Loans bankers like nothing better than the chance to get a little creative, and last year saw the perfect opportunity for a rash of innovative features and structures to hit the market. As the cost of their own dollar funding soared, especially at French banks, lenders looked for new ways to pass this on to their borrowers.
Proposals included limiting the amount of dollars that could be drawn under a multi-currency facility, or even giving banks the right to refuse to provide dollar funding under a multi-currency line if it was impractical for them. Most regularly, borrowers were simply asked to pay a premium of up to 50bp for dollar lines, to reflect banks’ own increased funding costs in that currency.
But this dollar premium has now disappeared.
The funding cost for European banks in dollars has certainly shrunk over the last few months, although they are still paying up compared to their American and Asian cousins. But some are still paying up even compared to other European lenders, and it is this disparity that has meant the end of the dollar premium.
When there was a weight of numbers of lenders asking for extra margin for dollar lines, borrowers had little choice but to pay up. Now that there are only a few banks whose increased lending costs mean they require an extra few basis points, borrowers do not feel obliged to pay more.
But instead of bowing out of these deals, most banks — regardless of their own dollar costs — have decided that they are willing to take a hit on their lending returns for the right clients. On one recent deal in Russia, a French bank was offered a euro ticket while the rest of the banking group was participating in dollars — it refused and committed in dollars along with the rest of the syndicate.
This can be seen across the emerging markets, where dollar deals are more prevalent: French banks’ profiles may have been reduced, but they are still active participants in those deals.
As liquidity requirements start to bite, all lenders across EMEA are making difficult decisions about which clients they are going to continue working with and which markets they are going to participate in. But banks with higher dollar costs are not withdrawing wholesale from dollar deals. Instead, their continued participation in these transactions shows their commitment to continuing their relationship with these borrowers and their activity in these markets.
The dollar premium has disappeared, but only because affected lenders have decided that the relationships with their clients are worth more than a few basis points.