IFR Syndicated Loans 2005

Australian M&A financing dominates the regional market for such deals. Volumes so far this year, at US$15.94bn, have already exceeded 2004's full-year figures of US$15.09bn and are set to climb further.The continuing growth in M&A volumes has sparked fierce competition among lenders with an increasing number of bankers focusing on M&A financing.“There is more money to be made in M&A and banks have focused strategies on getting a piece of the M&A pie,” said a senior banker. “Banks are aggressive as a result and because of that, though pricing held up, terms were relaxed and banks have become more willing to provide bridges to back acquisitions, hostile or not.”Indeed, it has now become par for the course for banks in Australia to write a bridge to back a hostile acquisition and then worry about how it will be taken out later. As was the case with a A$3bn (US$2.3bn) bridge that ANZ and Citigroup provided to back Australian shipper Toll Holdings’ hostile takeover bid for ports operator Patrick Corp. Such deals are relatively risky for banks because they cannot do a full due-diligence on the target, instead having to rely on public information. Fosters Group’s A$2.7bn borrowing blitz in June also revealed the aggressiveness among banks in Australia. Citigroup, CSFB, CBA , JP Morgan and Westpac provided a A$2.7bn bridge loan despite questions about the company’s credit fundamentals as international rating agencies knocked its credit ratings down by one or two notches. S&P knocked down Foster’s rating by two notches – noting the company’s increased leverage, the integration risk and its greater exposure to the higher-risk, more cyclical wine industry – while Moody’s reduced its view by one notch. The bridge was taken out by a £525m (US$930m) one-year, three-year and five-year loan and a US$300m seven-year loan – the first time a BBB– rated Australian borrower had secured seven-year funds from the bank market. The leads raised the balance by issuing two bonds that raised US$1.7bn just three weeks after the takeover’s close on June 3.Joint leads ANZ and NAB were no less aggressive when they underwrote a A$1.45bn takeover of Affinity Health by Ramsay Health Care. That deal was taken out by a competitively priced A$1.05bn five-year loan that found commitments from 16 banks, while a A$50m five-year tranche and a A$350m one-year tranche were held by the leads.Another interesting transaction was the NZ$3.4bn (US$2.3bn) share acquisition facility for Rank Group Investments that was secured only over Rank’s shareholdings in three different Australian and New Zealand companies. That deal was underwritten by CSFB. Rank Group Investments is a holding company whose assets include a 57.6% stake in Burns Philp, a 100% of New Zealand Dairy Foods and an at least 50.5% stake in Carter Holt Harvey.“That was an aggressive deal because so far banks have been willing to underwrite loans that backed acquisitions by investment grade credits but, in this case, it is a company that is unrated but considered sub-investment grade,” said a banker.Joint lead arrangers CBA, JP Morgan and NAB also showed guts in underwriting a A$2.5bn loan for CLP Australia to back the company’s acquisition of Singapore Power’s Australian assets. Subsequently, of the total facility, the leads syndicated only A$1.6bn while the balance (a A$600m six-month bridge loan and a A$250m one-year working capital facility) was provided by the leads.Bankers said that most of these deals were helped by a distribution strategy that encompassed not just securing participation from the banks in Australia but also banks in Asia as well. For years, banks in Australia have been working on building an appetite among Asian banks for Australian credits. There have been several hurdles in the path but slowly these have cleared and confidence in Australian credits among Asian banks is now at a high. All the four Australian bank majors now have distribution teams in Asia.Part of this appetite for Australi

There is no question that the one development that has most pleased Asia’s loan bankers in 2005 is the growth of acquisition financing. Until this year, only Australia had seen a steady flow of such deals, with Asia (ex-Japan) seeing only sporadic issuance.However, this year has been different. Australia still tops the year-to-date acquisition financing tables, but other markets are also getting into the act. Ex-Australasia acquisition volumes have reached US$5.63bn – their best since year 2000. Unlike in the past, activity this year has been more widespread, including deals from such apparently unlikely markets as India and Philippines.