Throughout 2010, the loan market proved flexible and hardy. Amid the peripheral European debt crisis, the bank market stayed open to domestic corporate borrowers. Partly because of this resilience, the loan product remains a key weapon in any treasurers arsenal.
"The loan market rebounded with a vengeance last year," says Jonathan MacDonald, head of loans syndicate at Barclays Capital in London. "In 2009 capital raising was dominated by the bond market and many saw this as a permanent shift away from loans. In 2010 we saw a strong reversal of that trend with a huge volume of loans successfully syndicated at very aggressive levels. Bond markets are still the best place to go for long term debt capital but corporates continue to rely heavily on the bank market for backstop liquidity facilities which bond investors cannot provide."
But European companies approach to funding has changed since 2008. Borrowers are more flexible with their financing and less willing than ever to simply rely on a single investor base for their capital needs. Although volumes in the European corporate bond market fell last year by more than 50% from 2009, issuance remains high and some believe that European companies are permanently shifting their funding models.
"If the situation continues where banks face significant funding costs, high quality corporate names will move to a financing model more like that seen in the US," says Matthias Gaab, head of loan syndications at Deutsche Bank in Frankfurt. "Only undrawn back-up lines will be left to the banks, and the best corporates will continue to tap the bond market for all their actual funding needs, because they get the money at a cheaper price."
Still, syndicated loans remain indispensable for any borrower looking for event-driven funding. After Swiss pharmaceutical firm Roche bypassed the bank market and raised $39bn of bonds to fund its $47bn takeover of US rival Genentech in March 2009, there were fears that the loan market would be passed over by the best corporate borrowers carrying out M&A. But a $45bn loan obtained in August by Anglo-Australian miner BHP Billiton showcased the benefits of funding acquisitions through the bank market.
The transaction was a test case in a market that had not been pushed by a jumbo takeover deal since the credit crunch. While the facility had been underwritten by five banks Barclays Capital, BNP Paribas, JP Morgan, Royal Bank of Scotland and Santander there were worries that not many other banks would want to commit to it in syndication.
But there was little need to worry, for 19 banks joined the five underwriters and initial bookrunner Toronto-Dominion during the sell-down.
Bond market at the ready
Although the loan was later cancelled when the Canadian government blocked BHP Billitons $39bn bid for PotashCorp of Saskatchewan, bankers said it proved that bank debt was indispensable for most jumbo takeovers.
"The BHP Billiton transaction redefined market capacity for an event-driven deal," says MacDonald. "Not every company could access this level of liquidity but BHP Billiton ticked all the boxes in terms of credit profile, global reach and ancillary business."
Some are doubtful, however, that banks will get much of an opportunity this year to prove their commitment to funding acquisitions. "The liquidity is there from banks to support event-driven M&A financing," says Richard Basham, co-head of EMEA loans at Citi in London. "Whether there is as much conviction in board rooms and CEO offices for takeovers is yet to be seen."
The bond market, thanks to demand heavily outstripping supply last year, is ready and willing to provide the long term debt needed to refinance short term acquisition loans, say syndicate bankers. But, like their loan colleagues, they do not hold much hope of an increase in M&A soon. "The bond market is there for companies wanting debt to finance takeovers," says Brendon Moran, global head of corporate origination at Société Générale in London. "But with the persistent uncertainty around, it seems likely that this year will be more of the same as last year in terms of M&A volumes being low."
Luckily for investors, the lack of supply of M&A bonds and deals from blue chip borrowers is being made up for by issuance from first time and unrated companies. Many of these are finding the bank market harder to access, thanks to Basel III proposals pushing up banks costs of funds for lending to lower rated, mid-cap companies.
At the same time, European investors are starting to ease their long-standing aversion to buying the bonds of smaller, lesser-known companies. "There were plenty of first-time issuers last year in Europe," says François Bleines, head of corporate syndicate at Deutsche Bank in London. "That was the biggest change from 2009. Europes bond market used to be dominated by telcos, utilities and auto companies. Now theres more diversity, which is a good thing."Bankers say Europe is catching up with the US bond market, which has long been open to a wide range of credits. "In the US, theres less bank lending," says Christopher Marks, global head of EMEA DCM at BNP Paribas in London. "But theres a sophisticated bond investor base that has had to learn to accommodate a great range of credits. In Europe were slowly moving in that direction."