Since the start of 2021, only six syndicated loans with a total value of $1.4bn have been signed across the CEEMEA region, according to Dealogic. The same period in 2020 saw 39 deals with a value of $13.9bn signed.
That has had a visible impact on the attitudes of characteristically optimistic lenders, that have, in previous years, prided themselves on being a bastion of support for young, emerging market borrowers.
“It’s been difficult,” said a senior loans banker at a European bank. “Corporates that have the ability to tap different markets have been going to the bond market. It’s not easy for us to just lower margins.”
While syndicated loan volumes dropped last year, international bond markets boomed. Last year, $330.7bn was raised in CEEMEA from 642 bonds. In contrast, syndicated loan volumes in CEEMEA declined last year, with $191.6bn raised from 356 loans.
When the Covid-19 crisis began many EM borrowers retreated from the international syndicated loan market.
While some held off because of higher margins that resulted from banks’ own costs of funding going up, others approached lenders for more manageable bilateral loans — most of which are not recorded in league table rankings. However, most lenders see the bond market taking a large portion of potential business from lenders as the real issue.
Although there are clear and distinct advantages for issuers in both asset classes, borrowers with access to both markets are leaning towards debt capital markets.
Pricing battle
Pricing played a critical role in preventing loan banks competing with bonds. The loan market has failed to reach pre-crisis levels while the bond market has tightened relative to pre-pandemic levels.
“The bond market is on fire and the floors we face as lenders are a problem,” said a senior loans banker at a US bank. “It’s impossible for us to compound a negative rate on a loan.”
Issuers are taking full advantage of conditions in the bond market. 2020 was an enormous year for sovereign issuance in emerging Europe, with a number of sovereigns tapping markets multiple times — Romania issued four times, for example — while this year Slovenia has already entered the bond market twice, only a few weeks apart.
Issuers tapping investors repeatedly while lenders find themselves faced with client discussions that lead nowhere is a sign that the bond market is coping with the effects of the pandemic far better than the loan market.
“By last summer, the bond market was offering issuers better execution while the loan market was still suffering from the fallout of the crisis,” one banker said, referring to the widening in margins that took place in the aftermath of the first lockdowns.
‘No matter how much we do’
Since then, lenders say they have offered various solutions to clients in the hopes of winning mandates but have found themselves losing to debt capital markets.
Not only do public debt capital markets offer obvious benefits, such as investor diversification and the opportunity to build a credit curve, but in relation to other asset classes, they have been far more welcoming to borrowers over the last year as investors who have been displaced by the ECB, scramble for assets.
“No matter how much we do, we are still very far away from bond market levels,” said the first loans banker at the European firm.
Unlike the bond market, lenders face two main hindrances: floors to benchmark rates (such as Euribor) and internal capital requirements.
It is standard for banks to have Euribor floored at zero, unlike the bond market which tolerates negative rates.
“I don’t see much change in the pattern of activity to be honest,” said a senior Frankfurt-based banker at a German lender. “In the current pricing environment, corporates are finding it easier to go to the bond market, especially for borrowers that are looking for longer-dated funding. The limit in the loan market is still really about three years.”
While institutional investors and asset managers have a mandate to invest, at times regardless of capital risks, banks can find themselves struggling to justify lending decisions to internal compliance teams.
Since the financial crisis a decade ago, that task has become more difficult for syndicated lenders.
“We still have certain regulatory requirements in the bank,” said a senior syndicated loans banker at a European firm. “Our allocation of capital to clients’ transactions is dependent on internal ratings, our own cost of funding and so on. Bond investors don’t have those exact same problems when it comes to internal capital regulation.
“There is not much the banks themselves can do to get business back.”
The bond market has become so attractive that even some of emerging markets’ more risky issuers in sub-Saharan Africa are set to tap investors this year.
“The pipeline has been very low,” said a senior lender at a French bank. “We have been waiting to see if Africa comes back, but so far nothing has materialised though there are some interesting conversations going on.”
Flexibility wins over some
There will, of course, still be loan activity from historically frequent borrowers.
The top-tier Turkish banks will continue to enter the market bi-annually, as they have been doing for decades. All lenders said they were in discussions with clients, or had received RFPs, though conceded the success rate of discussions was low.
Akbank, according to sources, will be launching its first syndication of the year next week, in which it plans to refinance a $603.07m-equivalent loan with tighter margins than it achieved last year.
“Bank lending will remain important because it is fundamentally more flexible than bonds,” said the senior banker at a US firm. “With a syndicated loans, you can add features, increase the size, extend the tenor or pre-pay at any time with minimal fees.”
For many emerging market borrowers, the relative opacity that the bank lending market offers compared to public debt markets is a huge bonus.
Some are even hopeful that a continued focus on providing ESG-linked loan products could help boost activity.
“I think the loan market can capitalise on ESG loans to win business back. With lenders, borrowers can test things in a loan with a small group of creditors before jumping in at the deep end with a bond,” said the banker. “Coupons linked to KPIs [in an ESG-linked bond] is still a relatively new concept. Combined with disclosure risk, it makes sense to go to the private loan market to test things out.”
Additionally, the spike in US Treasury yields, which has seen 10 year yields rise from 0.91% at the end of December to 1.3% as of Thursday evening, has the potential to push some crossover credits back into the loan market as bonds become more expensive.
Depressed outlook
However, even the almost-guaranteed nuggets of activity have not been enough to quell lenders’ fears.
Many say that emerging market loan volumes will remain neutral or decline. Very few expect an imminent boom.
“Bonds have become the friend of borrowers,” said a senior banker at a Japanese lender. “But that doesn’t mean that the loan, and the flexibility it provides, is a thing of the past.
“The bond is the flavour of the month, but as we come out of lockdowns and normal activity is restored, a lot of financing will need to get done. There will be opportunities for the strong to eat the weak, therefore boosting M&A financing.”
Acquisition-oriented borrowers have always found a safe home in loan markets.
But just this week, a Czech firearms company, Česká zbrojovka Group (CZG), showed that investors could also be a reliable source of funding when it mandated banks to arrange a local currency bond to fund its acquisition of US-based rival Colt.
With rates expected to remain low and with yield-hungry investors pouring record inflows into emerging markets, the overall picture for syndicated lending looks bleak.
“In the short-term, the outlook is subdued. I can’t see things really picking up before the third of fourth quarter. Right now, we are on track to do what we did last year,” a banker said, referring to total volumes.
“The revival of the loan market is dependent on the general increase of economic activity — not just in Europe, but across the globe,” added the Frankfurt-based lender. “At that point, we will see a general increase in funding.”