LONDON Syndicated lending in Europe, the Middle East and Africa in the first nine months of 2016 was US$590bn, the lowest total for four years, according to Thomson Reuters LPC data, as demand for loans remained subdued amid political and economic volatility.
The end of the main refinancing cycle and wider uncertainty - including Britain’s shock vote to leave the European Union in June and the upcoming presidential election in the US - has kept many borrowers away from the loan market, despite high levels of market liquidity and the ultra low loan pricing on offer.
Loan volume was 22% lower at the end of the third quarter than the same period of 2015 as refinancing -- the traditional driver of EMEA lending -- plunged 38% to US$276bn.
Third quarter volume was also 32% lower year-on-year at US$150bn, compared to US$220.5bn a year earlier as activity subsided over the summer after the Brexit vote.
Most European companies have already refinanced in the last couple of years at attractively low rates and bankers are not expecting an upturn before the end of the year.
“I do not see the figures improving at year-end. Once you are behind it is incredibly difficult to catch up. You would need a lot of big corporate refinancing to make up the lost ground and those are simply too few and far between,” a senior banker said.
Meanwhile, M&A financing was flat on last year at US$142bn as acquisition activity remained patchy, although a clutch of multi-billion M&A financings - including a US$57bn bridge loan backing Bayer’s (BAYGn.DE) acquisition of Monsanto - could boost fourth quarter volumes.
The third quarter did see several multi-billion event-driven loans completed, the largest of which was a US$13.1bn backing France’s Danone’s (DANO.PA) acquisition of US organic foods producer WhiteWave Foods.
German conventional generation and energy trading business Uniper closed a €4.5bn loan in July backing its spin-off from E.ON (EONGn.DE), and South African retail group Steinhoff (SHFFp.J) closed a US$4bn loan backing its takeover of US mattress seller Mattress Firm in early September.
Although levels of M&A activity are not enough to fill the gap left by the lack of refinancing, event driven deals provide banks with greater value as they look to secure ancillary business such as related capital market takeouts.
“Regardless of overall market volumes, it is these new money transactions that really count,” a second banker said.
“We are seeing a nice mix of things out there at the moment. Cross-over financings, loans backing spin-offs and IPO financings, as well as deals like Bayer, which will help not only fill out volume but also supply quality.”
LEV LOANS SLUGGISH
The European leveraged loan market’s sluggish year continued in the third quarter, bringing year-to-date volume to its lowest point since 2012 as a lack of supply created favorable borrowing conditions.
Leverage loan volume of US$38bn in the third quarter contributed to a 32% slump in volume to US$115bn for the first nine months, compared to US$170bn in the same period of 2015.
Investors faced a thin supply of new loans over the summer. Leveraged M&A loans were 29% lower at US$49bn in the first three quarters compared to US$69.6bn a year earlier, while refinancings showed a 40% decline in the same period to US$53bn from US$89.4bn.
With only a handful of auction processes in the works for the fourth quarter, bankers do not expect M&A-driven issuance to pick up substantially before year-end, putting bank revenues under pressure.
“From an overall deal perspective we think it’s going to be a down year,” a third loan banker said. “If you do the maths in terms of the number of processes coming through, there aren’t that many.”
The lack of prospective supply is exacerbating a borrowers' market as leveraged loans continue to look attractive to investors hunting for yield.
The weight of demand has pushed secondary market levels to an average bid of 100.24% of face value on Thursday, according to Thomson Reuters LPC data.
Favorable market conditions prompted a wave of opportunistic deals which hit the market in early September, including refinancings, repricings and dividend recapitalizations – which show no signs of abating.
“It’s tough, it’s very tough,” said one loan investor. “Conditions are very good for issuance, if you’re thinking about it, you will do it.”
After nine months BNP Paribas (BNPP.PA) tops the EMEA syndicated loan bookrunner league table with a US$28.69bn market share and 147 deals. UniCredit (CRDI.MI) claims second place with US$26.77bn and 128 deals, while JP Morgan (JPM.N) is third with US$25.11bn and 48 deals.
(Reporting by Alasdair Reilly & Hannah Brenton; Editing by Tessa Walsh)