“We are seeing quite a broad representation of acquisition financing opportunities in the region and we expect to see strong activity for the next couple of years,” said Clarence T’ao, head of Asian acquisition finance, loan structuring & syndication at BNP Paribas in Hong Kong. “New private equity funds are being established on a regular basis and these are looking for the right opportunities to invest in. With both private equity firms and companies competing for the same targets, we expect opportunities for leveraged buy-outs too.”The main reason for the upturn in such deals in Asia is that Asian companies are expanding overseas and looking to acquire assets to do so. This is in contrast to the last few years when Asian companies, still recovering from the Asian crisis – at least psychologically – and not sure about the global economic outlook, focussed more on deleveraging and strengthening their balance sheets than on capital expenditure or asset acquisitions. This year has been a different story and the turnaround could have been even more dramatic, particularly for China, had CNOOC’s US$18.5bn bid for Unocal and Haier Group’s US$2.25bn bid for Maytag Corp been successful. CNOOC’s takeover of Unocal would have been the largest overseas acquisition by a PRC company and would have led to the largest acquisition financing from Asia, while Haier’s bid would have led to the first Chinese LBO. While those efforts were unsuccessful, they nonetheless demonstrated PRC firms’ voracious appetites for overseas assets – particularly oil and gas firms in pursuit of energy sources – after Lenovo Group had kick-started the activity earlier this year with its acquisition of IBM’s PC business, via a US$600m financing arranged by BNP.Acquisition financing in the Philippines and India has also been a revelation. San Miguel Corp put Philippines on the acquisition map with a US$1.15bn bridge financing in May that funded its acquisition of Australia’s National Foods, while Indian companies have also been busy.Deal flow has been steady in 2005 with transactions for GE Capital International Services, UB Group and Matrix Laboratories. Matrix’s €165m (US$198m) financing marks the largest deal for an Asian pharmaceutical company, but that could soon be trumped by an acquisition financing from Wockhardt that is expected to be at least US$400m in size. Hong Kong, Singapore and South Korea have also seen decent deal flow this year and the trend is expected to remain strong in 2006. Hong Kong’s Johnson Electric is close to completing its CHF695.9m (US$538m) acquisition of European company Saia-Burgess, while the acquisition of Ssangyong Motors by Shanghai Automotive in January was the highlight of activity in South Korea.Another key trend in 2005 has been the ever more obvious return of Indonesia to Asia’s bank market. Lending to Indonesia has never been for the faint-hearted, and until recently it appeared that it would remain a minority pursuit. But after Susilo Bambang Yudhoyono was swept to power last October, Indonesia suddenly reappeared on Asian bankers’ itineraries again.Last year, US$2.7bn of deals was booked, with US$1.2bn of that coming after Yudhoyono’s election victory. Momentum picked up even further in 2005 and, although the volumes registered in the first three-quarters more or less match the same period

The highly liquid Latin American loan market has seen tightening margins on new-money deals and refinancings, longer tenors and transactions going into general syndication already oversubscribed. Telmex, the Mexican telecom, was the latest example of this, as its aggressive refinancing of a US$2.425bn facility put together in July 2004 saw demand of US$3.2bn in the preliminary phase and was set to be increased to just over US$2.7bn.The four-year tranche was priced at a 30bp over Libor margin and the six-year tranche at 42.5bp over Libor, a reduction of 15bp and 10bp respectively. This looked aggressive, but the strength of demand surprised even bankers on the deal and was yet another sign of the liquidity in the region's bank market. Fees were said to be 17.5bp and 27.5bp respectively, not bad on an amendment. MLAs were ABN AMRO, BBVA, Citigroup and HSBC. "This has been another very good year for issuers," said Katia Bouazza, senior vice president and head of Latin America syndicated finance at HSBC. "Favourable cross-market conditions and a liquidity glut have helped borrowers achieve better terms." Positives include low global interest rates, high commodity prices and a relative lack of deal supply.Those taking advantage of the good times include, from Mexico and Chile: Pemex, Bancomext, Cemex, CFE, Entel, ENAP, Banco Security, CTC, Carso, Bavaria, Hylsa and TFM. A wave of Brazilian credits heralded a comeback in lending to that country, including Grupo Votorantim, Braskem, CVRD, Banco Itau, Coelba and Telemar.All of them came in at margins that initially looked aggressive. They turned out to be higher prices than the market was subsequently willing to bear. Only one deal was pulled, IUSA, and bankers said this was credit specific although it could affect lower-tier Mexican names. "There have been few deals," said Bouazza. "The pricing has been very competitive." Argentina back on the mapWhile bankers complained about the lack of returns in the staple markets of Chile and Mexico, many were unable or unwilling to reach down the credit curve into deals from comeback credits Argentina and Venezuela. Those who jumped in were sometimes disappointed by the pick up relative to the extra risk – and in some cases subordination – they had to take on.Techint, the Argentinean conglomerate, wrapped up its ground-breaking US$1.38bn loan with 15 banks on board, in line with expectation. The deal confirmed the lending-to-Argentina trend but its complexity and bespoke structure made it an inefficient benchmark. Bookrunners were Citigroup, BNP, HSBC and HVB. Techint vehicle III issued a US$500m three-year bullet and US$500m five-year amortiser, while Siderar