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June 2010 | ifr Top 250 Borrowers | 35 SYNDICATED LOANS Syndicated lending: European borrowers

yearly lows of just under 70bp. BNP Paribas, meanwhile, was trading at about 145bp up from its 12-month low of just over 45bp.

The spike in lenders cost of funds and higher spreads across the bond market as a whole mean the loan market is once again priced well inside of the traded capital markets. Although, the bank product has traditionally priced inside bonds, the capital market has generally been the cheaper option for corporates over the past 18-months. This abundance of competitive- ly priced liquidity has resulted in a flood of bond issuance that has allowed European corporates to balance their debt funding needs between the two markets and retire vast swathes of bank debt.

“While the bond market is primarily looking at value, the loan market focuses on relationship. This different perspective means that there is a disconnect between how each market assesses risk.”

Slower to react

Unlike the bond market, where pricing can adjust either way rapidly, loan pricing tends to move in a steady evolutionary pattern. “While the bond market is primarily looking at value, the loan market focuses on relationship. This different perspective means that there is a disconnect between how each market assesses risk,” said RBS’s Malone. Given the ructions in the wider economy and capital markets, few believe the loan market can continue unaffected indefinitely. Bankers admit while their focus on corporate relationships mean they can absorb their higher cost of funds in the short term, in the end it will inevitably translate into higher pricing for clients.

So far there is only limited evidence that higher cost of funds is feeding through into banks’ Raroc models, though there is increasing talk that banks from the EU’s troubled periphery are retrenching. While

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higher hurdles from peripheral lenders will only have minimal impact on the pan- European market, increased Raroc hurdles from core-Europe banks would certainly result in pricing taking a step up, rather than merely consolidating at current levels.

In an intensely competitive market few expect any significant shift in pricing soon. “Pricing is going to stay in a narrow band in the near term with direction returning once there is clarity on banks refinancing prospects,” said Commerzbank Boehm.

Even if lenders wait for clear movement on their funding costs before altering yield requirements, a weakening bond market still poses problems for the bank product: in the post crisis European debt market, new money loans typically rely on the bond market for a partial take out. Typical here is SAP, the German

software maker. It has put in place a €2.75bn bridge facility to support its takeover of Sybase. While the facility offers lenders exposure to a new money drawn credit from a brand-name European corporate, the pricing looks to be well through what SAP would have to pay in the bond market. Margins kick off at 65bp and have step ups to encourage a swift takeout into the bond market. However, these step ups still only equate to an average margin of 76.87bp – well below where SAP would have to price to sell a bond. These margins, however, looked on market just in April when the group sold a €1bn dual tranche bond.

In offering a facility that is priced through the traded capital market, the facility bucks the trend of debt-backed acquisition financing seen in Europe and the US over the past year. During this time the market has relied on the bond market to de-risk the major part of loan underwrit- ings, with a syndication limited to any rump not taken out through the longer term capital market. To ensure they would not be arbitraged as cheap sources of funding, lenders have deliberately priced M&A bridges at a premium. But the speed at which the bond market has repriced demonstrates that banks still need to show some caution when structuring bridges. “At this moment in time the loan market is in a pretty good health,” said RBS’s Malone. “Banks have liquidity and are keen to do business, however when underwriting new loans protection is needed as well as and clarity on how quickly it is possible to get to market.” This is not to say that difficult bond markets mean big ticket new money deals are not possible. Bankers said the maturity of the European debt capital markets mean both bonds and loans work in tandem, not as competitive silos. In a volatile market, borrowers will have to get used to taking advantage of credit market windows when they open, they said.

“The emphasis has been on refinancing and locking in long term liquidity so far this year,” said Commerzbank’s Boehm, “As borrowers look to take advantage of M&A opportunities we will see market growth as well as more drawn debt.”

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