IFR Syndicated Loans 2006

In 2006, bankers threw away the rule book on Latin American loans. All previous price, size and credit assumptions flew out the window with landmark transactions culminating in CVRD's astonishing acquisition financing in August.As Brazilian pricing converged towards high-grade Latin American levels, Mexican borrowers like Bancomext, Carso and Pemex proved that new lows were there to be struck. And Tenaris showed how an Argentina-based entity could swiftly raise US$2.7bn to buy a US-based firm.Flexes down for Pemex wrong-footed the market, while a flex up for Embraer suggested resistance was near, but the liquidity machine lumbered on regardless. Telmex managed to place a US$3bn three-tranche refinancing with zero resistance, while America Movil wheeled out a bookbuilding to help shave off a few basis points.VTR, meanwhile, brought out the region's first term loan B in recent memory with a dual-currency that is expected to spur the development of a leveraged loan market in the region.CVRD fireworksIf anyone doubted it was Latin America's year to shine, CVRD destroyed those doubts with a US$18bn bridge loan, the largest emerging markets loan ever, eclipsing Gazprom's US$13.1bn loan last year. And as of late September, the deal raised more than US$31bn.Leads ABN AMRO, Credit Suisse, Santander and UBS were in for US$1.5bn and joining as MLAs on the same amount were Bank of Tokyo-Mitsubishi UFJ, BNP Paribas, Bradesco, Calyon, Citigroup, HSBC, JPMorgan and Scotiabank. Banco do Brasil, BBVA, Standard Chartered and SMBC also came in as MLAs but on US$1bn tickets.Other banks are still working on the transaction and it was fast-tracked to general syndication, implying a quicker takeout in the loan, bond and equity markets. A syndicated export pre-payment facility for up to US$5bn could be part of this takeout."It's nothing short of spectacular," said one banker working on it. "We have a number of banks that have never before been in Latin America.Pricing on the bridge is 40bp over Libor in year one, rising to 60bp over Libor in year two, ratcheting along a ratings grid. At the senior level there is a 3bp initial underwriting fee, a 4bp allocated underwriting fee and a 25bp participation fee. MLAs get 2bp, 3bp and 22.5bp respectively.CVRD's huge success led to speculation that pricing might be flexed down. This is the first year in recent memory that the region's banks have used flex and many bankers think this is a positive development."In certain cases it can be a useful tool, rather than going to the market with something that none of the banks want and ending up with a much smaller group when the momentum is not there," said Katia Bouazza, head of syndicated finance for Latin America at HSBC.However, not everyone is happy. Pemex rattled some lenders in March with a flex on most of a US$5.5bn issue that was done even after it was funded. It coincided with an aggressive US$2bn five-year for America Movil that confirmed the Mexican market had gapped lower.On the flip side, Embraer did a pre-launch flex upwards after going out too aggressively on a US$400m multi-tranche deal in June. This suggested to some that the tide was turning and lenders were finally saying no to declining margins.As the market split into a handful of blue chip multinational credits and the rest, it was uncertain whether prices had hit resistance. For certain names in some sectors, they may still have a way to go, and this means continued top-heavy syndications, club deals or bi-laterals.It also implies further pain for lenders, some of whom are losing money on deals just to maintain a presence. Those with no ancillary business to gain from this are starting to walk in greater numbers."We have exited some relationships that we've been in for a long time because it just does not make sense any more," said Michael Jakob, first vice president at BayernLB, a retail participant in the region. "If there is a drive of supply and demand and further downward pressure [on ma

The Australian syndicated loan market is buzzing in anticipation over the potential business linked to the frenetic acquisitions activity that has dominated headlines there in recent months. The deal which has grabbed the imagination of bankers most has been the anticipated A$17bn-plus takeover of iconic retailer Coles Myer, which could require a debt facility in excess of A$10bn. The potentially huge funding requirements from this one deal alone is an indication of how leveraged buyouts in Australia have become an increasingly important source of business. While borrowers have never had it so good, bankers still face great competition for few mandates, a process which continues to drive spreads ever lower.To add to their headache, there are signs that China's insatiable appetite for raw materials is pushing its state-backed banks to secure access to resources in the interests of China's national economic policy, by promising to fund Australian infrastructure projects at bargain pricing.It is no surprise that bankers are hoping that increasing interest from foreign private equity firms in underperforming Australian corporates will provide a lucrative source of business for some time to come. While the rest of Australia frets over the impact of greater foreign ownership of iconic brands, and the implications of audacious takeover bids backed by ever greater levels of leverage, bankers in Sydney and Melbourne are rubbing their hands in anticipation of