Restructuring, LBO financing keep western European market buoyant

  • 01 Jul 1998
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Appetite for western European credits has been strong over the past six months. Unlike the UK, margins have remained at similar levels to those in 1997 - underlining the strength of traditional bank/corporate relationships in continental Europe.
The recent wave of corporate restructuring, M&A and LBO activity is also keeping the market buoyant. But participants believe the western European market will start to go the way of its UK counterpart over the next six months, as more and more banks look to increase their returns and prepare for the arrival of the euro. Toby Fildes reports.

The western European syndicated loan sector has had an impressive run over the last six months. Volumes are up on the same period last year and market players are predicting an even busier second half.
The £780m four year term loan for Artémis to finance the acquisition of Christie's International plc - which is being arranged by Crédit Agricole Indosuez, Crédit Lyonnais and ING Barings - will be syndicated over the next two months and other similarly large financings are planned for September.
But, as in 1997, much of the volume so far this year is from plain vanilla financings - the five or seven year term loans or revolving credits for top tier borrowers.
More surprisingly, perhaps, the margins have remained the same. Top tier continental borrowers have still been able to achieve 15bp or 17.5bp over Libor for five or seven year deals throughout the first six months of the year.
It is an anomaly. UK and eastern European borrowers of plain vanilla financings have experienced increases in pricing this year and many observers predicted at the beginning of the year that western European borrowers would also have to accept higher margins.
But it has not happened. According to Rheinhold Berger, head of loan distribution at Deutsche Bank in Frankfurt, the reason why borrowers have escaped an upward surge in margins - so far, at least - is because there are still high levels of liquidity available to them.
"Some of the borrowers have been tapping the loan market for the last 10 years," he says. "They have extremely strong relationships with their close banks. These strong relationships can be worth 2.5bp or 5bp in margins as banks are anxious to keep hold of the business.
"What is also important is that the borrowers have strong relationships with the participants. Therefore the arrangers can agree to provide a cheap and competitive loan in the knowledge that they can count on a strong syndication."
The DM1.25bn (increased from DM1bn) seven year revolving credit for Merck KGaA, the German healthcare and pharmaceuticals company, is a case in point. The loan, arranged by Deutsche and Dresdner, carries a margin of 17.5bp over Libor throughout. Syndication was a targeted affair with 25 banks joining, taking between either DM30m or DM52m each. Of those 25 banks, 14 were German.
But many believe that the second half of 1998 will see, at long last, an increase in pricing for western European borrowers. While the top arrangers say they are still willing to provide rock bottom priced deals for their favoured corporates, most observers believe there will be fewer of these types of transactions in the second half of the year.
The chief reason for this is that most of top tier continental borrowers have already tapped the market for cheap pricing - Merck again being a prime example.
"Most single-A or double-A type credits have taken advantage of the cheap funds available over the past two years," says Ulrich Mattonet, head of syndications at Bayerische Landesbank in Munich. "They are locked in for five or seven years and are very happy to be so."
Instead of the top tier credits coming to market, many bankers are expecting a raft of second tier borrowers to approach the market over the next six or 12 months - some of which have not tapped the loan market before. And this may help to push pricing up. "They have seen how the top tier credits such as Merck have been able to win sub-20bp pricing and they will be expecting similarly cheap facilities," says one Paris banker.
"But I doubt they will be able to achieve their desired pricing levels. It is of course up to the individual lenders. But some of them will be new borrowers. Lenders will not know much about them and will be unwilling to provide cheap debt."
But some bankers believe pricing will go up as a result of a change in attitude by western European syndicated loan arrangers and providers. Indeed an increasing number of market players believe the consolidated drive for better returns on equity by US and UK banks has also been adopted by the continental banks.
"More and more European banks are re-evaluating their loans business," says an Italian banker. "It is a relatively new phenomenon - it was not happening at the beginning of the year and has only been noticeable over the past four or five weeks.
"And it is not only the big players such as ABN Amro, Banque Paribas, BNP, CFSB, Deutsche, Dresdner, ING and WestLB. It is also the participants such as the German Landesbanks and the regional Italian banks.
"They are starting to demand higher pricing in certain deals. As a result, I bet we will see certain deals sub-20bp struggle in syndication."
One way the banks can achieve higher earnings - without having to push for it - is by supporting acquisition-related transactions. And there have been plenty of opportunities for them to do so this year.
Over the last six months, there has been a vast increase in the number of corporates embarking on restructuring programmes, acquiring or divesting businesses - leading to a sharp pick in equity placement activity.
Driving the M&A boom is a mass refocusing by corporates on their core businesses and the looming deadline for the start of the euro forcing company managements to get their houses in order.
"Corporates, and banks for that matter, want to be in the best possible shape for the euro and everything that comes with it," says Dietmar Stuhrmann, senior manager and head of syndications at Dresdner Kleinwort Benson in Luxembourg.
"There will be no hiding places for continental European companies when the barriers come down. They will be have to be as strong as possible to defend their market share, and themselves against takeovers. So the strong trend of corporate restructuring and acquisition and bank mergers will continue."
Don McCree, head of global syndications at Chase, agrees. "Times are changing for companies," he says. "They increasingly need to compete on a European and possibly global scale. They may be big in their own country but there are comparatively small on European scale.
"Therefore companies are focusing on core businesses. The regional differences are reducing because of the knocking down of boundaries and there will be no protection against takeovers and mergers."
McCree also believes that because of the euro, corporates are changing their priorities. "They are also focusing on return on capital, shareholder value and global competitiveness. CEOs and boards are thinking about mergers that were inconceivable one or two years ago. The Daimler-Chrysler merger is an excellent example. In most CEOs' minds there is very much an element of can-do."
