The syndicated loan market is the beating heart at the core of the world’s financial system. More than any other facet of finance, it is loans to companies that drives expansion, profitability and ultimately share prices. Without access to this – the most basic and senior form of capital – the world’s conglomerates could not operate.
As the aristocracy of debt, the syndicated loan market has not suffered from the credit crunch to quite the same extent as its less blue-blooded relations in the bonds and derivatives arena. But it has not come away unscathed – the liquidity crisis set off by the US subprime debacle has had a profound impact on the loan market.
The years of plummeting prices and ever-loosening covenants on deals have come to a dramatic end. Prices have doubled, in some cases, and bankers are deliberating far harder over deal structures and covenants. Deal volumes have been slashed and the secondary market in loans has almost dried up.
According to data from research firm Dealogic, global syndicated lending plummeted by 42% to $1500bn in the first half of 2008. This compares to volumes of $2600bn for the first half of 2007. The number of deals signed has fallen too. In the first half of 2007, more than 5000 deals were signed, whereas in the first six months of 2008 just 3500 were signed.
Falling loan volumes
The US and Europe have been hit the hardest. In the first half of 2008, total loan volume in the US fell by 53% and in Europe volumes plummeted by 52%, compared with the corresponding period in 2007. The emerging markets fared little better. Deal volumes sank by 19% in the first six months of the year compared with the first six months of 2007.
In every crisis, however, there is opportunity. As the bigger, more established banks start to withdraw from the farther reaches of their financial realms, smaller local banks are coming in to take up the slack. With tougher market conditions, the bigger banks are focusing on their core markets and relationships.
“The traditional players are being more constrained in their ability to lend and much more focused on managing their capital as effectively as they can,” says Melissa Samuel, a banking partner at law firm Allen & Overy. “They are definitely still doing deals, but they are not piling into everything.”
As a result, domestic banks in emerging markets, usually the recipients of syndicated loans, are now lending to others. It is particularly evident in Turkey.
In early 2008, private equity house BC Partners took over Turkish supermarket giant Migros. The $3.2bn deal was unique in that it was backed not by the big established banking brands of the West, but by local Turkish banks. Garanti Bank, Isbank and Vakifbank led the debt financing, which had a seven-year tenor and paid 200 basis points over Libor.
Early days
Ebru Edin, head of project and acquisition finance at Garanti Bank in Turkey, believes that the Migros deal is just the beginning. “We are definitely going to see more of these types of deals in the Turkish market,” she says. “Top-tier local banks have strong balance sheets, know both the customers and the project risks very well and create an advantage to the buyer with tailor-made and swiftly served financing options.”
For Mrs Edin it is not only the hesitancy of international banks that has allowed in local players, but also the growing underwriting capacity and local know-how of domestic players. “Local banks already know the business better and can provide guidance about the risks or act more boldly as they have an ongoing business relationship with that sector or target company,” she says.
However, this boldness has led to some discomfort among more established lenders. Some have accused local banks of undercutting the pricing benchmarks put forward by foreign lenders and of putting in place weaker deal structures.
Mark Vincent, global head of loans syndications at Standard Bank in London, says: “Local lenders have come in and are stretching their wings. Because of the proximity to the borrowers and their understanding of the local markets, they would tend to be more aggressive than the more traditional international lenders,” he says. “The implication of that is that you have more competition in the market, pricing tends to get pushed down and structure gets weaker.”
Climbing league tables
It is not only in Turkey that local banks are climbing up the league tables. In Russia too, there has been a noticeable trend towards less-established players grabbing market share. One Russian bank that has ramped up its operations lately is Vneshtorbank (VTB). It recently opened up a loans syndication desk in London and plans to expand its presence across the world, particularly in Asia and the Middle East. The bank is opening offices in Dubai and Singapore, with aspirations of establishing itself in the US as well.