the expected fee bonanza. In the case of Coles Myer, an expected improved bid from a consortium of private equity buyers led by KKR is the latest stage in a game of cat and mouse with Coles' board of directors that could eventually lead to the appearance of a rival consortium, as well as competing bids from trade buyers such as Wal-Mart. This can only be a good thing for bankers as price tension pushes up the price tag – and the size of any debt facility that follows. At stake are senior roles in an at least A$10bn facility. Bankers are talking excitedly of a “volume premium” to ensure almost universal participation from every lender in town. Even so, syndication will have to go overseas to ensure enough funds are raised. The Coles Myer deal, if it happens, would be the culmination of a year in which private equity firms have stamped their presence on the Australian market. Even while the latest corporate drama plays out with Coles Myer and KKR, an approximately A$1.5bn six-year facility backing KKR's June A$1.83bn acquisition of Brambles' Cleanaway Australia and Industrial Services Australia businesses is still in general syndication with investor meetings recently held in Hong Kong and Sydney. In fewer than 12 months, the Australian record for LBOs may leap to a staggering A$10bn-plus from a mere A$545m, as private equity firms turn their attention to bigger acquisitions, while launching bids with increasingly higher levels of leverage.In March, Newbridge Capital acquired the Myer department stores business from Coles Myer with the financial backing of a six-year A$995m facility. In January, CCMP Capital Asia secured an A$545m-equivalent facility to acquire South African construction group Waco International. Bankers hope that this type of business will compensate for spread compression that has cut painfully into earnings.In April, the Perth-based Dampier to Bunbury Pipeline (DBP), the company that operates Australia's longest natural gas pipeline, raised A$580m via a club-style facility to achieve what may have been the tightest margin achieved on a five-year loan taken out by a Triple B rated borrower in Australia. Ten banks committed A$55.5m each to the facility, which paid an all-in of about 51.5bp over BBSY.To make matters worse for lenders, borrowers believe they can now fund some projects from alternative sources. Little known Perth-based Yilgarn Infrastructure, is hoping to finance a rail and port project in Western Australia using cheap funds from Chinese state-backed

These increased opportunities for leveraged finance are not surprising given that Asian companies, particularly Chinese and Indian corporates, are on an overseas acquisition spree.Additionally, global private equity houses and venture capital firms have set up shop in Asia as part of their relentless hunt for good returns. This has led to an increase in LBOs, which has prompted investment banks to follow them into the region to help finance these deals.While in the past Japan, Australia and South Korea were the most active markets for LBOs, followed by Hong Kong and Singapore, 2006 has seen non-traditional markets such as China, India and Philippines take centre stage. Indeed, the US$181m five-year LBO financing for China's GUM Holdings in September and the US$368m seven-year loan for Software Development Systems (SDS) in India a month earlier are seen as groundbreaking LBO transactions in those countries. The success of these two deals demonstrated that LBOs could be done despite the numerous hurdles these countries' regulators posed.GUM Holdings’ success is particularly significant given the poor record of Chinese buyouts succeeding. A notable such example is the US$282m five-year LBO financing for Harbin Pharmaceutical Group Holding that was cancelled in March 2006 after having been in the market for more than three months. Cancellation came about because of unexpected changes to PRC securities laws relating to general offers for listed companies in China. While it might have been a blow to mandated lead arranger Citigroup, the cancellation did highlight the challenges involved in doing LBOs in China. The story has been similar in India. Up until the close of the US$368m LBO for SDS, not many bankers felt the country had a regulatory regime fertile for LBOs. But the deal had a simple yet clever structure that enabled it to get around regulations relating to dividend repatriation and showed that LBOs could be done in India too. “The success of these deals does not mean there will be a deluge of such transactions," said one Hong Kong banker of developments in China and India. "But they nonetheless represent small and significant steps for the long-term growth and development of LBOs in these markets.”Many believe the Philippines, which poses fewer regulatory obstacles than China or India, should see more LBO activity. But there have been few M&A situations that have led to LBOs. All eyes are now fixed on developments surrounding the sale of Mirant Asia Pacific’s power generation assets in the Philippines because it is expected to result in the largest LBO out of the country. Taiwan has also appeared on the LBO map with bankers now focussing on the sale of an 80% stake in China Network Systems, the country’s largest cable television operator, by the Koos Group. After an initial round of bidding in which several private equity bigwigs such as KKR and Macquarie express interest, two bidders have been shortlisted for the stake, which