Loan market pins hope on M&A as Libor deadline looms

The syndicated loan market in EMEA is set to benefit from a rise in mergers and acquisitions, according to a survey — undertaken before the arrival of the Omicron Covid variant — by GlobalCapital of heads of loans in the region. Roughly 82% of the senior bankers interviewed expect M&A to account for a higher proportion of deal flow in 2022 than in 2021.

The loan market has been on a rip-roaring ride since the coronavirus pandemic began. While wrestling with the transition away from Libor, investment banks have been called on to help cash-strapped companies weather the storm. Borrowers drew down their revolving credit facilities or raised extra liquidity in emergency funding.

EMEA syndicated lending in 2021 had already reached €749bn by November 15, according to Dealogic, an increase from €646bn in the whole of 2020. This rise was in part driven by the boom in M&A, which has been on a tear and is set to have the highest annual volume globally at more than $5tr. But some bankers say that the lingering impact of the pandemic meant it was harder to value certain acquisition targets, which means that the M&A boom could just be beginning.

“In 2020 emergency funding was the big theme — in 2021 I was therefore expecting a resurrection in opportunistic refinancing. This happened in the US, but less so in Europe so far,” says Reinhard Haas, Commerzbank’s global head of syndicated finance in Frankfurt. “Bankers were perhaps a little too optimistic that we would leave Covid-19 at the end of 2020 — when, in fact, it’s still a daily topic around the world. The impact it still has on supply chains, as well as production and shortages of all sorts of things, has contributed to lower visibility or predictability when it comes to the future. This makes valuation prospects for M&A quite complicated.”

According to the GlobalCapital survey, roughly 72% of respondents think that there will be an increase in EMEA loan volumes by as much as 20%. Beyond a rise in opportunistic financing, some expect additional volume to come from changing habits among some corporate finance chiefs.

“A school of thought has developed among treasurers as a consequence of the coronavirus pandemic,” says Laurent Vignon, head of EMEA loan syndicate at Société Générale in Paris. “Some companies have decided to increase revolving credit facility lines, just to make sure they are not caught in the same rush for liquidity again. Some have renewed their Covid-19 lines, others have increased existing term and revolver debt.”

Loan bankers say that the market’s appetite for lending is very strong. However, it is also the case that over the years the number of banks in syndicates has shrunk. In the survey, 27% of respondents said they thought fewer banks were competing for deals in 2021, though the majority said the number is similar to the previous year.

Investment banks say they are interested in lending to investment grade companies but argue that borrowers simply do not have enough ancillary business to justify a large syndicate. Scott Mitchell, head of EMEA loan capital markets at Bank of America, says the high demand from lenders has put borrowers in the driving seat. “Most high grade borrowers have more banks knocking on their doors than they have business to share.

“Borrowers are looking to trim their bank groups — the two tier, three tier structures are more likely to go and be replaced by one tier structures. Companies want to give all banks equal opportunity to compete for business and don’t necessarily need more than 10 or 20 banks in the syndicate.”

Haas offers another reason bank syndicates are getting smaller. “We have been living through an ultra-low interest rate environment, which has led to many asset takers all but vanishing from the syndicated loans market,” he says. “Some of the Chinese and Japanese, even Irish banks who were once buying into loans in search of yield only are now very much gone. Today, syndicated loans’ groups of lenders are mostly very clubby. Local market participants are joined by a few large international banks or ones with a special angle, say in M&A advisory.”

Covid-19 is not the only force shifting the tectonic plates underneath the loan market. For years now, investment banks have been helping prepare companies for the shift away from the London interbank offered rate (Libor), the interest rate against which upwards of $400tr of loans and derivatives hang.

The deadline for new dollar loans to transition away from the Libor benchmark — which was discredited after traders were prosecuted for manipulating it — is December 2021, but companies have until June 2023 to transfer legacy dollar Libor debt to a new risk-free rate. More than half of survey respondents said they were not sure all EMEA companies would manage to transition away from Libor by the deadline.

However, the blue chips of western Europe, market sources say, are ahead of the game. “For the very large part of the market, the amount of engagement that both borrowers and lenders have on Libor is more than enough to spur action,” says Mitchell. “We are seeing increased action from our clients and Bank of America needs to be on the front foot helping and telling them about alternative benchmarks. The pace of those conversations is increasing and the action from all market participants is increasing even more so. We are actively involved in identifying clients that need help and are assisting as much as we possibly can.”

Smaller companies will need more attention. Many mid-cap companies had euro revolving credit facilities with the option to draw in alternative currencies such as dollars or sterling, which meant they had to decide what to do with their Libor exposure.

“Rather than deal with benchmarks like Sonia, they have simply taken out their optional currencies and moved the RCF to straight euros,” says Vignon. “But there are a couple of mid-caps with term loans in dollars and sterling which will be quite complicated.”

But sources say it is much murkier in the emerging markets. According to several sources, some EM borrowers have shown next to no interest in preparing for the transition. Many that have dollar Libor exposure have lending relationships with local banks that lack the resources to educate them about the transition.

“Our concern for Libor is the emerging markets. Frankly, some [borrowers] are not prepared and others just don’t want to hear about the transition,” says Vignon. “The dollar, as more of an international funding currency than sterling, is really the issue. The US regulatory authorities have been strong on the Libor transition and banks know well that when they want something, they want something. Banks will therefore be reluctant to enter into a Libor-based transaction close to the deadline, though there may be a couple of Russian banks less concerned with US authorities still doing Libor deals.” GC