It is in its home market of Russia, however, that VTB is particularly aiming to grab market share. The bank’s newly appointed head of loans syndications, James Nisbet, is optimistic. “With all the chaos going on, certain banks that have not been as badly hit by the subprime problems are seeing an opportunity to gain market share,” he says.
The US banks, hit hardest by the credit crunch, are lending less in Russia, which has allowed capacity for other banks to move in. “Smaller banks such as VTB are seeing an opportunity to get more business and up their profile,” says Mr Nisbet.
Middle market focus
Banks such as VTB still do not have the capacity to lead the jumbo deals for Russia’s biggest corporates but they are focusing on the middle market. These kinds of deals pay better fees and have the potential to provide ancillary business in the future.
VTB’s $1.5bn three-year loan to Russian potash miner Silvinit in July is a reflection of how times are changing. “Normally [VTB] would do deals of about $100m,” says Mr Nisbet. “But ‘bang’ – they went and did $1.5bn on their own without the need for other banks to be involved at the top level. If you include that deal in the league tables then we’ll be right up there with the top players. We don’t have the same clout of a BNP Paribas or Barclays... but we’re planning to be very active and take opportunities where we can.”
Santander’s rise
It is not only within emerging markets that the international syndicated loan market is shifting shape. In western Europe, one bank in particular is out to get as much market share as it can while conditions remain tough for its more subprime-exposed competitors. Spanish giant Banco Santander Central Hispano (Santander) has focused its attention on the loan market and shot up the bookrunner league tables recently.
Whereas in 2005 Santander did not feature in the top 25 bookrunners in Europe, the Middle East and Africa, by mid-2008 the bank had risen to 11th in the table with a 1.5% share of the market. The bank has been present in the two biggest deals of the year. These were the $55bn loan to mining giant BHP Billiton for the acquisition of its rival Rio Tinto, and the $40bn facility to back Belgian brewer InBev’s purchase of US competitor Anheuser-Busch.
These jumbo deals have taken up capacity in the loan market this year and led many of the bigger banks to restrain their lending in the emerging markets. “We weren’t doing deals of that size, even three years ago,” says Ms Samuel. “The capacity is still there but it is getting used up on some of these big deals. The overall amount being lent is still high, but it is more concentrated.”
This inevitably leaves opportunities for domestic banks in the areas where the international players have cut back on lending. However, there is a limit to how much local banks can expand, even in their home markets. Their scale holds them back.
A matter of scale
“Our $1.5bn deal has taken a lot of our funding,” says Mr Nesbitt, referring to VTB’s loan to Silvinit. “It will restrict us in terms of what we can do now – until we sell that down and syndicate it.”
Cost of funding is also an issue for banks in emerging markets. They do not tend to have large reserves of retail deposits and so are reliant on money from the international markets, which can be very expensive. This means that access to the top table on the big syndicated loan deals will remain a distant dream for most local banks in emerging markets.
Looking ahead, it is clear that the world of syndicated loans is changing. After years of benign lending conditions, which allowed for the rapid increase of leveraged lending to private equity, the market has entered a brave new world.
With the collapse of the lucrative leveraged loan market, banks are being forced to be more considerate in their lending. Loan volumes have been propped up this year by two of the biggest acquisition loans in corporate history – but who is to say this will be the case next year?
Sustaining volumes
Standard Bank’s Mr Vincent is optimistic that volumes will be sustained into 2009, but corporates will have to pay for the privilege. He says: “Inbev’s loan was the most expensive investment grade loan ever done. It bit the bullet and did [the deal] because it wanted to buy a company that 18 months earlier it would have been in a battle with private equity for and private equity would have paid silly money for.” He believes that strong corporates will still be making acquisitions and that a lot of money will come out of the Middle East and Asia into Europe and the US.
It is in pricing, however, that the real change will be felt. “You’ve got borrowers paying twice as much as they were paying a year ago – both in emerging and emerged markets,” says Mr Vincent. “Even for normal financings, investment grade borrowers are paying double what they were paying last year.”