could result in the largest LBO from Taiwan. The winning bidder is expected to raise NT$30bn–NT$40bn (US$913m–$1.2bn) to pay for the acquisition.South Korea, traditionally a strong LBO market, has disappointed leveraged financiers, particularly as some winning bidders on M&A transactions have opted for bonds rather than loans to fund their purchases. However, the country has still churned out a couple of LBOs this year, including the W113.8bn (US$119.8m) senior secured facility for CCMP’s buyout Buy The Way chain, which is in syndication. Bankers are also hopeful that other acquisitions will be financed via the loan market. One such possibility is E-Land’s W1.75trn (US$1.83bn) acquisition of the local operations of French hypermarket chain Carrefour, for which around W800bn has been provided as a bridge that is expected to be taken out soon. Other possibilities are Shinsegae, which has acquired the Wal-Mart chain's local operations for W825bn, and Kumho Asiana Group, which is the preferred bidder for

The Middle East remains a buoyant market, with oil money still flooding the region with liquidity. The staple flow of project finance deals has continued this year but it has been the boom in corporate issuance that really has the market buzzing. In 12 months to August 2006, there were 74 loans issued worth US$67bn, compared with 86 deals worth US$52bn the year earlier, according to data from Thomson Financial. “The growth of investment banking in the region is a sign of what is happening in the region. There has been a continued increase in access to corporate finance, equities, fund management and capital markets activity,” said John McWall, head of syndications at Arab Banking Corporation. “The impact of this is the explosion in capital market growth and many private companies are choosing to become public and become more acquisitive, which ultimately leads into the debt market.”Volumes have been boosted by several large corporate transactions as well as the usual raft of project finance deals, while the fall off in the number of issuances is perhaps reflective of the larger deals that are coming to market and the loss of FI borrowers over the past year. “Project finance is a traditionally stable part of the Middle East market but the real significant growth has been in the corporate market over the past two years,” said McWall. “The main driver of growth is coming from the UAE, with major corporates looking to expand overseas.”In March, DP World launched the region's largest corporate acquisition loan to back its takeover of P&O. The US$6.5bn five-year loan scored a huge oversubscription and the margin was flexed down by 25bp to 100bp over Libor as a result. Reverse flex is common on leveraged loans but is extremely rare on investment-grade names, although the borrower also flexed down the US$1.45bn loan backing its acquisition of CSX Corp's international business signed in February last year, but in that case the general consensus was that the deal was overpriced. For the latest deal, due to its size, MLAs Barclays and Deutsche Bank had to be careful when pricing the deal to ensure liquidity from both international and regional lenders, which rarely look at anything priced below 100bp over Libor. The market rightly judged the loan to be well-priced quasi-sovereign risk and subsequently piled in, prompting the reverse flex. Several corporate deals came after the DP World transaction, beginning with Qatar Petroleum’s US$550m five-year club loan in May. The state-owned, Single A rated company sought and won ultra-aggressive pricing for its debut US$550m loan of just 17.5bp over Libor, a 5bp commitment fee and a paltry 7bp upfront fee to banks that joined the club. The promise of lucrative ancillary business attracted investors into the deal despite the low margin. Another state-owned group, ADNOC, is preparing to launch its US$4.5bn five-year loan, which at 19bp over Libor, is paying a slight premium to Qatar Petroleum. Telecoms have made a return to the loan market in 2006 and no more so than in the Middle East. In June, UAE telecom Etisalat’s US$3bn deal was joined by transactions from Dubai Holding and Kuwait's Mobile Telecommunications Company (MTC). As a majority state-owned telecom, Etisalat secured a margin of 22bp over Libor (stepping up to 25bp over Libor if extended) on its US$3bn one-day loan with upfront fees of between 7bp and 12bp. Even for a state-backed company, this was quite tight and investors were initially slow to commit. Nevertheless, the deal closed with a slight oversubscription.Dubai Holding’s US$2.25bn 18-month loan backing its purchase of a 35% stake in Tunisie Telecom through MLAs are Emirates Bank and Standard Chartered, paid 70bp over Libor with a top ticket of US$100m for 30bp upfront. But it is MTC’s deal that has had the biggest impact on the market. MTC's hard lessonsMTC's US$4bn revolver launched on June 3 through MLAs BNP Paribas, Calyon, Credit Suisse and UBS. The five-year facility paid