did a US$380m three-year. The US$380m Siderar tranche at 200bp over Libor set a benchmark for that market, though bankers said that the acquisition finance cost was higher than what will probably follow in Argentina. "We have to be careful with benchmarking Argentina," said one banker. "It was definitely a landmark deal for Argentina." The III piece was backed by cashflow from Sidor (Venezuela), Siderar and Hylsamex and secured with shares of the latter. III is a Luxembourg entity. "It was innovative, it opened up the market more for Argentina," said a banker on the deal. "It was amazing that an Argentine company can come and raise almost US$1.4bn in a very complex transaction," said another. Bankers away from the deal said it took longer than expected to get through syndication and that some ended up holding more than they had wanted. They noted a reluctance to commit to a subordinated structure that includes Argentina and Venezuela. But bankers on the deal denied this. "We are where we want to be in terms of our hold levels," said one. "The deal was sold to a very targeted audience," said another. Despite the fact that all seems too good to be true, there is little on the horizon to knock LatAm borrowers off their pedestal."I don't see any major shift for the remainder of the year. Th

According to data from Thomson Financial, Russian companies have raised over US$20bn in the syndicated loan market so far this year, easily overtaking 2004's full-year figure of US$13.8bn. And assuming that loans like Gazprom's US$12bn jumbo for its expected takeover of Sibneft proceed, the Russian loan market is set to break not just volume records but be on track to be one of the largest in Europe.The glut of cheap money sloshing around the European and the wider emerging markets is one reason for this but it is also a realisation of Russia's improving credit story, which Moody's and Standard & Poor's have recognised by upgrading the company to investment-grade."Much of the increased lending into Russia is a factor of the of wall cheap money travelling through the emerging markets," said Peter Kennedy, managing director, global distribution & specialised finance at Standard Bank Plc. "But also Russia is not the emerging market it was five years ago. Helped by a high oil price, the macroeconomic picture has improved considerably and compared with other markets such as Turkey, the returns on offer are still good."After the country's disastrous default in 1998, Russia was generally off limits to most banks, and the country's natural resource based corporates were forced to structure their loans to mitigate country risk rather than credit risk. As such on a relative basis, returns in Russia were very good, and as the country risk profile risk improved, though pricing fell it remained - on a rating basis - still attractive.This year's explosion in volume has seen unsecured lending outstrip secured lending for the first time with around US$15bn raised on an unsecured basis against US$5bn on a secured basis. And with the market so liquid, pricing has fallen as well."With Russia's upgrade to investment grade a lot of new players entered the market and pricing has fallen," said one European banker, "This reflects that Russian borrowers have in some respects been playing pricing catch-up as there has been an element of overpaying for past mistakes. Much of the recent pricing fall, though sharp, is bringing the Russian market in-line with similarly rated markets."Sberbank is the latest borrower to benefit from rapidly falling loan pricing. Following on from Vnesheconombank, which completed a hugely successful benchmark loan at 90bp over Libor, Sberbank was able to smash through this level and mandate ABN AMRO and HSBC for a US$500m three-year loan at 55bp. Given that both borrowers are effectively state owned, the fall is undoubtedly steep. But when seen in the context of global falling returns, for a Baa3/BBB- rated bank that dominates commercial banking in Russia the loan is good value. Elena Ivanova, a director at ING, said: "Over the past year loan returns in Russia have fallen sharply driven by global liquidity and intense competition. But still from a lender perspective returns are still good. And on a risk - reward basis if you compare pricing in other countries, Russia compares well."This was borne out in the market reaction to Sberbank’s loan, which attracted over US$1bn in commitments in the senior phase alone. Disappearing structuresWith Russia's improving credit story, the need for structured financing is diminishing. Once Gazprom re-opened the unsecured sector with its US$215m loan in 2003, it was expected that secured volumes would plummet. However, with last year’s nervousness around Yukos, demand for the secured structure remained strong and borrowers continued to access secured and unsecured markets. But with demand for Russian assets now at a high, the need for structures for the blue chip natural resource companies has almost disappeared. And although the secured loans that have emerged from the blue chips this year have all proved popular, the trend is clearly for the more flexible unsecured product. Moreover, with borrowers like Gazprom increasingly looking to diversify their funding sources through the bond market

