LONDON (Reuters) - A series of jumbo multibillion dollar acquisition loans and rising demand for dollar loans in the Gulf are highlighting a developing dollar squeeze in Europe, the Middle East and Africa which is hitting some banks’ returns on syndicated loans.
Blockbuster acquisition loans, including a record US$75bn acquisition financing backing global brewer AB InBev’s (ABI.BR) acquisition of SAB Miller SAB.L and loans totaling US$31.5bn backing Teva Pharmaceutical Industries’TEVA.TL acquisition of Allergan Generics, are soaking up dollar liquidity in Europe.
Although the loans will be undrawn until the underlying acquisitions close, banks have committed to the deals which include big term loans that could be drawn. AB InBev’s term loans total US$35bn and Teva’s total US$4.5bn.
At the same time, low oil prices and dwindling liquidity in the Middle East are prompting sovereigns and financial institutions to turn to the syndicated loan market for large dollar loans to plug budget deficits and stem large withdrawals from the banking system.
Oman launched a US$1bn, five-year loan on Friday and Qatar is seeking a US$10bn loan. Banks’ rising dollar funding costs mean that Qatar is unlikely to raise the full amount, bankers said.
“There is a scarcity of petrodollars in the system,” a senior banker said.
Persistently low oil prices mean that corporate clients are earning fewer dollars and depositing less with international banks, which is resulting in a shortage of dollars and reduced availability for lending.
Banks without access to dollar deposits – primarily European and Japanese institutions – are having to buy expensive dollars in the wholesale markets to onlend, which is cutting into already low returns.
The cost of borrowing US dollars hit its highest level in more than three years last Wednesday, when the three-month euro/dollar cross currency swap basis hit minus 46bp, the widest level since July 2012. While this is lower than 160bp at the height of the eurozone crisis in 2011, it is creeping higher.
“I think this is a developing issue, but the longer the environment of increased stress persists, the more people will start to feel it,” a loan syndicate head said.
Strong US employment data, which has increased the likelihood of the Federal Reserve raising rates at its December 15-16 meeting, has also pushed yen-dollar swap costs sharply higher, which is bad news for Japanese banks lending abroad.
The problem has been developing for some time, as the European Central Bank’s policies have flooded the market with cheap euros, but has become more pronounced since April 2014, bankers said.
Banks are still lending money, but rising dollar funding costs are cutting into razor-fine loan returns, and making banks scrutinize the overall return from customers more closely.
Loans are traditionally viewed as loss-leading products, designed to net other more lucrative ancillary business, but the relationship model of lending is coming under pressure as banks try to boost return on capital.
“This is an issue and it is feeding through to a more acute focus on whether the relationship story stacks up in each deal you look at. If increased dollar costs mean that you’re further underwater on the loan, there’s an increased focus on ancillary business,” a loan syndicate head said.
Rising demand for dollar loans in the Middle East is behind the developing dollar squeeze, which was last seen in 2011. Middle Eastern banks have experienced large withdrawals and banks, including Qatar National Bank, started to raise syndicated loans earlier this year.
A recent rise in Middle Eastern loan pricing of around 25bp is encouraging banks to conserve liquidity by declining to join new internationally syndicated loans and selling corporate loans in the secondary market to raise dollars, loan traders said.
“Due to the dollar squeeze, local banks are selling corporate loans to raise dollars in big tickets of US$50m–100m. All the local banks are selling or being forced to sell which I haven’t seen before. We have bought around US$400m,” a secondary trader said.
Higher dollar funding costs are leading some banks to call for the return of the dollar premium of 2011, when banks asked European borrowers to restrict dollar drawings or pay a premium.
The dollar premium was around 20–30bp on introduction in mid-2011 and rose to 50bp in late 2011 before reducing and disappearing in 2012.
“Dollars are a problem, banks have woken up to it in the last couple of months. We can’t go on without being compensated for it,” the senior banker said.
Relatively few dollar premiums have been seen to date although one recent loan for an Italian company included utilization fees of 20bp, 40bp and 60bp for dollars, as opposed to 10bp, 20bp and 30bp for euros, two bankers said.
While some banks are undoubtedly finding dollar funding painful, many lenders are likely to continue to support deals, particularly for high quality clients such as AB InBev, which will be the world’s largest brewer after its merger with SAB Miller.
Banks pricing AB InBev’s US$75bn loan had two distinct views, depending on their access to dollars, bankers said.
AB InBev’s loan was priced with a weighted average cost of 110bp over Libor which, although higher than many bridge loans in 2014, was deemed fair by most lenders.
“Banks may start charging a premium, but there’s a lot of competition and they may just swallow the cost,” a second loan syndicate head said.
Additional reporting by Alasdair Reilly and Sandrine Bradley in London. Editing by Christopher Mangham.