Ten years ago, in response to the growth of secondary loan trading in Europe, the LMA was founded in London with seven members. In 1996, the European loan market was on the cusp of a merger fuelled boom that would see volumes rocket. But at that point deals were small compared to the jumbos that are common today, while the secondary market was little more than a side show."The association was initially focused on the development of a legitimate secondary loan market in Europe; 'liquidity' was, and still is, the mantra," said Tim Ritchie, the LMA's first chairman and head of global loans at Barclays said. Interest in secondary trading initially came from banks' increasing need to free capital as returns from primary lending were low, while shareholder pressure for better returns on equity meant there was a renewed focus on risk and portfolio management."In 1996 there was no organised secondary loan market as such. There were some isolated secondary sales, but buying and selling loans in the secondary market was generally frowned upon, with many sales being tainted by their linkage to failed primary syndications," said Ritchie. "However, at this time a more sophisticated approach to lending was beginning to emerge in Europe, with a number of banks beginning to employ more rigorous capital allocation models in the lending context."The need for standardised practices was pressing and the LMA had produced secondary trading documents by September 1997. This gave the market an impetus and rapid development followed. "The end of the 1990s saw a number of large acquisition facilities, specifically in the telecom sector. As a result, secondary trading in investment credits soon became entrenched and without this syndication of many of these transactions would have been more challenging," said Ritchie.With the secondary market becoming established, the LMA broadened its focus and moves to standardise the primary documentation. "Borrowers soon came to recognise that the LMA document provides a good framework from which to start discussions," said Kim Humphreys, head of corporate and sovereign syndications at Mizuho Corporate Bank, who took over as LMA chairman last year. "And since its inception there has been an open dialogue with organisation such as the Association of Corporate Treasurers and there have been several revisions. The document takes the drudgery out the loan process and has standardised the 'boiler plate' clauses that previously could take days of work".The LMA soon moved away from being London centric to having a European focus, producing standard documentation under French law and a series of initiatives including roadshows in Germany, Spain, Dubai and Prague.As the market continues to develop, so do the LMA's efforts to meet the challenges that development brings."Since the LMAs inception there has been an influx of non-bank funds into the European loan market. Everybody welcomes this increase in liquidity but it means the bank market must adjust the way it does business," said Humphreys. "Non bank investors now represent 50% of the leverage market and not to involve them would be short sighted. There have been a number of initiatives to bring the funds on board and we now have numerous non-bank members."The LMA has also worked to increase the market's profile, including the successful lobbying to the UK treasury to allow interest relief on ratchet loans and to revise the Treasury's rules on interest payments to corporates.The LMA's membership has developed along with the market and it expanded from its seven founders to have almost 300 members today. The association is now focusing on the implications of the growth in cross regional or continental syndications. As a result, Jack Lang from the LSTA now sits on the LMA board, and Kim Humphreys on the US group's equivalent body. Many think the next big challenge will be the trading of distressed debt and LCDS. "As the cycle turns we will aim to bring some clarity in the

For a country that has sometimes awkwardly sat between Europe and Asia, the Russian loan market now looks firmly European. After the calamitous default of 1998 the market has moved from a backwater that a handful of lenders dominated and where only secured credit was on offer to a deep and liquid market where relationships are vital to the success of large, cheap credits."Whereas sometime ago Russia was seen as largely a yield play, relationships are now key," said Charles Griffiths, head of European origination for the syndicate group at Bank of Toko-Mitsubishi UFJ. "Many syndicates have moved away from the traditional pyramid model and are now inverted with relationship lenders now providing the bulk of liquidity. However, with core lenders willing to step up for large amounts deal sizes have grown significantly."With a few, albeit notable, the focus on relationships has moved the market away from the secured structured commodity market. With banks now comfortable with country and credit risk, only a handful of top corporates have borrowed on a secured basis this year. From the top tier, corporates including Gazprom, TNK-BP and Gazpromneft/Sibneft have replaced their secured loans with unsecured one. In doing this, these companies have gained a rating benefit for their bond market activities by removing a class of secured lenders that sit ahead of bondholders. And they have been able to do this cost effectively given the price differential between the secured and unsecured market is now minimal.For example, TNK-BP refinanced the remainder of its secured loans this year through a US$1.8bn four-year facility. This facility paid 65bp over Libor, a margin that TNK would only be able to reduce by around 10bp if it offered security. Compare this with TNK's 2003 loan, which paid what was then considered to be a highly aggressive initial margin of 260bp over Libor. Even with the hopeful assumption that unsecured funds could be found at this size in 2003, to