Europe’s syndicated loan market is often seen by outsiders as traditional and slow to change. Nothing could be further from the truth, loan bankers insist — the market has always moved with the times. But 2016 could be a year when that really becomes apparent.
After reporting a third quarter 2015 net loss of €6bn in October, Deutsche Bank announced that it would be cutting the number of clients in its global markets and corporate and investment banking divisions by up to 50% to refocus on key relationships.
Credit Suisse announced in the same month that it would be cutting assets at the investment bank by 20%, following disappointing third quarter results.
One goal underlies these decisions: the quest for profitability.
Seven years after Lehman Brothers fell, many banks are still struggling to climb out of the post-crisis morass and make decent returns. Even though they have restructured and revised their strategies before, many are now keen to make
another fresh start — in all cases, as a leaner operation.
For one head of European loan syndicate this means that in 2016 the boyishly enthusiastic lending behaviour of recent years may be reined in.
“Signs of discipline are beginning to be seen,” he says. “I think there will be a move towards being generally more disciplined in 2016. Banks will become more selective; they will have fewer relationships and they will do more for them. I think the penny will drop: revolving credit facilities aren’t making any money.”
Banks will weed out their client lists as quietly as possible — they will not want to offend the clients that get dropped. And borrowers will not trumpet it either. Many of them, in fact, may be happy to have their syndicates thinned out a little, as finding enough ancillary business to feed so many banks can be a strain.
French water company Veolia dropped several of its core banks in its €3bn refinancing in November. A company spokesperson said some relationship banks had been unhappy at missing out on M&A transactions, and so a smaller group of banks was easier to manage.
“There is a little more rationalisation,” says the syndicate head. “Some bank groups have expanded, some have been reduced. There is probably more of a reduction than an extension. Clients have had too many banks globally and have decided to shrink.”
This trend is far from heralding a credit crunch. Banks are in general extremely eager to lend and any investment grade company — and many below that tier — has ample access to funds.
Some even dismiss the idea that banks in general are pulling back. “A number of banks did turn down amend and extend requests in 2015,” says Charlotte Conlan, head of loan and high yield bond syndicate at BNP Paribas in London. “However, given the relationship implications of such a decision and continuing demand for assets, we have not seen a material year-on-year increase in such declines.”
Jean-François Balaÿ, global head of debt optimisation and distribution at Crédit Agricole in Paris, says there is no reason for banks to question loss-leading business more now than before.
“In 2011-12, when there was a focus on the US dollar stretch on liquidity in the European market, then maybe at that time it could be that the assessment of the return on the loan or the relationship may have been tougher, but I think this is not the situation currently in the market,” he says. “There is no specific change.”
What Balaÿ does think is changing is the mood in corporate boardrooms towards major investment, such as mergers and acquisitions. “The perception I have today, and which gives me confidence for 2016, is that the level of discussion with clients on M&A-driven transactions is far higher than it was one year ago,” he says.
Loan bankers are used to being disappointed by M&A loan volumes — they were again in 2015. But that never stops them from hoping.
“Right now it is a bit lower, but there is one thing about M&A activity which you cannot predict, which is when the client is making a move,” says Balaÿ. “When you have a discussion with a client on M&A activity it takes a long time before it even happens.”
Certainly, 2015 ended on a high for M&A, with record deals in certain industries, including brewing, with Anheuser-Busch InBev’s $108bn takeover of SAB Miller, and pharmaceuticals, as Pfizer and Allergan agreed a $160bn merger.
“It is not an issue of if deals will happen, but more a matter of when they will happen,” says Roland Boehm, global head of debt capital markets loans at Commerzbank in Frankfurt. “I’m positive for 2016. Banks are risk-on. Companies are looking to do acquisition financing.”
A Fitch survey of senior credit investors managing €7.5tr of assets in late 2015 found that 83% of respondents said M&A would be a significant or moderate use for European corporate cash in the next 12 months, with only 3% expecting significant capex.
The problem for the loan market these days is that, with bond markets bursting with cash, less debt financing from M&A deals ends up flowing into the bank market.
“Although volumes were as expected in 2015, it was a disappointing year,” says Damien Lamoril, head of European loan syndicate at Société Générale in London. “Volumes are down, due to a lack of refinancing and there has been disappointing M&A.”
Indeed, investment grade syndicated loans in western Europe totalled $592bn in 2015, up to November 23, down from $810bn in 2014, according to Dealogic. The number of deals fell by 20%.
There was an uptick in M&A loans, from $148bn to $169bn. But a staggering 45% of this came in one deal, billed as the world’s largest ever loan: the $75bn taken out by AB InBev for the SABMiller deal, in a self-co-ordinated deal with 21 relationship banks.
The AB InBev deal proved, if proof was needed, that there is no reluctance by banks to underwrite.
Boehm describes the loan as “outstanding”, and says a similar sized deal might come this year. “Liquidity is there, but any deal needs to make sense,” he says. “The underlying credit story is key. Banks are hoping to do similar kinds of deals in 2016.”
But although Mathias Noack, co-head of global syndicate at UniCredit in Munich, agrees that such a deal could be repeated, he says: “Banks would prefer a continuous M&A market and a stable dealflow, rather than a one-off, jumbo deal.” Rather than any shortage of credit, subdued M&A has had more to do with volatile stock market valuations and uncertain economic growth prospects. Bankers say many M&A conversations with clients did not lead to anything.
But at the same time, companies that have pulled the trigger have used bigger portions of cash
that they already have on balance sheet, as well as equity financing.
Shell required only £10bn in loans to finance the £13.1bn cash component of its £47bn acquisition of BG Group, agreed in April.
Refinancings plateau
Usually, when juicy M&A loans are scarce, banks make do with more humdrum refinancing deals. But even they are sparse at the moment.
Though margins for investment grade borrowers have tightened, the gain has not been so much that they have been tempted to return to market just to take advantage.
There were $274bn of refinancing deals in 2015, compared to $421bn in 2014.
And many believe pricing for top-rated issuers, after tightening, has now plateaued, so refinancing may be slim again in 2016. “I believe the refinancing volumes will carry on decreasing in 2016,” says Lamoril. “The bulk of refinancing has been now completed on very tight terms. What we are still seeing are refinancings by mid-caps and cross-over credits, where there is probably room for pricing to tighten.”
Despite all the sense that a new discipline is on the way, so far, most banks have continued to line up for refinancing deals, and have endured downward pressure on loan margins in an attempt to safeguard client relationships for the sake of ancillary business. “Issuers rightly know what they are able to achieve when they come to market,” says Noack at UniCredit. “It is a borrower’s market.”