Loan market discovers the limits of relationships
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Loan market discovers the limits of relationships

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When the cost of money changes, love is not all you need

The investment grade loan market is going through a rough start to the year, a victim of the empty M&A pipeline, which has led to a shortage of bridge facilities and term loans.

To make matters worse, the flow of companies refinancing their loans, which usually keeps the market watered, has dwindled to a trickle.

The loan market is famously based on relationships between companies and banks: loan facilities cement these relationships. It's an unwritten rule that banks do not make appreciable money on loans, in fact they are more inclined to see them as a cost.

It's a "subsidised market", as one head of loans put it.

For years, that subsidy has been rather pleasant for companies. They could rely on their relationship banks to tighten loan margins year after year.

But that was when interest rates were falling and central banks were pouring money into banks' pockets.

Things are rather different now. Banks' funding costs have gone up, and companies are finding that, however fond the relationship, banks have got to ask for more money on loans.

For revolving credit facilities, which are usually undrawn, the price increase only amounts to a handful of basis points. But it is still enough for companies to postpone refinancing if they have the choice.

And on term debt the price change is material.

Unfortunately for the banks, putting up loan costs does not bring clients running to their side.

Some issuers, put off by the higher rates, are pushing back refinancing their loan facilities to the second half of the year, or trying to avoid refinancing by repaying loans with cash.

That has taken a big bite out of the business loans bankers usually do, and the fees they make from refinancing loans.

Despite the strain put on them by the rising interest rate cycle, the corporate-bank relationships themselves are not being questioned. But loan bankers are feeling rather neglected. Lonely, you might say.

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