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Thursday, 23 November 2017

Syndicated Loans 2005 - Coming of age

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Loan pricing for Central European borrowers is already at Western levels and spreads for borrowers in the prospective EU countries of South-Eastern Europe have collapsed. Across the entire region competition for mandates is fierce and a liquid local market, along with central bank control, means supply is far from plentiful. However, with some of the region's traditional lenders now looking further east, the nascent LBO market may provide new supply. David Cox writes.

Just as loan pricing has fallen significantly in Western Europe this year, central European borrowers have enjoyed heavily reduced pricing. However, unlike the western European market, which has seen virtually every corporate borrower of size put in place a finely priced loan, a dearth of sizeable borrowers in central Europe has meant deal flow has been slower and, hence, the fall in pricing starker.

Although large central European borrowers have not been overly active in the loan market, Hungarian oil and gas group MOL showed that the region had kept pace with wider European trends earlier this year when it signed a €700m extendible five-year loan at 22.5bp over Libor. As well as securing benchmark pricing, the loan is the largest to date from a Hungarian corporate. Polish group PGNiG was the next to illustrate the depth of liquidity when it signed a €900m club facility through just six banks (though more were willing to sign up).

But while other blue chip names like PKN Orlen are expected to take advantage of the benign conditions, there are a limited number of corporate borrowers in in the region with the credit quality or borrowing requirements of companies like MOL or TPSA. Bankers believe this will limit the potential for further major pricing falls.

"High-quality borrowers with the ability to reward the bank across the whole relationship will continue to enjoy tighter pricing," said Sanjay Kohli, a director, at Mizuho Corporate Bank. "Those with whom the relationship is less strong, or which are perceived to have a weaker credit profile, will face disproportionately wider pricing – though it will still be quite competitive by historical standards, thanks to broader supply.”

With the accession of several central European states to the European Union in 2004, just as in Western Europe - lending is becoming a commodity product. And with a highly liquid bank market the next tier of corporate borrowers have little need to borrow internationally and are able to fund domestically at advantageous rates. The commoditisation of the product is a reflection of the market's maturity: As in western Europe, revolving credit in Central Europe to investment grade borrowers has also become primarily a relationship tool," said Ingo Bleier, deputy head in syndications and loan markets at Bank Austrian Creditanstalt. "The main borrowers are known in the market and they use credit to define their core relationship bank group."

This maturity is likely to mean that credit crises of the past are unlikely to reoccur: Mizuho's Sanjay Kohli explains: "Previous peaks have been a cumulative response to events: credit concerns in a tightening economy, perhaps, or the Asian financial crisis. We are likely to see a turn but possibly through negotiation, not third-party

Second wave

With markets such as Poland and Hungary enjoying extremely competitive pricing, so yields have fallen sharply in the prospective EU members of south-eastern Europe. The higher yields offered in Romania, Bulgaria and Croatia have attracted a steady stream of new lenders, pushing down returns. Moreover, action by central banks is limiting the ability of banks to borrowing externally.

Although returns have fallen significantly, lenders in south-eastern Europe have shown more discipline than Western counterparts in rejecting loans that are seen as overly aggressive. For example, although a prime regional borrower, Banca Commerciala Romana had some push back on its US$400m five-year loan because of its overly ambitious pricing of 72.5bp over Libor. While DSK's €100m three-year facility found tough market reception due to its aggressive pricing.

"Competitive pricing can only go so far," adds Mizuho's Sanjay Kohli, "Banks are beginning to lose appetite’, However, when pricing turns, we are unlikely to see a rapid increase to the next peak. Instead, we are likely to see a flatter upward trend”

But with lower returns on offer, many of the region's traditional banks are looking elsewhere for new supply. After much talk, leverage buyouts are finally predicted to yield more supply, with deals expected from Czech Republic and Poland this year. Already in Bulgaria BTC and Mobitel proved popular last year. While, increasingly the regions lenders are looking at the fast growing markets further east of Russia and the CIS. Here though returns have fallen rapidly they are still offer good value.

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