The CEEMEA market is ripe for M&A transactions. Bankers are buzzing with plans to take advantage of the strong bond market and for bridge-to-bond structures, long the darling of western European M&A, to become the saviour of dealflow in the region. But this model is fraught with difficulty, and only the strongest emerging market borrowers need apply.
The emerging market bond market is showing no signs of stopping its thunderous run this year. Credit Bank of Moscow, Hungary and Sibur all mandated for deals last week and DCM bankers predict a bounteous fortnight ahead. Loans bankers have caught on to the hunger for emerging market paper and discussions with borrowers are alive with ways of structuring M&A deals with bridge-to-bond portions, where a typically big ticket bridge loan will be taken out with bonds rather than refinanced through syndication in the loan market, as has been common practice until now.
But the bond takeout strategy won’t work for everyone. The bond market has certainly been open to new issuers — Federal Grid Co, Samruk Energy and EP Energy all debuted internationally in the last quarter. But loans officials are only likely to consider a bridge-to-bond deal for a repeat bond issuer with proven investor appetite.
Furthermore, the borrower must have recent financial reports for investors to scrutinise. This will prove tricky for many emerging market firms, as even the big names are notorious for taking longer than their western contemporaries to publish data.
This greatly reduces the number of top tier firms that can hope to benefit from the bridge-to-bond structure for M&A financing. Even some of the largest names, such as Russia’s biggest oil firm Rosneft, are not regular bond issuers. Rosneft signed its first international deal in more than a decade in December.
Rather, it was Rosneft’s strength as a borrower, demonstrated by its considerable clout in the loan market, that convinced bankers to consider the bond take-out route for its $16.8bn bridge facility signed at the end of last year.
Most companies, however, don’t have the luxury of explicit backing from the Russian state. These other firms are forced into taking either the club loan route if they have the relationship banks willing to lend big tickets at relationship terms, or the far riskier syndicated route.
This week, Czech energy holding firm EPH decided to go for a syndicated loan when it signed a €1.5bn deal to part finance the purchase of a 49% stake in Slovak gas firm SPP. The facility has a €200m bridge that won’t be taken out by bonds because it will be used for a dividend recapitalisation.
Turning away from bonds is a risk. The firm now has a €1.3bn term loan to syndicate at a time when bankers are increasingly vocal about the elusiveness of the emerging market retail market, where there are just too few banks competing for too little business for anyone to be happy with junior positions, they say.
But the Czech bank market has shown remarkable enthusiasm for its domestic firms. EP Energy pulled in €1bn from a club of domestic banks last year. After that success, there’s no reason to think they wouldn’t be willing to do it again for EPH. A dearth of loans last year also means international lenders will be interested this early in 2013.
If EPH succeeds, it will be proof that the syndicated loan market is still capable of running at decent capacity. But should it struggle, it will push M&A bankers further into the bridge-to-bond model, and everyone — barring CEEMEA’s top borrowers — will face bigger hurdles than ever when financing M&A deals.
No pressure, then.