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34 | June 2010 | ifr Top 250 Borrowers SYNDICATED LOANS Coping under pressure


In the face of a bond and equity wobbles, the loan market has stayed steady. This reflects lenders’ focus on relationship rather than yield only. But with pricing stabilising after more than six months of falls, bankers warn that loans cannot remain invulnerable to longer term capital market ructions. David Cox reports.


“The loan market is in fundamentally better health than it has been for some time. Underwriting is back on the agenda and retail appetite is at its strongest for the last 18 to 24 months.”


E


urope’s sovereign debt crisis may have closed the bond and equity markets to many of the continent’s borrowers, but the loan market remains – for the moment – in good health. But this willingness to lend has not translated into a busy market. Demand for new credit has been weak, with the first half of 2010 on course to be the quietest since 2002 according to data from Thomson Financial. Disappointing volumes should not detract from what has been a remarkable turnaround for the loan market. During the banking crisis that followed the collapse of Lehman Brothers in 2008, the loan market, which was reputedly the most stable and reliable of all markets, closed. That led some to question the market’s very viability. Those fears turned out to be overblown: after a year of recovery of 2009 the market is now fully functional.


“The loan market is in fundamentally better health than it has been for some time. Underwriting is back on the agenda for strong credits and to date retail appetite is at its strongest for the last 18 to 24 months,” said Roland Boehm, global head of debt capital markets loans at Commerzbank.


Falling back down to earth As the market has recovered, so the elevated pricing that banks demanded throughout last year has also fallen. And with demand outstripping supply, the ferocity of the year’s pricing fall has surprised many. As the market convalesced after the collapse of Lehman’s, margins for A– credits such as Scottish and Southern stabilised at about 150bp in the first part of 2009. Since then margins have halved: Linde, a similarly rated German industrial gasses group, signed a €2.25bn refinancing with a 65bp margin in May. Linde’s facility effectively repriced its rating category, which had been nailed at 75bp since the


start of the year following successful benchmark refinancings from Philips and Henkel.


Pricing has fallen so rapidly because, in the face of continuing corporate deleverag- ing, where cancellations outweigh new funding requests, liquidity for new loans is deep. According to bankers syndication declines - let alone failures - are now rare. Enel, for example, increased its €8bn loan to €10m after raising €13bn in senior syndication alone.


“There’s not been a lot of activity this year and banks are generally underlent,” said Sean Malone, head of corporate loan origination at RBS. “This in part explains why lenders are reacting so positively to funding requests at the moment. If activity did step up markedly, banks could once again become over stretched.” But even if oversubcriptions remain commonplace, difficulties in the Eurozone and wider capital market disruption mean most bankers expect pricing to stabilise at current levels in the near term. Linde’s loan is therefore likely to remain the benchmark for A- rated borrowers. Aa3 rated GDF Suez, which closed in June, serves as the benchmark for stronger credits. At the time of Linde’s loan signing, bankers noted that returns on loans had reached risk adjusted teturn on capital (Raroc) neutral levels for most European lenders. There were therefore hopes that pricing would stabilise at these levels, even if hopes were tempered by depressed market volumes.


The European sovereign debt crisis has had only a limited impact on the loan market, which remains open for business. However, there have been increasing fears in recent months that lenders’ rising costs of funds will impact their appetite to lend. Although an imperfect guide, rising CDS levels offer insight into rapidly rising financial spreads: CDS for Barclays, one of Europe’s largest lenders, was trading in early June at around 180bp, well up from


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