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Sunday, 17 December 2017

Grand, Central and Stationary

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Unlike the Russian investment-grade loan market which is powering forward under full steam, loan markets in central and Eastern Europe are quiet, lacking the kind of scale necessary to drive the market in the current conditions, and the fillip brought by commodities. Ouida Taaffe reports.

Many of the capitals of Central and Eastern Europe retain a certain imperial grandeur - with wide boulevards, beautiful art nouveau coffee shops and monumental Habsburg palaces. The huge scale of their architecture is not, however, always matched by the extent of their international borrowing. In the first quarter of 2008, just two sizeable corporate loans came out of central and Eastern Europe: CEZ, a Czech power utility, signed a €600m club through CSOB, ING and Intesa Sanpaolo as MLAs with KBC signing up as a lender; PKN Orlen, the largest oil group in Poland signed a €300m club multicurrency revolver through Barclays, Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, BRE Bank, HSBC and SEB Merchant Bank. In addition, in the CIS there was the Industrial Union of Donbass in the Ukraine mandated ABN AMRO and SG to arrange a US$250m five-year B loan.

"There have been [very] few loans in CEE that have been syndicated outside domestic markets. Most are funded by local liquidity, or supported by multilateral organisations like the EBRD," said Damien Lamoril, deputy head of the European loan syndicate at SG. "Most [loan] activity to come will be in project finance - such as road construction," he added. "These projects will be both privately-backed and state-funded."

Many countries in CEE need to invest quite large sums in their infrastructure, and not just their transport links. However, Lamoril noted the increasing cost of funds in the capital markets not only pushes corporates towards the loan market, it could also concentrate the minds of state borrowers in CEE.

"I wonder what will happen on the sovereign debt side, where there has been a sharp widening of spreads in the capital markets," said Lamoril. "It could be that some countries will approach the loan market for funding. My view is that some of them would still be able to raise loans below their CDS levels."

If CEE governments were to borrow from the syndicated loan market, non-state-owned entities in the region could, of course, find their own access to money more constrained. This could have a particular impact on FIs, currently some of the busiest borrowers in the region. Lamoril argued that "locally-owned FIs in countries that face sovereign funding challenges could also consider more structured solutions, such as asset-backed securitisation."

Presuming, however, that the borrowing habits of CEE states themselves do not change, bankers expect the current - muted - lending pattern to continue, though they detect a "healthy undercurrent" of credit demand driven by economic growth. Over the past year, according to EIU figures for example, Poland and the Czech Republic had GDP growth of 6.1% and 6.6% respectively. Bankers said inflation is an issue in some countries - Hungary currently faces the largest challenge from that quarter - but rampant inflation is not, at least for now, a problem.

Even when CEE corporates do borrow, however, they do not necessarily look far afield for the money. Both the CEZ loan and the facility for PKN Orlen were club deals. In a tougher lending climate - and cold winds are freezing liquidity in CEE as much as in Western Europe - clubs have obvious attractions. However, as one banker points out, "in difficult times the difference between a market price and a relationship price is much more accentuated", which can make a club a challenge even for the most committed lender. Market rates are moving north with a knock-on impact on borrowing trends. "If a syndicated loan costs three times more than it previously would have, a borrower may not want to set that public benchmark," said one banker. "A bilateral costing the same would not be public, which makes that more attractive."

A borrowing binge, however, even if growth remains strong, seems unlikely. The main driver of lending - given that most corporates refinanced while money was cheap - is M&A, which, bankers noted, is not a particular feature of the CEE corporate environment. "The economies in Central and Eastern Europe are relatively small and relatively nationalistic," said one banker. "I don't think the concept of pan-European national champions has really emerged. Politically, most of the CEE countries have a national champion mentality. If there is M&A it will be down to buyers from outside those countries."

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