Loans market pays for the costs of capital

Syndicated lending across central and eastern Europe has in recent years mostly been a function of the costs of capital and liquidity. And that was turned on its head with the financial crisis.

  • 28 Sep 2010
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Hasan Mustafa, head of the CEMEA loans syndicate at RBS, says the recent evolution of the syndicated lending market in central and eastern Europe has been divided into two distinct phases — pre and post-Lehman.

"Before the crisis, loan pricing was significantly inside where the capital market was pricing the same credit, so for chief financial officers of the key borrowers in Russia and the CIS, which were the main drivers of activity, that the only port of call was the loan market," he says. "That was turned on its head after the collapse of Leman when banks ran into difficulties with respect to liquidity and cost of capital."

The extent to which lenders’ appetite disappeared following the fall of Lehman, says Mustafa, is immediately visible in the issuance statistics.

For CEEMEA as a whole (including the vibrant Middle Eastern markets), he says that volumes peaked at about $240bn in 2007. In the first half of 2008 they remained steady at about $120bn, before nose-diving to $70bn in the second half and to below $40bn in the first half of 2009. In the second half of 2009 and the first six months of 2010, they have been around $60bn.

Volumes remained quite subdued in the post-Lehman world largely because of changes in the pricing dynamic. "When the loan market did re-open, pricing was such that the capital market had become more certain," says Mustafa.

"Another downside to borrowing in the bank market post-Lehman was that the tenors available shrank dramatically," Mustafa adds. "What used to be a five year liquidity bucket turned into a one year market and only gradually edged out to two and three years."

Russia remains comfortably the most active and promising syndicated loans market in the CEE region. In 2009, the recovery in the Russian market was driven principally by bank borrowers, led by Bank of Moscow and the state development bank, Vnesheconombank. A key transaction from the corporate sector in 2009, meanwhile, was the $364m five year deal for Transneft, which was part of a $1.54bn pre-export facility signed in November.

The outlook for issuance over the medium term is mixed. "Although we’re seeing a recovery in supply, we’re not going to repeat the 2007 numbers in a hurry because of the changes in the way borrowers see the market," says Mustafa.

"Diversification has become a key priority for many large CEEMEA borrowers who have learned a lesson in the importance of not relying on a single source of liquidity."

Others are hopeful that there will be a rising supply of activity from Russia, with event-driven supply becoming increasingly prominent. "Although issuance has been driven mainly by refinancing, I think we will see more loan activity underpinned by new investment," says Damien Lamoril, head of EMEA loan syndication at Société Générale Corporate & Investment Banking in Paris. "Before the crisis we began to see borrowers such as Norilsk Nickel raising large facilities to finance acquisitions overseas, and I would not be surprised to see a revival in the market for M&A facilities of this kind."

At a more micro level, there are signs that M&A activity is already gathering momentum. "The recent 12-18 months have been difficult throughout CEE in terms of M&A transactions and leveraged buy-outs," says Vittorio Ogliengo, head of financing and advisory at UniCredit. "However, the market is picking up again and at the beginning of the year we successfully closed the biggest LBO deal ever done in the region, which was the buy-out of the brewing company, Starbev."

Others agree that activity is likely to pick up in the M&A market. "More M&A activity is starting to drive issuance in the loan market," says Mike Elliff, head of CEEMEA debt capital markets at RBS. "There is no reason why one of the Russian blue-chip names could not raise a substantial amount in the loan market to finance a major acquisition."

There would certainly be no shortage of liquidity to underpin issuance of this size in the Russian market, which is attracting a proliferation of international banks. "While the Russian banks have been focusing mainly on the rouble market, we have seen a number of US and German banks returning to the market, while Spanish and Chinese banks are also becoming increasingly active," says Lamoril.

Bankers say that this plentiful liquidity is helping to drive pricing down in the Russian market. So too is declining pricing in western Europe, which is making Russian pricing look increasingly compelling on a relative value basis. "When you start to have triple-B European credits pricing at between 90bp and 120bp, then TNK-BP at 275bp starts to look very attractive from a risk-return point of view," says Mustafa.

Equally important, however, is that renewed appetite for bank lending in Russia is opening up a broader range of opportunities for borrowers. "What is new in the Russian market is that six months ago borrowers could normally access international markets only through secured pre-export financings," says Lamoril. "Today we are seeing many more deals being done on an unsecured basis."

Elliff says that another prominent theme in the region’s loan market is the evolution of export credit agency financing. "ECA financing is becoming a more important funding tool for corporates in the region and we are seeing significant activity in the market," he says. "Although the ECA process can be time-consuming, once you have the ECA on board, execution and pricing risk is extremely low.

"Official ECA-supported funding is playing an increasingly important role in the region as typically it functions on a counter cyclical basis to the normal debt cycles. "As general availability to bank and capital market liquidity has constricted ECA finance is being used to support essential and strategically important capital expenditure.

"First class borrowers are turning to the ECA market for long term funding support on either a project finance or corporate basis. RBS remains at the forefront of advising on and arranging ECA supported finance for its key clients in the region, many of which are either first time users of this debt product or returning to the market after many years away.

"Clients with long term committed expenditure plans are putting in place ECA framework agreements which allow projects to be financed under pre-agreed finance terms. Borrowers like Tatneft, Vimpelcom and others are active in this market."

Bankers say that a number of other markets in the CEE region are also awash with liquidity. Turkey’s banks, for example, progressively pushed pricing down throughout 2009. Yapi set the bar at 250bp with its $408m facility in April, which was subsequently matched by Garanti, Vakifbank and Akbank, before Isbank and Yapi tapped the market at a new low of 225bp. That level was eclipsed towards the end of the year when Garanti’s $700m facility generated total demand from 35 banks of more than $1bn at a tight all-in yield of 200bp.

There was also an encouraging flurry of corporate issuance from Turkey in 2009, with borrowers such as Efes Breweries, the glass and chemicals company, Sisecam, and Koç Holdings all signing successful facilities. "We have seen some corporate deals from Turkey, but nothing similar to the jumbo facilities we saw from Oger Telecom that supported its acquisition of Turk Telecom a few years ago," says Mustafa.

Elsewhere in the region, improving sentiment towards CIS borrowers in the second half of last year was best illustrated in December when Ferrexpo became the first Ukrainian corporate borrower to access the syndicated loan market in 2009. Deutsche Bank was sole bookrunner on Ferrexpo’s three year pre-export facility which was priced at an attractive margin of 700bp.

Azerbaijan has also put itself on lenders’ maps recently, most notably with the recent launch of a $2.25bn five year loan arranged by RBS and Société Générale backed by crude oil sales from BP’s interest in the Azeri-Chirag-Gunashli field in Azerbaijan. "The key to this transaction is that there is no recourse to BP," says Lamoril at Société Générale.

"The risk is purely on oil production in Azerbaijan."
  • 28 Sep 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 31,385.40 114 7.52%
2 JPMorgan 29,232.19 105 7.00%
3 Goldman Sachs 27,645.83 55 6.62%
4 Barclays 26,090.00 67 6.25%
5 Deutsche Bank 23,883.15 74 5.72%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Mizuho 299.85 1 21.73%
1 ING 299.85 1 21.73%
1 Commerzbank Group 299.85 1 21.73%
1 BNP Paribas 299.85 1 21.73%
5 UBS 60.22 1 4.36%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 1,607.28 5 22.59%
2 Credit Suisse 1,301.65 4 18.30%
3 UBS 970.80 3 13.65%
4 BNP Paribas 522.35 4 7.34%
5 SG Corporate & Investment Banking 444.17 3 6.24%