clear the market the margin would have needed to be double at least.But as in the rest of Europe, unsecured lending at tighter margins means a new dynamic comes in to play. Previously, given the yield they offered, borrowers like TNK-BP or Gazprom had no need to get involved in syndication and were simply able to sit back and watch the commitments roll in. However, just as lenders would rather decline tightly priced loans in the rest of Europe - especially if they believe it will not impact their relationship and subsequent ancillary business flow - borrowers now have to ensure that their lenders are aware of the importance of committing in the bank market."In terms of thinking about their relationships, top borrowers are learning fast," said Rizwan Shaikh, debt market director at Citigroup. "They are now becoming more careful about allocating ancillary business to those banks who commit capital".This shift in thinking means that where syndicates used to be large as retail lenders uninterested or unable to win ancillary business used to sign up, they now resemble syndicates elsewhere in Europe. "Even though loans have grown considerably in size, syndicates have now taken on the typical European inverted pyramid form with a small number of lenders providing the bulk of liquidity," said Shaikh.Still good valueOn a comparative European basis, Russia's top corporates still provide a relatively decent yield and the lack of interest from retail lenders probably reflects lingering concerns over Russia's past sins. For example, Gazprom paid 55bp over Libor for its most recent refinancing. But as well as being Europe's largest company by market capitalisation, with a split Baa1/BB+ rating, on a comparative basis a German corporate would probably expect to pay 30bp-40bp over Libor at an absolute maximum. While in Hungary, the BBB– rated oil and gas group MOL recently paid just 18bp for a hugely successful €825m loan (increased from €700m). Even as relationship lending takes hold, the secur

Data from Thomson Financial shows that German companies have signed 107 loans worth almost US$189bn so far this year, which although smaller in terms of number of deals, has already overtaken last year's US$184bn volume total. At this level, Germany is now the largest loan market in Europe in volume terms, overtaking the UK, which has traditionally held this title, and France, which has occasionally challenged for it.The new situation corrects something of an unusual situation. Despite its status as Europe's largest economy with a capital intensive manufacturing base, Germany has long been a minnow in loan terms. For example, even at the height of the technology boom in 2000, German companies borrowed just US$50bn, making it the fifth largest market in Europe. British companies borrowed US$312bn that same year.After long relying on bilateral lines, most decent-sized German companies now have a large syndicated five-year or seven-year back-up facility. And this year German companies returned aggressively to the acquisition trail and showed themselves to be highly effective users of the loan market. "The year may end up with fewer deals in number of transactions than last year, but in terms of volume, profitability and required expertise the quality has been higher," said Dietmar Stuhrmann, managing director at Dresdner Kleinwort. "Last year the market was dominated by cheaply priced refinancings, while this year has seen more deals that are funded merger deals and debuts, both closer to the CDS and bond price."E.ON exemplifies this expansionary phase. To fund its audacious takeover attempt of Endessa, which, if successful, will create the world's largest utility, E.ON put in place a €32bn loan. To ensure the success of what is the largest loan from a European company to date, the group paid a clear merger premium and offered a clear refinancing route for the bulk of the facility.Other German companies - like Linde and more recently Merck - have since followed this strategy when looking to fund transformational mergers. This means that 2006 will be a profitable year for many banks.Open marketDespite the German loan market's late blooming, it is a very open market. International banks are highly active and their presence, along with borrowers' openness, means that German companies enjoy some of the continent's cheapest loan pricing, along with French borrowers.German borrowers generally enjoy a 5bp-10bp pricing discount to similar rated British corporates, which have to borrow in a less open market that the large UK clearing banks dominate."Germany is very integrated in the wider European loan market, meaning the international factor in terms of banks is very important," said Dresdner's Stuhrmann. "German companies seek advice from their house banks but they are most certainly not willing to overpay and pricing is very competitive. However, as loan markets mature it is natural that you have a concentration of business with the majority of syndicated loan business carried out by a few leading banks."This liquidity is not limited to the top tier with international banks increasingly attracted to the Germany's vast Mittelstand, which has been busy this year. A few years ago much the middle market was suffering as German banks faced credit issues and pulled back from their traditional lending activities. But the sector is now seen as highly profitable and increasingly a focus for international and European lenders."From focusing on Dax 30 companies a few years ago there is now huge interest from international banks even in the smaller Mittelstand market," said Peter Rochus at WestLB. "The Mittelstand was previously covered entirely by German banks but with mergers turning previously German-focused companies into larger European ones, there is a lot of interest and this is having a positive impact in terms of pricing and liquidity."And with German companies showing no signs of slowing their acquisition spree, German bankers are confid

