CEE 2006 - Borrowers' market
The Eastern European loan market is very borrower friendly. Lack of supply and fierce competition mean borrowers enjoy fine pricing. Even as M&A returns to Western Europe thus edging up pricing, the limited market further east means that lenders are will have to focus on maintaining volumes, and pricing could yet fall further. David Cox writes.
In volume terms, the Eastern European market is small. According to Thomson Financial, last year borrowers from the Visegrad countries (Czech Republic, Hungary, Poland and Slovak Republic) plus Slovenia, Bulgaria, Romania and Croatia signed just 68 loans for around US$18bn compared to Russia, which clocked up 83 loans for over US$48bn.
In general, the Eastern European market is constrained by a limited number of large borrowers and a highly liquid local bank market, which is largely foreign owned so has few opportunities to lend abroad and is therefore happy to lend cheaply and plentifully at home.
However, while the market is small, last year showed the region's borrowers are more than capable of matching Western European pricing points. "Although an improving economy, unprecedented liquidity in the global bond markets and recovering equity markets have all helped to push down loan pricing last year. The main reason for aggressive loan terms is probably because banks demand for assets far outstrips supply of deals in the market," said Sanjay Kohli, a director at Mizuho Corporate Bank.
While initially slow to catch on, Eastern European borrowers have taken advantage of the cheap pricing. MOL, the Hungarian oil and gas company, set a regional benchmark with a €700m extendible five-year revolver, which despite being priced at just 22.5bp for a then unrated borrower, raised over €1bn in syndication and was increased from €400m.
MOL was later rated BBB-, putting the price easily in line with Western European industrial comparables. The group was later followed by PGNiG, the Polish oil and gas company, which completed a €900m five-year club at 25bp over Euribor, down from the 45bp the group paid for a €600m backstop signed in 2003.
Tight pricing has accompanied the disappearance of formal syndication in favour of club style exercises. Unlike several recent large Western European borrowers, most top Eastern European borrowers are experienced users of the syndicated loan market and are well aware of the need to provide ancillary business. This means borrowers – most notably in Poland –are avoiding full-blown syndications in favour of club style facilities, thus allowing banks to maximise their relationships and avoiding syndication risk.
Although, this year has not seen any major corporate supply, pricing continues to fall. In the financial sector serial loan market borrower Nova Ljubljanska Banka raised more than €900m in syndication for its €600m five-year loan (later increased to €700m) despite paying just 15bp over Euribor.
"The lack of M&A in 2005 may have forced banks to focus on top-line growth," said Mizuho's Kohli. "The M&A downturn hit corporate finance earnings at banks, shifting their focus to preserving client relationships and leading many banks to offer aggressive loan terms."
In Western Europe, last year's refinancing wave has been followed by a series of relatively well priced – if not generous – M&A linked loans this year. And although there has been much talk of regional consolidation from borrowers including MOL, CEZ and TPSA as yet there is little sign of return to the debt funded acquisition trail.
"With more refinancing likely to take place in 2006, only the return of M&A may now stop the downward pricing spiral," said Kohli. "If M&A does not pick up substantially, spreads will at best remain at current low levels. In addition, commitment fees, upfront fees and structures will become under pressure with borrowers demanding fewer and lighter covenants.
"However, bagging mandates by pitching low is one thing but if an arranger encounters resistance further downstream and cannot distribute the deal, pricing will not stay for long."
With the number of borrowers in countries such as Hungary, Poland and the Czech Republic limited, the chances of any major increase in volumes is low. This means banks active in the region are likely to continue to have to look elsewhere for supply.
Outside of the core EU members, Croatian borrowers are restrained by reserve requirements and only a handful are expected this year while volumes in Romania and Bulgaria are constrained by the relatively few borrowers that need to borrow abroad.
Further afield, Russia is booming but pricing has fallen dramatically. In the Ukraine, pricing is rich though volumes are still tiny, but the country does have companies large enough to access the loan market. So far, outside of the banking industry there has been activity in the heavy industry sector as well as telecoms.