While the syndicated loan market has not traditionally been the first port of call for many supranational and agency borrowers, the success of the recent transaction for Caisse dAmortissement de la Dette Sociale (Cades) showed that when these credits do venture into the bank market, the returns can be impressive.
Historically, the use of loans or back-up line facilities has been unusual in this market, with one banker calling the deal from Cades "the biggest, brightest light in this space by some distance".
The French agency found itself inundated with commitments for its one year revolver credit facility, with lenders scaled back before the borrower signed the Eu12bn line in February.
BNP Paribas, Crédit Agricole, HSBC, Natixis and Société Générale were bookrunners and mandated lead arrangers on the facility, while Citi, Deutsche Bank, JP Morgan and Royal Bank of Scotland joined the deal as mandated lead arrangers.
Damien Lamoril, head of EMEA loan syndication at Société Générale in Paris, which co-ordinated the facility for Cades, was not surprised by the strength of demand for the deal from the Aaa/AAA/AAA rated agencys relationship banks.
"The syndication process was a great success and we had a very high hit ratio," he says. "Cades has a huge wallet to share with its lenders with the large amount of bonds to be issued, and thats why it was extremely successful and people were very keen to come to the deal."
The facility, which will be used as an undrawn back-up line to the agencys Eu30bn commercial paper programme, was only marketed to the borrowers existing relationship banks. Demand for the loan was so strong the deal was increased from a planned Eu10bn to Eu12bn.
"Banks were attracted into the loan because the risk is extremely low as we are a triple-A rated borrower," says Patrice Ract Madoux, chairman of Cades in Paris. "Also, lenders are likely to consider that we have such good access to the short term markets that we will not really be planning to use this line in the year."
Money market reliance
Cades commercial paper programme will contribute up to Eu30bn of its increased Eu55bn-Eu60bn overall funding plans for the year. Of this, around Eu4bn-Eu8bn of funding will come in the form of bilateral agreements with banks to purchase Cades commercial paper.
As Cades has grown its commercial paper programme, so other borrowers from the sector have also increased their reliance on the money markets as they look to increase their financing programmes and diversify their funding away from the public bond market.
And like Cades, many supranational and agency have commercial paper back-up lines from the loan market to support their programmes.
While many of the lines are arranged on a bilateral basis directly with banks and are not syndicated to the wider market, the facilities are often necessary to ensure that a supranationals funding programme retains a triple-A standing.
This was not Cades first visit to the syndicated loan market to back its money markets funding. The agency signed a one year Eu10bn revolver through BNP Paribas, Crédit Agricole, HSBC, JP Morgan, Natixis, Royal Bank of Scotland, Société Générale, Deutsche Bank and TD Securities in 2009 to be used for similar purposes.
"We do this type of credit every time we take on a large amount of debt," says Ract Madoux. "It will just be seen as a security blanket and not a facility we are planning to use."
Less keen on loans
While undrawn back-up facilities, whether arranged bilaterally or on a syndicated basis, are used by many of the agency and supranational credits, both borrowers and lenders are much less keen for these names to use the loan market for term financing. Away from the commercial paper back-up lines, the syndicated loan market holds little interest for these triple-A rated credits. Instead, for their drawn funding needs the borrowers remain content with the attractive conditions available in the public or private bond markets, and are unlikely to be tempted away.
"These borrowers have never been big users of bank loans because their credit profile and ratings mean that they have very good access to the bond market, where funding is available at cheaper pricing," says Société Générales Lamoril. "They dont need to go through banks to raise money because they have effective and proven access to liquidity in the bond market. It may be something that is nice to have to complement the overall funding programme, but the bulk of the issuance is coming through the capital markets."
At the end of February, the Bank of England priced a $2bn three year deal in the public bond market at Libor minus 1bp, a level that borrowers would find almost impossible to match in the bank market.
For banks too, the aggressive pricing available to supranationals in the bond market makes lending to these names unappealing. Banks own costs of funds are often far higher than the supranationals, and even the returns from ancillary business would not match the subsidies needed to lend at a competitive rate. Lenders would, of course, expect that they would be mandated on some of the borrowers many bond transactions and so be able to recoup some of their losses through the fees. However unlike with their corporate borrowing clients, banks would not be able to expect the lucrative fees from acquisitions, buy-outs or IPOs.
"The bond market is more attractive than the bank market for the core issuers in the supranational and agency space," says Giles Hutson, head of EMEA Corporate, SSA and Emerging Markets DCM at Bank of America Merrill Lynch in London. "We are unlikely to see five year term loans starting to play a big part in this sector as the pricing isnt comparable."
Low risk rating
Banks also have to contemplate their own commitments to the borrowers through their derivatives business on top of any direct lending to supranational and agency credits.
"The street doesnt have too much difficulty in allocating capital to this space, as the internal risk ratings are extremely low, so the risk-adjusted return on capital is not a material hurdle to making commitments," says Hutson. "However, banks do have a finite, if large, amount of capital to allocate to each client. And what is given in commercial paper back-up lines or in lending facilities in general will therefore detract from the swap market capacity."
Despite these problems, some of these borrowers can find refuge in the syndicated loan market in their times of need. At the beginning of March 2011, Generalitat de Catalunya was looking to raise financing of Eu2bn through the syndicated loan market, no doubt attempting to help manage its economic problems by further diversifying its funding.
"The borrower is looking for drawn funding because, quite simply, it has run out of cash," said a syndicated loans banker familiar with the deal. "In this situation you have to use all the different means you have across the markets syndicated loans, public bonds and even private investors."
In the summer of 2010, the A2/A+/A+ rated borrower raised Eu1bn through the bank market, paying 300bp for a four year transaction. While that facility was agreed with a number of domestic Spanish banks, the new facility is being marketed to local and international lenders through co-ordinator La Caixa.
Similarly, for one group of semi-sovereign issuers, the syndicated loan market offers an interesting source of funding as it grows in strength. Crossover sovereign credits, which are government backed but which operate their balance sheet like a corporate, would be able to exploit an increasingly borrower-friendly environment in the loan market where margins are tightening, maturities are lengthening and terms are improving.
"For crossover credits, the syndicated loan market is back in a big way," says Hutson. "Its now offering more capacity and much better pricing than it has been at any time over the last three years. The loan market has come way back into contention as a source of financing for corporate issuance, and absolutely plays a part in both relative value and alternative sources of funding on those balance sheets."
Corporate hybrids including Deutsche Bahn and Hellenic Railways have tapped the loan market in the past, the latter signing a Eu700m six year term loan in 2009 with a syndicate of six banks to be used for general corporate purposes.But while the syndicated loan market provides an attractive variation for some, most borrowers from the supranational and agency sector will see the bank market as a source for undrawn back-up lines only and are unlikely to turn to it as an alternative to the attractive pricing and ready liquidity of the bond markets.