Buoyed by an oil price that has bounced around record highs all year, the Middle East is enjoying an economic boom. And with this comes a renewed confidence to invest in infrastructure and a new cycle of international corporate expansion. Accompanying this economic assertiveness, over the past year there has been an explosion in lending volumes with around US$32bn raised on the syndicated loan markets so far this year. And in a borrower friendly environment, the popularity of the region has meant a steady fall in loan pricing for corporate, financial and infrastructure names. The unprecedented level of global liquidity that has caused funding costs to fall across all markets can explain much of the pricing fall in the Middle East. However, it is the entry of international banks or more specifically - European banks - that explains much of the sharp pricing reductions in the Gulf Cooperation Council (GCC) countries. For international banks the attraction of the GCC is clear: the glut of global liquidity has cut lending margins across the major European markets, while the sclerotic nature of much of the continental European economy means opportunities for big-ticket event-linked lending are thin. As such the Middle East offers plentiful supply and relatively good returns."There is increasing competition between the European Banks active in the region and the make up of syndicates is increasingly dominated by international banks," said Julian Taylor, managing director of syndications at HSBC. "Pricing continues to be aggressive in both the project finance and FI markets as seen on Qatofin and ADCB. However, returns are still relatively good at the hybrid and crossover corporate end of the market."In the developed financial institution market, Abu Dhabi Commercial Bank (ADCB) is the latest borrower to benefit from these conditions. The bank mandated Banc of America Securities, Calyon, Deutsche Bank and JP Morgan to arrange a US$750m loan priced at just 27.5bp over Libor. Despite smashing through last year’s benchmark from Gulf International Bank, which put in place a five-year loan at 35bp over Libor, the deal was a huge success and by September looked on track to be increased to US$1bn.Although an unambiguous success, when mandated there was considerable lender scepticism that ADCB would be able to raise such a large ticket at a price that was so through the previous benchmark. However, although on an absolute basis the pricing reduction looks sharp; when compared to international comparables the returns is well within market pricing. Once BBB+/Baa1 rated South Africa completed its US$1.5bn three-year and five-year loan at 22.5bp and 30bp for the longer tranche respectively earlier in the summer; it was clear that it would only be a matter of time before GCC borrowers, some with higher ratings, would start to demand similar pricing.Moreover, for European banks that are faced with the option of lending domestically to BBB corporates at drawn returns in the mid-teens, a Aa3 rated bank paying a drawn margin of 27.5bp is still attractive: “Many of the region’s borrowers offer good returns based on their ratings when compared with Europe,” said John McWall, head of syndications at Arab Banking Corp.” We are seeing upwards of 80% of regional syndications dominated by international banks. Although this pricing environment is tough for many local banks, the region is buoyant economically and banks are recording very profitable business through their retail networks.”Although cheap money may be tempting, the high oil price means most of the region's banks are highly liquid and have little need for external funding, with several pre-payments reported. And while European banks are happy to lend at these levels, the falling pricing environment is tougher for many local banks. Benchmark pricing is logically below the cost of funds of the region’s other local banks and many are being pushed out of the FI lending market. But for now European a

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-partySecond waveWith 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 ne

Overall, this has been a good year for the investment-grade loan market. Year-to-date there have been 410 deals worth US$490.57bn, well up from the 365 deals worth US$311.537bn booked in the same period last year, according to data from Thomson Financial.Bankers were not so optimistic when the year began, however, as the main developments of the past few years continued unabated and if anything in more exaggerated form. In short, the excess of liquidity compressed pricing, pushed tenors out and loosened documentation. There were too few new-money deals and those deals that did come were generally poor yielding.Bankers spent much of 2004 trying to postpone the inevitable return of seven-year money with the structure of a five-year revolver with two one-year extension options at the end of the first and second years, but that was pretty much abandoned this year in favour of seven-year tenors. Pricing, as well as tenor, remained under pressure, with margins, commitment fees and utilisation fees falling from their already razor-thin levels.Gaz de France helped kick off the refinancing flurry with a €3bn seven-year loan at just 13bp over Euribor with a paltry 4bp commitment fee. This proved that the market was ready to accept seven-year money, and paved the way