LONDON, March 28 (LPC) - Syndicated lending in Europe, the Middle East and Africa (EMEA) of US$125bn in the first three months of 2019 is the lowest quarterly volume in nearly a decade, as political and economic worries continue to curb borrowers’ appetite, LPC data shows.
Volume was 60% lower in the first quarter than US$305.43bn a year earlier as a confused backdrop of Brexit chaos, global trade wars and economic slowdown late in the credit cycle continue to hit borrowing.
“2019 is going to be quieter than 2018,” said Kristin Yeatman, a vice president at Moody’s.
Higher debt market volatility and growing protectionism also deterred companies from making large cross-border acquisitions and bankers expect little change in the second quarter.
“With the current lack of visibility, I don’t see any real take-off in activity until after Easter and maybe not until after July,” a banker said.
M&A lending dipped 63% to US$31.4bn in the first quarter, down from US$84bn in the first quarter of 2018 as large-scale M&A deals slowed and financing slumped.
Many companies have already proactively refinanced existing loans early in the last few years. Refinancing volume fell to US$93.53bn in the first quarter, 52% lower than US$194.4bn raised a year earlier.
“It has been very quiet. Most refinancings have been done and M&A activity seems to have stalled amid Brexit and wider issues,” a senior banker said.
The handful of large M&A loans that were syndicated in the first quarter were mainly underwritten towards the end of 2018 and sold quickly in January.
UK consumer goods company GlaxoSmithKline (GSK) closed the largest syndicated loan of the first quarter, a US$9.5bn loan supporting its US$5.1bn acquisition of US cancer drug specialist Tesaro.
That 364-day financing comprised a US$5bn tranche to finance the acquisition and a £3.5bn tranche to refinance a £3.5bn bridge loan that was arranged in April 2018 to back the buyout of Novartis’ 36.5% stake in a consumer healthcare joint venture.
Meanwhile German business software firm SAP closed a €7bn loan backing its US$8bn cash acquisition of US-based experience management firm Qualtrics International. The financing comprised a €3bn three-year term loan and a €4bn up to two-year bridge loan.
The slowing stream of refinancing deals mainly consisted of amendments and extensions to existing loans, and the conversion of existing facilities into sustainability-linked loans.
German borrowers led the way in refinancing in the first quarter. Technology company Siemens successfully closed a €7bn (US$7.96bn) syndicated multicurrency revolving credit facility in March.
The deal replaced its existing US$3bn revolving credit from 2013 and a €4bn RCF from 2014, which were due to mature in September 2020 and June 2021. It raised over €12bn in commitments, underlining banks’ appetite to lend in a low deal flow environment.
Meanwhile, chemicals group BASF amended and extended an existing revolving credit facility for €6bn (US$6.8bn) in January.
Volume in Central Eastern Europe, the Middle East and Africa also reflected the pattern of lower activity in EMEA, with the lowest first quarter volume since 2009.
Borrowing in the first three months of the year reached just US$19.7bn, roughly a third of US$58bn recorded in the same period last year. LEVERAGED DOLDRUMS The European leveraged loan market is also on track for its lowest first quarter in a decade after a turbulent December in the credit and equity markets, as wider uncertainty continues to weigh on the market.
Only US$16.63bn of leveraged loans were completed in the first quarter, showing a 74% drop on US$64.96bn in the first three months of 2018.
It is the lowest first quarter volume since 2009, when only US$9.92bn of loans were completed in the aftermath of the financial crisis.
Higher pricing after increased volatility in December removed the rationale to refinance. Only US$5.13bn of refinancings have been completed in 2019 so far, 85% lower than US$33.85bn a year earlier.
Leveraged M&A was also 56% lower in the same period at US$6.82bn, down from US$15.4bn in 2018.
Loans continued to be favoured by private equity firms seeking additional flexibility, and exceeded high-yield bond issuance of US$12.94bn.
A quiet January reflected the market’s risk-off mentality after a turbulent December. Activity picked up in February when several deals were launched, including US$6.45bn-equivalent loans backing the buyout of Power Solutions, Johnson Controls’ auto batteries business.
The warm reception for the jumbo deal, which was successfully sold in the US and Europe, opened a window for nearly €8bn of deals to launch in March.
Live deals include Swedish specialty chemicals firm Perstorp’s US$1.1bn-equivalent refinancing, plastic container maker IFCO Systems’ €1.092bn buyout loan and business software provider Exact Software’s €625m buyout financing.
Despite an upturn in activity and more deal launches, the outlook for the rest of the year is more pessimistic than 2018 as the forward pipeline remains thin.
“Brexit is a mystery and there are trade war tensions. There are a lot of issues that make people more cautious about the market and investing,” Moody’s Yeatman said.
Bankers are worried about a thin forward pipeline and are concerned that it could take three to four months for new deals to materialise for syndication in the third quarter.
“The pipeline isn’t looking massive and my expectation for the next quarter is not going to be a big rebound. M&A pipeline activity will not strengthen quickly enough for the next quarter,” a second banker said.
The market is targeting more new money carveout deals as investment-grade companies sell subsidiaries to private equity firms, in public to private buyouts or by buying stakes in publicly listed companies, bankers said.
Potential deals include Nestle’s skin care business which could fetch US$7bn and is attracting private equity interest. Bayer is also considering selling its animal health business for up to €8bn, but these deals are complex and hard to predict, bankers said.
Bankers’ financing Apollo’s takeover offer for British packaging company RPC were disappointed after the private equity firm was outbid by US-based Berry Global Group in early March. (Reporting by Alasdair Reilly and Prudence Ho; Editing by Tessa Walsh)