Volumes in the North American leveraged loan market rose to US$508.8bn for the year to September 19, up from US$386.2bn and US$329.4bn for the same periods in 2005 and 2004 respectively, according to data from Thomson Financial. Even as volumes expanded, hungry investors were there at every turn to lend to companies of varying credit quality. And demand dictated that they often faced heavy scalebacks on their original commitments. “Market conditions for the first several months of the year were very favourable and you had continually tighter margins and more aggressive capital structures,” said Bill Hughes, managing director and head of U.S. Loan Capital Markets at Lehman Brothers in New York. Leveraged loans appeared to be structured at the issuer’s behest. Few deals reflected this more than Covalence Specialty Materials’ LBO financing. All the elements were there: the issuer flexed pricing down, cancelled a bond offering in favour of a second lien loan and, months after launch, took out the original credit facility with a new covenant-light deal. On January 23, Bank of America, Credit Suisse, Merrill Lynch and Morgan Stanley launched the US$995m debt for Apollo Management's LBO of Covalence. After several alterations, the loan portion comprised a US$175m six-year revolver, a US$350m seven-year term loan B and a US$175m second-lien piece. High demand for the deal allowed the issuer to flex pricing. It also replaced the US$200m bond offering with the US$175m second-lien tranche and increased the US$325m TLB to US$350m. Just over three months later, the former plastics division of Tyco International returned to market to replace the US$175m revolver with an US$200m asset-based revolver and remove maintenance covenants on the TLB (which became a US$300m TLC) and second lien. The amendment also proposed to split the collateral between ABR and term loan, leaving term loan lenders secured by a first lien on only fixed assets and a second lien on current assets. It offered ABR lenders, meanwhile, a first lien on current assets and a second lien on fixed assets. The move infuriated lenders, because of the blatant erosion of covenant protection. The agreement went through after Covalence offered investors an additional first-lien on all intangible assets.Strong demand allowed the issuer to flex pricing down. The loan also replaced the US$200m bond offering with the US$175m second-lien tranche and increased the US$325m term loan B to US$350m. Just over three months later, the former plastics division of Tyco International returned to market to replace that deal with a covenant-light term loan and an asset-based revolver. Lenders were furious because of the blatant erosion of covenant protection. But their objections went largely unheeded.Investors gain cloutBut the situation did stay hugely in borrower's favour all year. Attractive financing conditions eventually brought enough issuers to market that investors were able to be more discerning with their cash.“Investors entered the year with ample liquidity, but record amounts of new issuance eventually chewed away at excess cash and conditions turned more bearish by mid-year,” Lehman Brothers' Hughes said.Issuers and arrangers started to listen when investors said “no” to repricing calls and other developments that limited their control. As investors started to push back and spreads started to widen, secondary trading levels started feeling the pinch as well. Secondary levels softened as market participants began backing away from repriced deals likely repricing candidates. This affected deals for Charter Communications, Lear Corp and Sports Authority, all of which broke for trading in April and immediately traded in the low pars. The average secondary price for par loans hovered around 101 in the first half of the year, but declined to trade around par as conditions weakened.DaVita's decision in late May to put an end to its month-long repricing attempt illustrates how investors’ beca

Investment-grade corporations have completed US$706.1bn in loan volume for year to September 19, according to data from Thomson Financial. That’s a roughly 11% larger market than last year when borrowers recorded US$636.2bn in volume for the same period, and 22% larger than the loan market in 2004 when volumes reached US$578bn. A variety of factors has driven this escalation in volumes this year. Time Warner led the year with its outsized US$21bn refinancing, while issuers such as Tribune tapped the market to buoy sinking stock prices through buybacks. On top of that, more technology companies that ever found their way the high-grade market, owing to market specific developments. Whatever their specific reason, however, most borrowers came to market because the conditions were – and still are – ideal to lock in long-term debt. “For most of 2006 we've been advising companies that we are nearing peak conditions in the loan market, and that it's an opportune time to modify their