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Syndicated Loans

Falling EM loan margins will sort the brave from the desperate

Senior lenders on emerging market loans are trying to dissuade junior lenders from joining deals to show borrowers that there’s only so much margin-tightening that the market will accept. The tactic is disingenuous. The top banks need to show more courage.

A little brother is a great scapegoat for when things go wrong, and so it has proved in the wonderful world of emerging market loans. Senior lenders have turned the retail market into their little brother, rather than face up to the hard truth that they need to lead from the front if they want to stop loan margins continuing their plunge.

Turkey’s Akbank is close to signing its $1.5bn-equivalent August refinancing facility. The loan comes with a very contentious all-in pricing of 75bp.

Lenders at the very top of the deal have issued a call to arms to any banks thinking of joining at the retail stage. In simple terms, this is along the lines of: “The last thing we want to do is oversubscribe this deal. Save your money. We have to show Akbank and its contemporaries that the loan market won’t stand for this.”

All very well, except the loan market has shown repeatedly that it in fact will put up with it — at least for as long as senior banks are not themselves willing to take the stand they are demanding of retail.

The 15 strong bookrunner and mandated lead arranger (MLA) group of Akbank’s last loan — a $1.2bn March facility that carried an all-in margin of 100bp, heavily criticised at the time for being too low — reads like a roll-call of banks operating in emerging market syndicated loans.

Notable exceptions such as Barclays, BNP Paribas, BTMU and Deutsche Bank were all in the senior group for fellow Turkish FI Garanti Bank’s $1.4bn May 2013 deal, which carried the same pricing as Akbank’s March loan.

Across those two deals, every bank in Dealogic’s top 10 bookrunners of syndicated loans in EMEA for 2013 so far is represented at the senior level.

Precedent lost

Given how willing the biggest lenders are showing themselves to be in supporting deals that are being priced more and more tightly, it seems pointless for them to be asking lenders with a smaller market presence to bow out. This is all more striking when you consider how feeble the big boys have been in markets where retail has all but disappeared already.

Take Russia, where club deals are king and where the Middle East and Asian trade finance banks that made up much of the general syndication stage in Russia until around the end of last year have largely retreated from the market. Fertiliser producer EuroChem is in the market now with a five year unsecured deal. It is structured as a club, with lenders asked to provide up to $150m each. Bankers have been vociferous that the 180bp margin is far too low.

But with no retail market to bully into staying away from the deal, senior level banks have only themselves to blame for allowing the price to sink to such depths. At least two of EuroChem’s relationship lenders have wisely told the company that they want no part of this loan at this price.

Those still attached to EuroChem’s loan assure EuroWeek that the deal is going to do just fine, maybe even raising more than the borrower’s $1bn soft target. If two of the biggest international lenders in Russia cannot sway a deal by walking away, it’s hard to imagine what makes lenders think that a few low-level banks quitting Akbank’s roster will stop it from raising whatever it needs at the pricing it wants.

That more banks have not joined the two that declined EuroChem’s deal makes the protest futile. It also paves the way for lower or equally priced deals from similar borrowers in the future. And that’s hardly surprising. After all, it’s not like the market is going to stand up to them, is it?

 

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