for a slew of seven-year loans. Other borrowers included German chemical giant Merck, which tapped for a €1bn seven-year revolver at 20bp over Libor with a commitment fee of 30% of the margin, and French utility Suez with a €4.5bn loan at 17bp over Euribor drawn and 5bp undrawn."The first half of the year really was more of the same," said one European syndicate desk head. "Liquidity pushed pricing lower, tenors became longer and we were all left wondering where it was going to end. Pricing can probably still get tighter, but the focus has now moved on to winning M&A mandates and away from just shaving off a basis point here and there."Swiss food giant Nestle marked the pricing low point with its €3.2bn refinancing – split between a €2bn seven-year loan for parent company Nestle SA and a €1.2bn extendible five-year line for Nestle Deutschland. The €2bn paid a drawn margin of just 7.5bp over Euribor, which is lower than some lenders' cost of funds, making the deal a pure relationship play. Pricing on the €1.2bn loan was more in line with the market but still very thin, at 12.5bp over Euribor drawn and 3bp undrawn.Theoretically, tenors could be extended even further with the return of the evergreen, but this seems unlikely given that evergreen loans usually feature financial covenants, and covenants have pretty much disappeared on corporate revolvers, except for seriously weaker credits."Cross-default covenants, MAC clauses and the like have been a thing of the past for more than a year now, but with tenors out to seven years it brings the whole issue of downside protection into focus," said the same European desk head. "Everyone agrees that the whole thing will end in tears, but that's the market, and you have to play in it if you want to play at all."While these developments were not new for loan banks – having characterised the market since the end of the boom in 2001 – what has been different this year is that after three years of pain, banks have developed some strategies for making money in a declining fee-income environment. These strategies include lending further down the credit curve – where returns are higher along with the risk – and to smaller companies, where the cost of capital is higher. Middle and smaller companies are inherently more dynamic so often create lucrative ancillary M&A business.Banks have also looked to increase lending to higher-yielding regions such as Russia and the Middle East. While pricing has also been squeezed in these places, the compression lags Western Europe, and the region's borrowers still generally have to pay more.Lenders have also looked to structured loans, hybrid loans and crossover names in their search for additional yield."W

The US syndicated loan market proved its mettle in 2005 as record liquidity absorbed chunky institutional loans backing jumbo LBOs. Leveraged loan volumes grew in 2005 as supply hit US$79bn in the first quarter, US$68bn in the second quarter and was approaching US$53.06bn as the third quarter drew to an end, according to data from Thomson Financial.More than US$60bn of this backed LBOs as improving economic conditions and an accommodating lending environment empowered the private equity community.“There is a tremendous amount of liquidity in the system among asset classes such as syndicated loans and high-yield bonds,” said Andrew O’Brien, head of US syndications at JP Morgan. “In addition, private equity firms have been successful at fundraising and the same is true for CLO managers, where both the new players and the existing lenders have more dollars to spend.” Market technicals played a big part in setting the scene. “Add to the excess liquidity the fact that credit spreads are attractive for issuers and the default rate remains low and it was a recipe for record new issuance volume,” said O’Brien.From the outset bankers did their best to ensure volumes matched or exceeded 2004's levels. Warner Chilcott opened the year with its US$1.79bn LBO financing with investors gobbling up the paper at Libor plus 250bp.With the floodgates open, arrangers got to work bringing a host of large, heavily leveraged buyouts to market. Buyout volumes totalled just over US$110bn in the first nine months of the year. The most notable buyouts were SunGard (US$11.3bn), Hertz (US$15.6bn), Neiman Marcus (US$5.1bn), Masonite (US$2.5bn), Telcordia (US$1.35bn), MGM/Sony (US$4.84bn), School Speciality (US$1.5bn) and NewPage (US$2.3bn). M&A related deals for DaVita (US$3.05bn), MGM Mirage (US$6bn) and LifePoint (US$1.7bn) also fed the market.Most LBO financings featured large institutional tranches with SunGard’s US$3.5bn in term loans being the largest. The size of these LBOs was matched only by the equally aggressive lending practices, which grew with them. Leveraged multiples rose as covenants packages got looser.