Pricing during the second quarter of this year reached an eight year low with Nestlé's refinancing, but in some parts of Europe there is hope for arrangers as banks are beginning to push back and reduce exposure. Tanya Angerer and Nick Briggs report.
France continued to dominate the loans market in western Europe in the second quarter this year, commanding 23.5% of total funds raised. Volumes in the first half of this year more than doubled in comparison to the same period in 2004.
But bankers are disgruntled despite these high volumes, as the French market is causing prices throughout Europe to plummet.
Sparking concern was Carrefour's Eu1.5bn facility launched in mid-June with a margin of just 11.5bp for the first five years, stepping up to 13bp in the last two.
"Certainly the French market in terms of aggressiveness in pricing and documentation is the number one in Europe," says Matthias Gaab, co-head of European loan capital markets at Deutsche Bank in Frankfurt. "The whole pricing cycle across Europe is being pushed by the developments in France."
The Carrefour deal refinances the company's seven year loan that paid a margin of 17bp and was signed only last November.
"In a sense, the volume in Europe is artificial," says Gaab. "They all refinance previous deals and there's really no new moneycoming in."
Other refinancing facilities include France Telecom's Eu8bn loan and Vivendi's Eu2bn deal. The latter pays an out of the box margin of Euribor plus 28.3bp, compared to the 60bp it paid on the Eu2.5bn 2004 deal it replaces.
In a market overshadowed by refinancings, the lucrative M&A driven deal for drinks company Pernod Ricard provided some much needed excitement.
The Eu9bn loan, arranged in support of Pernod's Eu10.7bn buy-out of fellow drinks group Allied Domecq, paid a margin of Libor plus 75bp.
"The deal was well executed and superbly priced for the market," says Julian Van Kan, head of loans syndications and trading at BNP Paribas. "But banks have been giving in, as we saw with the Carrefour deal. In France, corporates have been dictating the market, as have borrowers in the rest of Europe — in the UK and Scandinavia, for example — whether it is on price, documentation, tenor or structure."
However, that trend could be set to change. Although France has experienced a rise in volume, banks appear to be reaching the end of their tethers and some have started to decline deals. For example, the deal for Carrefour, the second biggest retailer in the world, was oversubscribed by around 80%. Although that is a strong result, the deal was less popular than last year's, which was more than 100%, oversubscribed.
"There is still a lot of liquidity in the market but it has definitely decreased from last year," says Carol Shymanski, head of global loan syndications at Calyon in London.
The UK recorded the second highest loan volumes last quarter, taking around a fifth of the market, as well as posting the greatest number of deals — 33 more than France with 92.
However, a clear trend in the UK market is the almost total demise of syndicated lending, as self-arranged deals become more common. UK borrowers have always had an affinity for club deals, but recent facilities suggest that they may soon be the norm.
"While there has been an increasing trend in the UK towards self-arranged deals, that is not quite the case in the rest of Europe," says Lois Salter, head of European loan sales at Royal Bank of Scotland in London. "As we get more acquisition deals coming through, like Pernod and Metrovacesa, it will probably be less common. Relationships can only access so much of the market, then depth in distribution becomes key."
Two loans that highlighted the trend for club deals were those for Tesco and Vodafone. Supermarket giant Tesco approached 15 relationship banks with its £1.5bn five year revolver, and Vodafone launched such a secretive loan on a bilateral basis that participating banks do not even know the full amount.
"There haven't been any real crackingly good deals in the UK investment grade market this year," says Ian Fitzgerald, head of distribution and syndication at Lloyds TSB in London. "The lack of M&A, and the fact that the majority of transactions are refinancing for general corporate purposes and are of a non-time-critical nature, means that most are club-style deals."
The loan for Group 4 Securicor at the end of the second quarter was one example of a borrower having to revert to club syndication after receiving severe criticism from relationship lenders.
Initially, Bank of America won the role of sole mandated lead arranger for the security company's £1bn loan, but relationship lenders felt ignored by the lack of titles on offer and concerns were also expressed about the pricing, especially for an unrated name.
Banks refused to join on the terms offered and Group 4 Securicor had to abandon its initial sole mandate strategy.
"Group 4 Securicor's problems signify the level of competition that there is in the market," says Carol Shymanski, head of global loan syndications at Calyon. "Banks are not winning ancillary business and are resisting."
However, several post-initial public offering loans did boost banks' profits in the second quarter, such as the deals for satellite company Inmarsat and baker RHM.
RHM launched a £900m facility, which replaces bank debt and refinances a securitisation, while satellite company Inmarsat's $550m post-IPO loan also injected some crucial profits for banks suffering from costly refinancings.
"Stresses and strains are beginning to appear in the market," says Fitzgerald. "A couple of deals haven't worked and that's a good sign. Much depends on the sector, but the signs are that banks are beginning to be pushed too far."