McCree might also have pointed to the Fortis acquisition of Generale Bank, which is just one example of the wave of restructuring that is sweeping Europe's financial services sector.
JP Morgan, Banque Nationale de Paris, ASLK/CGER (facility agent), Bank Brussels Lambert, Crédit Communal de Belgique, Deutsche Bank, Kredietbank and Rabobank are arranging a Bfr135bn ($4bn) revolving credit to support the purchase.
The loan has a 364 day maturity and will act as a bridge financing that will be taken out in the capital markets, probably in October. The facility carries a margin of 30bp over Libor, which increases to 35bp on January 1 1999.
Within the western European acquisition financing sector are an increasing number of LBOs. And the region has played host to some of the most successful transactions so far executed.
One such transaction is the LBO of SEAT, the owner of Italy's Yellow Pages. Some Lit2,606bn of senior debt facilities was arranged by ABN Amro, Banca Commerciale Italiana, Banque Paribas and Citibank.
The loan was split into four tranches - a Lit1,410bn seven year term loan priced at 200bp over Libor; a Lit260bn eight year term loan priced at 275bp; a Lit260bn 8.75 year term loan priced at 312.5bp; and a seven year Lit276bn working capital facility priced at 200bp.
When the deal was initially launched, some observers thought the deal would struggle to attract enough banks into the syndicate.
"They had good reason to doubt the success of the transaction. LBO financing was - and still is - a developing sector in western Europe and one in which there is a limited number of banks with the requisite expertise and appetite.
"You could bring an excellent deal to the market but the participants may not have the experience and resources to do the deal," says one Amsterdam banker. "Bankers are not used to the structures or the risk profiles."
But the deal confounded the doubters. Syndication was a blow-out success, largely as a result of enthusiastic support from Italian banks. But the arrangers shrewdly pitched the deal to potential lenders.
"Banks saw SEAT as an extremely strong corporate risk with a dominant position in the Italian market," says Domenico Lellis, head of syndications at Paribas.
"It has a very good track record and is a household brand name. Banks evaluated the risks accordingly. So they probably looked at the deal as a corporate financing paying margins typical of that of a LBO financing The presence of Telecom Italia in Seat's equity also encouraged bankers to make this reasoning."
Another deal to prove the doubters wrong was the DM281m LBO of Sirona Dental systems from Siemens. The debt facilities were arranged by Warburg Dillon Read and consisted of a DM181m seven year term loan priced at 175bp, a DM49m eight year term loan priced at 212.5bp and a DM50m seven year revolving credit at 175bp.
The facility was oversubscribed in syndication but was not increased. According to the arranger, success was down to the strength of the borrower.
"The company has a 12% share of global dental equipment," says an official at the bank. "It is not often when something so global is on the market. When you compare Sirona to a local firm dealing with national, rather than international, buyers this is an extremely strong deal."
Opinions differ as to why European LBOs have been more successful than those in the UK in recent months. Given that the UK has traditionally been a much more active buy-out market than continental Europe over the years, it would be logical to presume that it also has more banks with the necessary experience.
However, some bankers point to the fact the deals coming out of western Europe are generally of better quality than the UK. "The Sirona deal is a case in point," says a London banker.
"Sirona is a fine company with international interests. It is also in a sector which is immune against economic downturns. The deals coming out of the UK are often in difficult sectors and are overpriced. Also purchase prices are not quite so high in continental Europe and there is a local investor base that is expanding."
The growth of the European LBO market was recently underlined with the announcement of the largest buy-out to be financed in the Euroloan market - the acquisition of Kappa Packaging NV from KNP BT NV by venture capital groups CVC and Cinven.
The acquisition will be financed by Dfl 1.7bn of senior debt facilities and a Dfl 1.2bn mezzanine tranche arranged by Barclays.
The senior debt tranche - which Bankers Trust, Deutsche, Goldman Sachs, ING Barings, Banque Paribas and Salomon Smith Barney have joined as co-underwriters - is being syndicated down to a lower group of sub-underwriters and ordinary participants.
The quality of the co-underwriters bodes well for the remaining selldown and bankers have reacted favourably to the deal's terms. Senior debt consists of a Dfl 900m seven year term loan (tranche 'A') at 187.5bp over Libor, a Dfl 300m eight year term loan (tranche 'B') at 237.5bp, a Dfl300m nine year term loan (tranche 'C') at 287.5bp and a Dfl200m seven year revolver at 187.5bp.
As the largest LBO financing in western Europe, the deal offers lenders a degree of prestige. And the deal has attracted praise for its structuring and the fact that it offers exposure to a popular sector.
The deal will also feature the biggest high yield bond in Europe - Barclays intends to take out the Dfl 1.2bn mezzanine tranche with a high yield bond denominated in either Deutschmarks or euros in October.
Although the growing European corporate bond market will increasingly start to provide greater competition for the syndicated loan sector, the loan product is likely to remain the first port of call for most European companies for the foreseeable future.
And the high level of corporate restructuring activity as Europe heads for a single currency is unlikely to slow down, providing bankers with a rich vein of corporate lending opportunities in the months ahead.
By contrast, sovereign activity in the loan market has been extremely limited so far this year as most government treasuries have turned to the bond market for cheaper financing.
But Greece has had a busy year in the syndicated loan market. The Hellenic Republic has recently raised a DM220m term loan through Bank Austria and lead arrangers Bayerische Vereinsbank and DG Bank. The facility carries a margin of 37.5bp over Libor with 17.5bp for co-arrangers taking DM30m.
The republic is also raising another medium sized term loan - about the same size as the Bank Austria loan, possibly through Banque Nationale de Paris.
However, these two deals could be eclipsed as the republic is threatening to come to market with a jumbo revolving credit facility - as much as $2bn - in September or October.
If it decides to do so, bankers believe the financing will win strong support. The rarity of the type of deal and the strong bank relationships that the republic has built over the past 10 years should mean that the facility is comfortably oversubscribed.

