It’s always tough on the parents when a child grows up and leaves home. And for lenders in Central and Eastern Europe, that day has perhaps come a little closer with the news last week that one unnamed borrower in the Czech Republic is casting off its dependence on the international market by looking to tap its home country's lenders for an unprecedented €1bn loan.
This is a great achievement, but international lenders need not panic just yet. This is likely to remain a one-off for some time.
It has nonetheless left many London-based loans bankers flabbergasted. Until now, borrowers in the Czech Republic — one of the CEE’s least prolific lending destinations — have shown little inclination towards big loans, domestic or international. According to Dealogic, only management firm PPF Group has closed a bigger loan in the last five years, a €2.09bn Crédit Agricole-led facility in 2007.
So what has made a conglomerate so eager to turn away from the international market? Eurozone bank retrenchment has surely played a large part in the decision. Fears about liquidity drying up in the CEE have been on the tongues of ratings agencies and analysts since the final quarter of 2011, when both Fitch Ratings and Morgan Stanley released research that cast the region in a bleak light.
As banks hack away at their non-core market exposure, the effect is starting to be seen in the level of dealflow across the emerging markets — year to date syndicated loan volumes in the region are languishing at their lowest levels since 1999. In mid-March, participants in the second iteration of the Vienna Initiative will hold more talks on ways to stop deleveraging banks from leaving CEE borrowers out to dry.
Borrowers in the Czech Republic, as elsewhere in the emerging markets, have few alternatives. Only the upper echelons of the Czech corporate universe have access to the international bond market, for example. Last year, only energy firm CEZ and railway operator Ceske Drahy raised money through the public markets.
As the international financing options for Czech companies dwindle, a burgeoning local funding market could certainly be very appealing to borrowers. But it is not likely to support a large number of transactions. Tickets for the mysterious €1bn Czech loan are between €150m-€200m. The banking group has not been named, but tickets like that would weigh heavily on any local bank’s balance sheet.
CSOB, owned by KBC Group and one of the largest banks in the country, had a corporate loan book of Ck76.5bn (€3bn) in 2010, excluding factoring. This was divided up among 4,500 corporate clients, making an average of about €670,000 per client. If CSOB were to take on a €200m piece of a new loan, it would amount to 6.6% of its entire loan book.
This might be justifiable as a one-off, but similar loans to other domestic companies would start to create some serious concentration risk. Moody’s warned of this problem in Russia and the CIS last December, when borrower concentration levels hit their highest point since 2007.
If the Czech borrower manages to complete its €1bn facility it will certainly be a milestone for the country's loan market. But it isn’t one that could be repeated safely soon.