It’s only three months into 2013, and we already have a contender for the tightest investment grade loan deal of the year. Germany’s BASF has launched a $3bn five year plus one plus one transaction priced at just 25bp. The deal for the A1/A+/A+ rated firm is set to be one of the tightest printed since 2008’s crisis.
Many argue that such tight headline margins are not helpful in a market that has been vocal about the effect that forthcoming regulation is likely to have on the availability of liquidity. Surely if banks can afford to provide credit lines at these prices — so the logic goes — they must have plenty of capacity on their balance sheets?
But the truth is that the success of the BASF transaction with its skinny pricing will tell us little about the health of the syndicated lending market. It does, however, tell us plenty about how banks perceive their relationship with the German chemical firm itself.
Pricing of investment grade syndicated loans fluctuates regularly — and almost independently of the liquidity positions of the lending banks themselves. Blue-chip borrowers like BASF are a breed apart from other corporates: accordingly, their funding activities exist on a different plane. When it comes to A1/A+/A+ rated firms like BASF, the question that many lenders ask themselves is not “can we commit paper to this name?”, but rather “how big a ticket do you think we can get?”
The margin on deals like BASF’s is based on any number of factors: the lack of primary deal flow in the wider primary market; the ancillary business that BASF has doled out over the lifetime of its existing credit lines; the expectation that banks have of receiving ancillary in the future; the strength of the German sovereign; the strength of the chemicals sector... the list is almost endless.
One item on that list, of course, may well be how constrained banks’ capital is. But it is rarely the primary consideration when deciding whether to lend to blue-chip names — especially for revolving credit facilities that lenders know that these top-rated firms are unlikely to ever draw. This is why these top-rated European firms have frequently been able to access funding even as lenders faced their toughest times in the markets.
All of which makes it tough to draw broader conclusions from deals such as BASF. If it is successful, and even if other investment grade firms follow its super-tight lead, no one should suddenly feel reassured about the health of banks’ long-term liquidity. Top tier borrowing tells us nothing about that — but everything about how lenders view those relationships.