Compared to its peers, Germany showed the slowest rate of growth in the first half of this year, compared to the same period in 2004. Volumes were up 17% and the number of transactions was up by just one to 63.
The deals that dominated the German market were mostly associated with the automotive sector. Despite the recent downgrade of Ford and General Motors, loans for Volkswagen, steel maker ThyssenKrupp and tyre manufacturer Continental sailed through syndication.
"The developments prompted by GM and Ford caused significant volatility in the bond market," says Gaab at Deutsche Bank. "But this nervousness hasn't spilt over to the loans market at all."
Volkswagen's colossal Eu12.5bn refinancing facility, which pays a margin of 20bp, was oversubscribed by Eu4.5bn amid the downgrade debacle.
ThyssenKrupp, which has recently been focusing on the automotive sector, completed syndication of its Eu2.5bn loan in mid-July. It pays a margin of Euribor plus 27.5bp, thereafter ratcheting according to a ratings grid. Confirming the loan market's confidence in the sector, the facility was increased by Eu500m following an oversubscription,
Despite the lack of repercussions in the loan market from the auto downgrades, banks have become more sensitive about tumbling margins and some are beginning to retreat.
"We are seeing banks reduce their exposure," says Bill Fish, head of global loan product at Dresdner Kleinwort Wasserstein in London. "They are leaving relationships if they are not profitable and taking smaller tickets."
One issue looming in loan bankers' minds this quarter has been the effect of bank consolidations — including the mergers of Unicredito and HVB, and the battle for Banca Antonveneta — on the loans market.
What this signals for the European loans market has yet to be concluded, with bankers disagreeing over the possible effects.
Some say that cross-border mergers might lead to the decline of the borrowers' market. Others refute this and declare the mergers irrelevant amid the glut of liquidity.
The Italian loan market grew by $20bn in the second quarter compared to the first, but much of that growth can be attributed to the Eu9.18bn Wind leveraged buy-out.
The biggest investment grade loan in the second quarter was for the quasi-governmental agency Infrastrutture, owned by state bank Cassa Depositi e Prestiti. The Eu2bn maiden loan was launched in early May and pays a margin of 2bp.
"The Italian investment grade syndicated loan market is extremely volatile," says one Italian loans banker. "There are very few big corporate borrowers and when they are not in the market activity just drops."
One such borrower is Telecom Italia, which had just launched its Eu9bn facility when Loan Market Review (LMR) went to press.
The telecom group is seeking to refinance tranche 'B' and amend tranche 'C' of the Eu12bn facility it signed in January.
The once sleepy Spanish loan market last quarter again recorded phenomenal growth, bringing funds raised during the first half of the year to $52bn, three times the figure for the same period last year.
No less than Eu7.57bn of that was for Europe's second largest property firm Metrovacesa to fund the acquisition of 70% of Gecina — France's biggest property company.
The Eu6bn loan for Telefónica — which partially funds the company's purchase of 51% of the Czech Republic's Cesky Telecom — also boosted figures.
Though volumes are on the rise, smaller domestic banks are smarting. "The cajas in Spain have been suffering since the tumble in prices and the onslaught of competition from international banks," says Massimo Carocci, head of the credit division at Caja Madrid in Madrid. "These banks are beginning to look more at the leveraged side, rather than investment grade, because they can take smaller tickets with more interesting prices."
Russia and the CIS
A busy second quarter for Russian bank syndications was dominated by two record breaking deals — on April 8 Vneshtorgbank signed the largest loan for a Russian bank with a $450m three year deal, only for Gazprombank to top that with a $650m three year loan a week later.
Both facilities were increased from $300m following oversubscriptions, Gazprombank paying a margin of 150bp over Libor and Vneshtorgbank 120bp over.
Parex sets Latvian benchmark
Parex banka has managed to increase last year's Eu117m loan to Eu188.5m and attract 34 lenders – what does this tell us about appetite for Parex debt, and the Latvian banking sector as a whole?
We are sure that this transaction will serve to increase interest in the Baltic states from international investors, as well as contribute to the further development of the banking sector in Latvia.
How did you choose your mandated lead arrangers and what attributes or qualifications do you look for in members of your syndicates?
Standard Bank has assisted us in five deals, while ING has arranged three of our syndicated loans and has become our partner in many lines of business.
Mizuho has also done fantastic work in targeting financial institutions in the Asian market earlier this year.
These banks are not only active as arrangers of syndicated loans, but are also well-established in the financial sectors of their regions, so their experience and reputation is likely to attract interest from a wide geographical area.
Parex banka has been a regular borrower in the syndicated loan market over the last five years or so – how has your experience of raising funds changed during that time?
Syndicated borrowing has become a steady source of funding, with terms and pricing becoming ever more advantageous for the bank.
What challenges did the bank face when structuring and syndicating the Eu69.5m loan — signed in February — that targeted Asian lenders?
Being close to leading Japanese financial institutions has made it easier to maintain relationships and as the largest bank in Latvia, Parex has a role as an economic ambassador.