credit facilities,” said Dennis Dee, managing director and head of corporate loan markets at RBS. “There are numerous examples of companies doing this. Some are extending tenors while also reducing pricing and/or exercising accordion features. They are taking action at a time of perceived optimal market conditions.” He explained that companies were even atypically returning to market just a year after completing a multi-year facility in order to extend tenors, reduce pricing or exercise accordions. Bank of America and Wells Fargo, for instance, were in the market in September to exercise an accordion feature for Harrah’s Entertainment. The deal aimed to increase the casino operator’s US$4bn revolver to US$5bn. Other borrowers have returned for similar increases, as conditions allow. The peak borrowing conditions now could point to a slight market downturn soon to come, some say. The Federal Reserve appears to be done raising rates, for example, and borrowers are beginning to think about the impact this will have on liquidity. Similarly, the auto and housing sectors show conspicuous signs of slowing. Separately, the impact has been minimal, but together it could be indicative of a weakening economy. Borrowers that anticipate this are adjusting their loan agreements accordingly. Telling timeTime Warner and Time Warner Cable completed a US$21bn four-tranche loan in February, which signalled the start of an active year. In addition to being one of the larger investment-grade deals, Time Warner’s transaction also spread its wealth in a high-grade market where volumes are heavily concentrated among three banks: JPMorgan, Bank of America and Citigroup. Citigroup and BNP Paribas led a US$7bn five-year credit facility for Time Warner. Meanwhile, Time Warner Cable completed three other tranches: a US$6bn five-year revolver, via Bank of America and Deutsche Bank; a US$4bn three-year term loan, through Wachovia and Barclays; and a US$4bn five-year term. loan through Bank of Tokyo-Mitsubishi and RBS. The deal financed Time Warner's circa US$18bn acquisition of Adelphia Communications with Comcast, as well as a share repurchase. Nor was Time Warner alone in using loans to finance a share buyback. One of the reasons leveraged buyout activity has been so intense of late is because there have been several under-levered companies with under-valued stock prices. Private equity funds have been keen on loading up the balance sheets of these investment-grade companies to buy their undervalued equity, thus relegating their credit ratings to junk. Freescale Semiconductor, for example, agreed to be bought out by a Blackstone Group-led consortium. Its ratings have since suffered as a result. To ward off LBOs, and to prop up stock prices, companies have been launching share buyback programs and financing them in the loan market. Newspaper publisher Tribune launched a US$2.25bn loan in June to help finance its planned buyback of as many as 75m shares and refinance debt. It was just

Having recovered from the downturn that forced them to clean up balance sheets and sell non-core assets, companies have returned in force to the acquisition trail, ending the recent spell in which the private equity industry was the dominant force on the M&A buy-side. At the same time, recovering equity values have led shareholders to regard the prospect of a take-private with deep suspicion, reasoning that if there is sufficient upside in their investment to attract take-private bids, they might as well remain in control. After all, these same shareholders have remained committed to businesses through the tough times. These obstacles help to explain not only why sponsors are finding it difficult to source fresh deal flow, but also why deal numbers have been below expectations – even if the size of this year's deals has compensated on the volume side. So far two of the year's flagship take-private deals – for Danish telecom TDC and Dutch marketing services provider VNU – have been plagued by drawn-out timetables because of shareholder resistance.As always, there is one sure way to break the deadlock – pay up. But herein lies the dilemma. Sponsors need to keep their equity input to a minimum if they are to provide their investors with a decent return. Private equity relies on a leveraged model of profit creation, after all. But without a decent equity contribution, sponsors cannot hope to achieve the multiples required to compete with the returning trade buyers. So how much equity is the right amount?Increasingly, it is arranging banks that are providing the solution. The explosion in the syndication of subordinated debt, principally to institutions, has enabled the higher leverage multiples required to ease the equity burden, even if temporarily. The subordinated debt revolution that has ensued is not only changing banks' role in financing leveraged deals; it also threatens to change the nature of the market permanently. "It's inevitable – this is how the US market has been for years," said Euan Hamilton, global head of leveraged finance at RBS. "The market is moving from a bank-driven model towards an institutional-driven model. The emergence of bespoke buyers has allowed the market to grow, both in terms of size and the scale of deals being done. The market couldn't have done a deal like TDC if it had been comprised only of banks." Now that sponsors are targeting the large-cap market, it is unlikely that their return models will allow them to return