“Covenant packages are generally looser for these large deals, just as corresponding leverage is often higher for these larger corporates since the borrowing risk is seen as lower,” said Kathryn Swintek, head of leveraged finance at BNP Paribas.Bankers thought that 2004’s average leverage of 4.9x was aggressive but by the mid-point of this year it had risen to 5.5x, although it eased to 5.2x by August. While this is close to the LBO hey days of 1997 and 1998, of 5.9x and 5.8x, respectively, but they not expected to hit those heights again. “While you can factually observe an increase in leverage, it's still within historic averages. Where the market is more aggressive is in areas such as spreads, covenants, and use of proceeds,” said Mark Okada, chief investment officer at Highland Capital Management.Feeding demandIn tandem with an increase in LBO activity and loan business in general, the institutional investor base also continued to grow. The investor base grew steadily in 2005, doubling since 2002. In 2002, fewer than 100 manager groups and just over 250 active loan investment groups were operating in the leveraged space, compared to 200 active manager groups and close to 500 active loan investment vehicles now.“The senior secured nature of loans, their low volatility and low correlation relative to other asset classes is very attractive to investors,” said Highland’s Okada. “Add to this the fact that loans have the highest risk adjusted returns, or highest sharp ratio, of any asset class over the past decade and it is no wonder investors continue to think it’s an attractive place to put money to work.” The increased demand for loans helped to absorb the steady supply of LBOs. Although buyouts made up the lion's share of leveraged loan business, dividend recaps also contributed as sponsors saw a chance to claw back some of their investmen

If 2004 was mezzanine's year as asset of choice in leveraged lending, this year must belong to second-lien. Previously regarded as a US financing tool, use of the asset class has rocketed since Brenntag introduced it to the European market in 2003, with over 30 deals making use of it so far this year. The growth is just one more indicator of the abundance of liquidity that continues to dominate the market. As new sources of liquidity have opened up in the shape of credit funds, CDOs and hedge funds, second lien has provided another way of tapping this extra liquidity, elbowing its way in forcefully between B/C tranches and the higher-yielding junior debt. Sponsors have been quick to spot the opportunity. Their enlarged appetites have resulted in a blowout year for the leveraged loan market, which has seen 183 issues worth US$142,976.3m in the nine months to September, shattering last year's 12-month total of 242 deals worth US$130,163.9m, according to figures from Thomson Financial. More than 20 of these deals have generated debt mandates topping the €1bn mark, creating plenty of scope for bankers to fine-tune structures to fit demand. It is little wonder that this is the year that European LBO record was smashed with the €7.55bn debt backing Naguib Sawiris' €17.2bn acquisition of Wind Telecomunicazioni, the Italian telecommunications provider. Perhaps the biggest impact of the additional liquidity has been on pricing. This has been particularly evident where performing credits have been refinanced. In April, the market gasped as SEAT Pagine Gialle launched a €2.62bn refinancing that slashed margins on the A and B tranche by 40bp and wiped out the C tranche altogether. Although funds groaned at the loss of blended yield, Charlotte Conlan, deputy head of loan syndications and trading at bookrunners BNP Paribas, was unrepentant: "For the right credit, 250bp/300bp is the market's new level for B/C paper. While flexing to this level after a successful syndication is easy, the real challenge is to set pricing at these levels or finer from the outset." While investors may have complained at the time, their actions appear to support Conlan's view, as SEAT's paper now trades comfortably north of 101 in the secondary market, if supply can be found at all. It did not take long before leads JP Morgan, Lehman Brothers, Banca Intesa and UBM were answering Conlan's pricing challenge with their €1.83bn deal backing the primary LBO of Pirelli Cables by Goldman Sachs Private Equity. The July deal launched with pricing on the B and C set at 250bp and 300bp, although the big cut was on the chunky A tranche, which launched at a 150bp-225bp and settled towards the top of that range as syndication progressed. And as the third quarter drew to a close, BNP Paribas, Calyon, HSBC-CCF, Natexis Banques Populaires and RBS really pushed the market's limits with the €1.588bn recapitalisation of Vivarte. Pricing at launch threw any semblance of an established pattern for European pricing out of the window, as the deal features a 175bp margin on the A, 250bp on the B and 275bp on the C tranche. A successful syndication at or near this level would make Vivarte a landmark deal for the leveraged market, as it will firmly establish the principle that a performing asset can demand lower pricing, regardless of sector. Previously, such aggressive terms have been the territory of businesses with a high cash conversion ratio, typified by the earlier deal for directories publisher SEAT Pagine Gialle. Although Vivarte is both well-diversified and not over-leveraged, the deal is still firmly rooted in retail, a sector known for its high operational gearing and sensitivity to consumer sentiment. Despite the breakdown of the established mantra for pricing European deals, bankers do not feel that the market has moved fully towards the flexible pricing or bookbuilds that characterise leveraged lending in the US. "These changes do not represent a move away from the tradition