Having raised almost Eu200m of one year debt, does Parex have any plans to try a loan with a longer maturity?
A $300m three year deal for Vnesheconombank, paying a margin of just 90bp over Libor, had also raised over $600m as Loan Market Review (LMR) went to press.
"Lending to financial institutions has become less profitable and less interesting compared with last year, but larger and larger deals are still getting done, which does go some way to compensate for this," says Guy Brooks, global head of trade distribution at Deutsche Bank in London. "Lenders are also attempting to get out of the blue-chip bracket and diversify down the oil and gas company chain, but the market has not really developed yet, mainly due to the disparity in size and transparency."
Aluminium companies Rusal and Sual and oil companies TNK-BP and Rosneft had deals totalling around $3.5bn in syndication as LMR went to press, while Gazprom raised $972m of unsecured debt through ABN Amro in May, including $272m of five year money.
In Kazakhstan, meanwhile, Bank TuranAlem (BTA) became the country's first bank to agree a three year loan. Signed in June through bookrunner SMBC, the facility was increased from $50m to $110m despite a margin of just 130bp over Libor.
BTA has since begun talks with lenders about a $300m one year deal that it hopes will raise $500m. Halyk Savings Bank is looking to raise a similar amount later this year.
Syndicated lending opportunities in eastern Europe were fitful during the second quarter.
Mol mandated BNP Paribas, Citigroup and HSBC to arrange a Eu450m deal that was increased to Eu700m — the oil and gas company matched the structure of many investment grade western European deals by attaching a pair of one year extension options to the facility's five year tenor.
But others are opting out of traditional syndications to save time and money — Telekomunikacja Polska (TPSA) in April chose 21 banks to put together a dual-currency club deal equivalent to Eu1.1bn.
Polish Oil and Gas Company (PGNiG) in mid-July chose just six lenders for its Eu900m club facility, upsetting some of the banks that in September 2003 helped at short notice to arrange a liquidity backstop for its Eu700m 2006 Eurobond.
"There are too few corporate borrowers in central and eastern Europe to go around and an absence of middle market corporate syndications to absorb the available liquidity," says Sanjay Kohli, a director of central and eastern Europe origination and structuring in Mizuho's international and trade finance department.
Even Nova Ljubljanska banka, a fixture in the loan market since 1995, eschewed a syndication this year by signing 13 lenders into a Eu540m five year club deal.
"Geographically, syndicated financing is running out of stones to turn over in eastern Europe," says David Testa, an executive director of debt origination at WestLB in London. "Banks have long been active in Russia, Kazakhstan and Ukraine and are running out of new countries to explore. Places such as Poland and Hungary are already over-banked and the new ground being covered is in going down the credit curve."
Since the start of April, three South African borrowers have returned to the syndications market to secure finer pricing and bankers agree that the market increasingly resembles that of investment grade Europe.
Paper company Sappi in April refinanced the Eu562.5m tranche of the Eu900m loan it signed in July 2001 — its new Eu600m five year facility pays a margin of 40bp over Euribor, a saving of 15bp.
Calyon and Dresdner Kleinwort Wasserstein in May signed a Eu400m loan for Sasol that refinanced the Eu375m three year deal it signed in 2003 — in the process the chemicals company was able to cut its three year funding costs from 60bp over Euribor to 32.5bp.
And South African Reserve Bank (Sarb) in July signed a $1.5bn three and five year loan through a group of 24 mandated lead arrangers. The $1bn three year tranche paid a margin of 22.5bp over Libor, well under the 47.5bp over Libor the bank paid on its $1bn three year in July last year.
The Middle East
First half loan volumes in the Middle East have already streaked past the $20bn mark, an increase of nearly 135% on the same period in 2004, largely driven by project financings and refinancings.
Project finance bankers have been busy all year, and since the beginning of April the ink has dried on deals for Q-Chem II, Q-Power, Qasco and Qatofin in Qatar alone.
Once the mandate for the Ras Gas II and III expansion project is awarded, discussions for Qatar Gas III financing will also get underway.
An $880m 12 year financing for Egyptian LNG's second liquefied natural gas train at Idku was completed in July, as was a $3.45bn four year bridge loan for Dolphin Energy.
"We are seeing plenty of dealflow in project finance, although the best credits are beginning to test return criteria in terms of overall pricing," says John McWall, head of loan syndications at Arab Banking Corporation in Bahrain. "It is the activity in acquisition related deals, such as for Dubai Ports Authority and Mobile Telecommunications Co, that is particularly interesting, with companies looking to expand within the Gulf Cooperation Council and beyond regional borders."
However, other areas of the market have not yet hit previous highs. "So far this year we have not seen the same financial institution volumes as in 2003 or 2004, simply because a lot of banks have already come to the market and taken care of their funding," says Raouf Jundi, head of origination for Middle East and Africa loan syndications at Bank of Tokyo-Mitsubishi.