Scandinavian market faces growing liquidity pressure

The Scandinavian loan market has had a quiet six months compared to the same period last year, with dealflow dropping sharply and even high profile deals struggling in a market where banks have been looking for better margins.

According to most bankers, the main reason for this drop in activity is that the number of borrowers tapping the market for refinancings has dramatically fallen. "Scandinavian lenders were extremely active last year and the year before," says David Roberts, assistant general manager and head of syndications at Den Danske Bank in London.
"The majority of key borrowers entered 1998 already locked into five or seven year financings at sub-20bp margins. And with the rises in margins seen in the UK, western Europe and the emerging markets, most Scandinavian borrowers have assumed that they are not going to get cheaper financings this year."
Incentive was one borrower to come to market in the first six months looking for cheap funds. The blue chip Swedish holding company wanted $1bn over seven years and appointed Deutsche Bank to arrange the deal. Deutsche priced the deal at 13.75bp for the first five years and 15bp for years six and seven.
Although the deal was a refinancing of an existing facility arranged by Deutsche and Enskilda Debt Capital markets in 1996, many observers saw the pricing as too tight. As a result the deal took longer to close than expected - although it was ultimately successful - and sent a worrying signal to the rest of the market.
"The reception that Incentive got frightened many people," says the head of syndication at a US bank in London. "Here was a great company struggling to get enough banks. It was a definite sign that banks wanted pricing to go up."
But pricing has not risen dramatically. Instead most single-A type borrowers have found that their loan facilities are now carrying margins of between 17.5bp and 22.5bp.
The DM450m seven year revolving credit for Rauma, arranged by Deutsche Bank, Merita and Enskilda Debt Capital Markets, is a case in point. The transaction carried a margin of 20bp over the first five years and 22.5bp for years six and seven. Appetite was strong in syndication and the loan was oversubscribed.
Opinions differ as to why margins have not increased further. Some believe that the number of banks supporting the region is still high - despite certain US and Canadian banks moving out of the market because of the low pricing - and that competition for Nordic mandates has remained strong.
"Although there has been some refocusing, there is still a large number of banks covering Scandinavia and limited dealflow has meant that borrowers have had the luxury of a liquid market," says Den Danske's Roberts.
"These banks are still committed to relationship lending. And while they are also committed to achieving higher return on equiy, they still view their relationship clients as very important to them."
Others believe that Scandinavia is running about three months behind the UK in terms of pricing, and that the next six months will see margins for Scandinavian borrowers edge up.
"Scandinavia has always been cheaper," says one banker. "But the number of banks which can continue to run their loans business offering 15bp margins is decreasing.
"More and more banks are moving away from the region. Before too long, liquidity will become an issue like the rest of Europe." EW