In total, 44.2% of the around 500 people that the Loan Market Association quizzed for its annual survey said that intense competition would be the largest influence on the loan market next year. At the end of 2012, only 13.5% of respondents felt that way. Instead, it was regulation that had loans bankers most concerned.
Loans bankers are right to be worried, if only because there are very few that will come out of 2013 not feeling like they’ve just taken a beating over everything from tenors to terms to pricing. But it looks as if the competition is already eroding the terms of loans for banks and there is nothing on the horizon that looks as if it could steady that frenzy.
In investment grade loans, swathes of firms have refinanced early to take advantage of the low prices on offer as banks try to undercut one another. Just last week, a German chemical products firm signed a refinancing facility and amended terms to €1.5bn of loans. The firm was paying 40bp over Euribor on the old loans and is now thought be paying 22.5bp. And this is not an isolated incident. Carlsberg, Siemens, Saint-Gobain and E.On have all come to the market and slashed margins to refinance existing debt.
Emerging market bankers have arguably had it as bad as or worse than their investment grade-focused colleagues. As well as pre-export finance structures being replaced by unsecured loans for sub-investment grade borrowers including EuroChem and MMK, emerging market loan margins and peripheral European loan prices briefly aligned in the last quarter. Gazprom Neft (Baa3/BBB-) signed its latest loan — a $2.15bn December deal — at a 150bp margin, this is the same price that better rated Spanish energy firm Gas Natural (Baa2/BBB/BBB+) paid for a €2.25bn deal in November.
Turkey example
Perhaps the biggest worry, and the greatest example of competition rather than fundamentals is driving the market, is among loans for Turkish financial institutions. Lenders have piled into these deals every year for the last decade. Turkey’s big five of Akbank, Garanti, Isbank, Vakifbank and Yapi Kredi, all offset rock bottom loan prices, which came well below lenders’ own costs of funding, by offering a wealth of ancillary business. The thinking goes that this lucrative ancillary business is easier to attract if you have already curried favour by lending a big ticket at low prices.
At the beginning of 2013, Akbank set the standard by pricing its first of two annual loans at 100bp all-in. Lenders grumbled and claimed there was no way the margins could go lower. Then in August, Akbank priced its second and final loan of the year at 75bp all-in. Lenders threw their hands in the air in disgust and told EuroWeek in private that they hoped the deal would struggle so as not to encourage the other banks to follow suit. But the market didn’t put up as much (or any) resistance as they hoped for and 39 banks piled into the loan.
There’s good news and bad news for international banks looking at these deals. The good news is that Vakifbank’s Mustafa Turan, vice president of international banking and investor relations, told EuroWeek’s Turkey corporates and banks roundtable this week that he doesn’t see syndicated loan prices tightening again next year. The bad news is that it is generally considered by lenders to be Akbank and Garanti which have the power to set the benchmark pricing among Turkish FIs.
And what was one of those bank's prediction for loan pricing next year?
A representative for Akbank on the same roundtable said that further reductions would depend on market conditions. If those conditions are ones of banks in furious competition to lend money with this year's lack of deal flow set to continue, then the signs are ominous for bankers worried about tougher conditions.