to the mid-market space. During the last few years, sponsors have built portfolios of complementary, large-cap businesses. They are now entering an era where the buy-and-build tactics learned at the smaller end of the market can be applied on a larger scale. It therefore makes sense for them to value targets on the basis of future synergies as it does for a trade buyer – traditionally the reason why the latter would bid up the price tag beyond sponsors' reach. Already this year, Liberty Global was forced to bow out of the bidding for Casema, leaving Cinven and Warburg Pincus to drive the wave of consolidation in the Dutch cable industry. The liquidity enabling these larger transactions has come not only from the traditional specialist funds, but also from hedge funds, banks and allocations from structured vehicles. Their combined thirst for the higher-yielding assets has driven an explosion of second lien and mezzanine issuance, radically moving the benchmarks for these assets. "Until Casema, the record for mezzanine was [Gala's] £460m, and you couldn't have had a better credit story than Gala. Now the benchmark has moved to €1bn," said Ian Gilday, managing director in Goldman Sachs' leveraged finance division. One consequence of the growing structural complexity has been to make banks' distribution capabilities more important than ever. "The strength of the distribution-led approach lies in having the best relationship with all investor types. It allows you to predict accuratel

M&A is back. Bankers are cheering the return of premium paying acquisition-related transactions and are salivating at the mass of ancillary business attached to these takeover deals. “Few deals, almost none, were the traditional five to seven-year undrawn backstop deals priced at 12.5bp to 17.5bp, which was a feature of 2004 and continued into 2005,” said David Bassett, managing director and global head of loan markets at RBS. “It is hard to beat that pricing this year, so there have been fewer refinancings and these have been replaced with more high-grade M&A transactions that are generally better priced than relationship-driven deals.”The scale of the revival can be seen most clearly from the yearly statistics. There have been 188 acquisition-related financings worth US$305bn in the 12 months to August 2006, according to data from Thomson Financial. This is a great leap from the 128 deals worth US$126bn syndicated in the same period last year. As a consequence of the return of M&A and dearth of the refinancings that characterised most of 2005, the number of refinancings has declined by more than a third. These figures make great reading for banks and understandably they are welcoming the return of acquisition-related deals. The number of M&A deals has not, however, increased in line with volumes due to the marked increase in the number of jumbo financings. The end of 2005 marked the return of sizeable acquisition transactions with the £18.5bn record sterling loan for Telefonica backing its acquisition of O2. And the record €30bn loan from France Telecom in 2000 was smashed in March by German utility E.On, which launched a €32bn loan to back its acquisition of Italian firm Edessa. There has been some concern that even though substantial M&A deals have been done, any premium that used to be prevalent for these types of financings has been largely eroded. With margins of 22.5bp to 27.5bp with a participation fee of between 12.5bp and 17.5bp, E.ON paid a slight M&A premium, mainly because of the deal's size and the increased liquidity from the market. Another large deal was Linde’s US$8.9bn and €2b loan financing its takeover of BOC. Linde paid between 50-55bp, a clear premium over its 2005 €1.8bn revolver, which paid just 16.5bp.But corporate M&A transactions seem to have fallen into two camps. “There are the very strong rated companies who can fund very cheaply, where the premium for banks is minimal in context of how much liquidity is being taken from the market; and there are other corporates, which are not so highly rated or do not have strong banking relationships, which have to pay a premium for event-driven transactions,” said Rachel Watson, managing director, head of western European origination at HSBC. Hostile and non-recommended bids, such as Mittal Steel and Xstrata for example, can command a much higher premium.This year has also seen a marked shortening of maturities for large transactions and a continuation of last year’s trend of banks arranging bridge loans for large deals to facilitate takeout financing either in the capital markets or elsewhere, such as disposals as in the Bayer and RAG deals.Borrowers have also been keen to keep bank groups small for these jumbo transactions with large underwriting commitments from fewer banks. HSBC underwrote €11.2bn of E.On’s €32bn loan – the largest even underwriting ticket for a European loan – with the intention of selling down the paper in the capital markets. “These structures suit both borrowers and MLAs as it is a way of adding capacity without depending on raising large sums of money from the market,” said Julian Taylor, managing director, syndicated finance, at HSBC. “Also general syndication generally does not attract the preferential mix of investors looking to invest in one-year facilities.”Linde’s deal also had a clear refinancing strategy in place with a large part of the loan to be taken out by a €1.4bn–€1.6bn capital increase, a €1.2bn–€1.6bn hybrid capita