LatAm Loans

Good news has been a rare commodity for the European leveraged finance market in the last year, but the £1.14bn loan supporting the buyout of Biffa, the UK waste management group, is set to close oversubscribed this week. This successful syndication has been welcomed as a sign that the market is finally returning to normal. But the optimists should be wary: investor demand is still fragile and weaker deals are likely to have a rough ride.

When Pernod Ricard set out in March to raise Eu12bn to finance its takeover of Vin & Sprit, the loan market gasped at the pricing it demanded. Now Pernod has bowed to the inevitable and coughed up. Paradoxically, this is encouraging for the loan market, showing that issuers are realising they need to satisfy lenders to get deals done.

The crumbling of the leveraged finance overhang is a rough process, verging on chaotic. Individual banks in syndicates are selling their positions without telling the others; opportunistic private equity funds are buying back their own debt below par. Most accept that some of this indiscipline is unavoidable, but loan bankers and the Loan Market Association are trying to decide where — and if — they can draw the line.

UBS revealed that its leveraged loan commitments totalled $8.6bn at the end of the first quarter, down from $11.4bn at the end of the year.

One of the most senior European loans bankers, Julian van Kan, has suggested that to cope with the widely publicised shortcomings of Libor, the loan market should go back to a system used in the 1990s. But setting loan rates privately or on an ad hoc basis would cloud the atmosphere, rather than helping to clear it. Banks and borrowers should face up to the fact that loan margins should reflect the lenders’ funding costs.

The draining of liquidity from the loan market is polarising banks according to their attitudes to borrowers. While the relationship factor has always been the big driver, yield is becoming much more important, especially for the investment banks that use credit default swaps to hedge their portfolios. They are reluctant to lend at margins below lenders’ CDS spreads, and are therefore simply saying no to deals.