some Lit2,606bn of senior debt facilities was
arranged by ABN Amro, Banca Commerciale Italiana, Banque Paribas
The loan was split into four tranches - a Lit1,410bn seven year
term loan priced at 200bp over Libor; a Lit260bn eight year term
loan priced at 275bp; a Lit260bn 8.75 year term loan priced at
312.5bp; and a seven year Lit276bn working capital facility priced
When the deal was initially launched, some observers thought the
deal would struggle to attract enough banks into the
"They had good reason to doubt the success of the transaction. LBO
financing was - and still is - a developing sector in western
Europe and one in which there is a limited number of banks with the
requisite expertise and appetite.
"You could bring an excellent deal to the market but the
participants may not have the experience and resources to do the
deal," says one Amsterdam banker. "Bankers are not used to the
structures or the risk profiles."
But the deal confounded the doubters. Syndication was a blow-out
success, largely as a result of enthusiastic support from Italian
banks. But the arrangers shrewdly pitched the deal to potential
"Banks saw SEAT as an extremely strong corporate risk with a
dominant position in the Italian market," says Domenico Lellis,
head of syndications at Paribas.
"It has a very good track record and is a household brand name.
Banks evaluated the risks accordingly. So they probably looked at
the deal as a corporate financing paying margins typical of that of
a LBO financing The presence of Telecom Italia in Seat's equity
also encouraged bankers to make this reasoning."
Another deal to prove the doubters wrong was the DM281m LBO of
Sirona Dental systems from Siemens. The debt facilities were
arranged by Warburg Dillon Read and consisted of a DM181m seven
year term loan priced at 175bp, a DM49m eight year term loan priced
at 212.5bp and a DM50m seven year revolving credit at 175bp.
The facility was oversubscribed in syndication but was not
increased. According to the arranger, success was down to the
strength of the borrower.
"The company has a 12% share of global dental equipment," says an
official at the bank. "It is not often when something so global is
on the market. When you compare Sirona to a local firm dealing with
national, rather than international, buyers this is an extremely
Opinions differ as to why European LBOs have been more successful
than those in the UK in recent months. Given that the UK has
traditionally been a much more active buy-out market than
continental Europe over the years, it would be logical to presume
that it also has more banks with the necessary experience.
However, some bankers point to the fact the deals coming out of
western Europe are generally of better quality than the UK. "The
Sirona deal is a case in point," says a London banker.
"Sirona is a fine company with international interests. It is also
in a sector which is immune against economic downturns. The deals
coming out of the UK are often in difficult sectors and are
overpriced. Also purchase prices are not quite so high in
continental Europe and there is a local investor base that is
The growth of the European LBO market was recently underlined with
the announcement of the largest buy-out to be financed in the
Euroloan market - the acquisition of Kappa Packaging NV from
KNP BT NV by venture capital groups CVC and Cinven.
The acquisition will be financed by Dfl 1.7bn of senior debt
facilities and a Dfl 1.2bn mezzanine tranche arranged by
The senior debt tranche - which Bankers Trust, Deutsche, Goldman
Sachs, ING Barings, Banque Paribas and Salomon Smith Barney have
joined as co-underwriters - is being syndicated down to a lower
group of sub-underwriters and ordinary participants.
The quality of the co-underwriters bodes well for the remaining
selldown and bankers have reacted favourably to the deal's terms.
Senior debt consists of a Dfl 900m seven year term loan (tranche
'A') at 187.5bp over Libor, a Dfl 300m eight year term loan
(tranche 'B') at 237.5bp, a Dfl300m nine year term loan (tranche
'C') at 287.5bp and a Dfl200m seven year revolver at 187.5bp.
As the largest LBO financing in western Europe, the deal offers
lenders a degree of prestige. And the deal has attracted praise for
its structuring and the fact that it offers exposure to a popular
The deal will also feature the biggest high yield bond in Europe -
Barclays intends to take out the Dfl 1.2bn mezzanine tranche with a
high yield bond denominated in either Deutschmarks or euros in
Although the growing European corporate bond market will
increasingly start to provide greater competition for the
syndicated loan sector, the loan product is likely to remain the
first port of call for most European companies for the foreseeable
And the high level of corporate restructuring activity as Europe
heads for a single currency is unlikely to slow down, providing
bankers with a rich vein of corporate lending opportunities in the
By contrast, sovereign activity in the loan market has been
extremely limited so far this year as most government treasuries
have turned to the bond market for cheaper financing.
But Greece has had a busy year in the syndicated loan market. The
Hellenic Republic has recently raised a DM220m term loan
through Bank Austria and lead arrangers Bayerische Vereinsbank and
DG Bank. The facility carries a margin of 37.5bp over Libor with
17.5bp for co-arrangers taking DM30m.
The republic is also raising another medium sized term loan - about
the same size as the Bank Austria loan, possibly through Banque
Nationale de Paris.
However, these two deals could be eclipsed as the republic is
threatening to come to market with a jumbo revolving credit
facility - as much as $2bn - in September or October.
If it decides to do so, bankers believe the financing will win
strong support. The rarity of the type of deal and the strong bank
relationships that the republic has built over the past 10 years
should mean that the facility is comfortably
|Top 20 arrangers of European
acquisition financings January to June
|2||ABN-AMRO Bank NV||NEE||5,145.77||8||8.65|
|6||Credit Suisse First Boston||DDY||3,913.78||9||6.58|
|9||Warburg Dillon Read||SZE||2,494.13||5||4.19|
|10||Banque Nationale de Paris||FRE||1,974.43||4||3.32|
|13||Lloyds Bank Capital Markets||UKE||1,531.86||6||2.57|
|14||Royal Bank of Scotland||UKE||1,464.63||9||2.46|
|15||Chase Manhattan Bank||USA||1,420.51||7||2.39|
|Source: Capital Data
|Top 20 arrangers of Western European
Loans January to June 1998|
|4||Chase Manhattan Bank||USA||8,418.84||29||6.63|
|8||Warburg Dillon Read||SZE||4,989.31||12||3.93|
|10||Credit Suisse First Boston||DDY||4,544.43||14||3.58|
|11||Banque Nationale de Paris||FRE||4,295.75||12||3.38|
|13||Den Danske Bank||DEE||3,345.30||17||2.63|
|17||Royal Bank of Scotland||UKE||2,447.53||17||1.93|
|Source: Capital Data