Loan market liquidity improving after bond, equity surge
LONDON (Reuters) - European companies' drive to refinance loans with bonds and equity issues is feeding cash and confidence back into the syndicated loan market and freeing up money for new lending, senior bankers said.
Strong capital markets issuance has reassured banks that bridge loans can be refinanced quickly and loan volume is poised to rebound when M&A activity picks up.
"A lively bond market should act as a catalyst to loan activity, as it promises quick take out, something that gives banks greater confidence," said a London-based banker.
Constraints on banks' capital pushed companies to diversify their funding in the bond market, which produced record volume of 175 billion euros (147.7 billion pounds), according to SG analysts, and equity issuance is climbing with $100-300 billion (61-182 billion pounds) forecast for 2009.
Although the drive to diversify appears to have been at the loan market's expense, increased interplay between the capital markets has restarted the recycling of cash that is allowing banks to contemplate underwriting again.
"I have no doubt for a large strong investment-grade company, banks would be happy to underwrite a new-money loan," a senior mergers and acquisition (M&A) loan specialist said.
Debt diversification has left a smaller loan market treading water in 2009 so far with subsistence refinancings and forward start agreements, which extend loans when they mature in return for increased pricing and fees.
Loan volume of $225 billion for the year to date, which includes $41.5 billion of forward starts, is down 35 percent on the same period of 2008.
Lending in May dropped to $23.6 billion from $60.66 billion in April, according to Thomson Reuters LPC data, but alternative loan instruments such as U.S. private placements and their German equivalent -- Schuldschein -- are booming as alternatives.
The drop in lending is also reflective of the lack of "new money" financing backing M&A activity, which previously supplied around 50 percent of loan volume.
But a series of oversubscriptions on recent loans shows that market liquidity is improving and the deals have been increased.
A 2 billion euro loan for Compagnie de Saint-Gobain (SGOB.PA) has just closed heavily oversubscribed, a 225 million pounds forward start for Anglian Water is likely to be increased to 300 million pounds, while a 500 million euro loan for Dutch animal feed company Nutreco NUTR.AS raised 655 million euros and was increased to 550 million euros in May.
"We are seeing the re-emergence of banks that had closed down internationally starting to lend again now that their balance sheet is in better shape. The signs so far are quite good," a head of loan distribution said.
Top arranging banks are getting ready to underwrite large bridge loans for top-rated companies to allow underlying acquisitions to close -- potentially breaking the deadlock around the availability of financing that has hampered M&A.
The first underwriting of the year appeared in April when banks underwrote 600 million euros of a 1.4 billion euro loan backing German fertiliser and salt producer K+S AG's SDFG.DE acquisition of Morton Salt of the US. The deal syndicated successfully and was increased to 1.55 billion euros.
Bankers report an upturn in M&A discussions in recent weeks as companies seek to exploit low valuations but these talks are not expected to bear fruit until after the summer and possibly Q4 if the underlying deals progress.
"M&A discussions have picked up in recent weeks but we will not see the deals this side of summer," the M&A banker said.
Large bridge loans are expected to be sold down quickly via bond or equity issues either before or after the underlying acquisitions close, which allows banks to re-use the funds. Few companies are expected to be able to match Roche (ROG.VX) and prefinance acquisitions in the bond market.
M&A bridge loans will include duration fees and pricing step-ups that take loan pricing higher than bond guidance levels to encourage a speedy refinancing.
German carmaker Porsche (PSHG_p.DE) found this out to its cost when the margin on its 10 billion euro loan soared to 400 basis points after it failed to get a rating in May.
For companies without public ratings, the US private placement and Schuldschein markets offer alternative funds with longer maturities from a more diversified investor base.
Associated British Foods (ABF.L), completed a $600 million private placement in March with UK and U.S. institutional lenders and German software maker SAP (SAPG.DE) closed the biggest Schuldschein this year at 660 million euros.
(Additional reporting by Tessa Walsh, Editing by Sitaraman Shankar)
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