Top 20 arrangers of European acquisition financings January to June 1998
Pos.BankNatUS$ mNo.%Share
2ABN-AMRO Bank NVNEE5,145.7788.65
3Goldman SachsUSA5,020.6788.44
4HSBC GroupUKE4,805.48128.07
6Credit Suisse First BostonDDY3,913.7896.58
7Deutsche BankGEE3,835.4996.44
8JP MorganUSA3,778.1286.35
9Warburg Dillon ReadSZE2,494.1354.19
10Banque Nationale de ParisFRE1,974.4343.32
11Merrill LynchUSA1,817.9643.05
12Société GénéraleFRE1,688.9172.84
13Lloyds Bank Capital MarketsUKE1,531.8662.57
14Royal Bank of ScotlandUKE1,464.6392.46
15Chase Manhattan BankUSA1,420.5172.39
16Greenwich NatWestUKE1,233.1372.07
17ING BaringNEE1,213.2832.04
18Crédit AgricoleFRE900.7531.51
19Crédit LyonnaisFRE871.5831.46
20Banque ParibasFRE785.8331.32
Source: Capital Data Loanware

Top 20 arrangers of Western European Loans January to June 1998
Pos.BankNatUS$ mNo.%Share
3HSBC GroupUKE8,569.21246.74
4Chase Manhattan BankUSA8,418.84296.63
5Deutsche BankGEE7,585.00275.97
6JP MorganUSA5,957.61194.69
7ABN AmroNEE5,602.31284.41
8Warburg Dillon ReadSZE4,989.31123.93
9Goldman SachsUSA4,859.82103.82
10Credit Suisse First BostonDDY4,544.43143.58
11Banque Nationale de ParisFRE4,295.75123.38
13Den Danske BankDEE3,345.30172.63
14Greenwich NatWestUKE3,269.22202.57
16Société GénéraleFRE2,540.55142.00
17Royal Bank of ScotlandUKE2,447.53171.93
18ING BaringNEE2,408.44101.90
20Merrill LynchUSA1,824.1951.44
Source: Capital Data Loanware

  • 01 Jul 1998

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 417,761.51 1606 9.02%
2 JPMorgan 380,362.89 1737 8.21%
3 Bank of America Merrill Lynch 364,928.71 1322 7.88%
4 Goldman Sachs 269,252.76 932 5.82%
5 Barclays 267,252.43 1082 5.77%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 45,449.36 196 6.56%
2 BNP Paribas 38,734.80 217 5.59%
3 Deutsche Bank 37,615.10 139 5.43%
4 JPMorgan 34,724.19 118 5.01%
5 Bank of America Merrill Lynch 33,835.53 112 4.88%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 22,475.46 105 8.65%
2 Morgan Stanley 19,057.00 101 7.34%
3 Citi 17,812.08 111 6.86%
4 UBS 17,693.89 71 6.81%
5 Goldman Sachs 17,333.10 99 6.67%