LPC-EMEA syndicated lending steady at US$203bn in first quarter
* EMEA first quarter lending boosted by M&A deals
* M&A loans increase by 120% to US$82.59bn
* Leverage loan volume buoyed by wave of repricings
By Alasdair Reilly and Hannah Brenton
LONDON, March 31 Syndicated lending in Europe, the Middle East and Africa (EMEA) of US$203bn in the first quarter was 4% higher than the US$196bn in the same period of 2016 as a number of early year acquisition financings helped keep volumes stable, according to Thomson Reuters LPC data.
The loan market remains highly liquid and borrowers continue have access to competitively priced loan financing, but with banks facing more rigorous regulations and other macroeconomic and political challenges expected in 2017, lenders are becoming more selective in the deals they do.
“There seems to be an election or other political developments every week, so banks are working around that. There are more M&A financings around, but volume remains low,” a senior banker said.
Loans to Europe’s highest-rated companies totalled US$135bn, which is 19% higher than the first quarter of 2016, but 21% down on the US$170.8bn seen in the same period of 2015. First quarter volume was supported by large scale M&A financing and a consistent level of refinancing activity.
The European leveraged loan market, which finances riskier, more indebted companies, also recorded a positive start to the year increasing 20% to US$47.53bn. This increase was driven by a wave of opportunistic deals, such as repricings, refinancings and dividend recapitalisations, as borrowers took advantage of hot market conditions to secure better terms on their debt.
Deal count was low with only 222 deals completed in EMEA in the first three months of 2017, down 42% on the 386 deals completed in the first quarter of 2016 as the market was dominated by fewer but larger financings.
M&A lending in the first quarter of 2017 saw a 120% increase to US$82.59bn in the first quarter of 2017 as a wave of deals agreed in late 2016 came to the market. Acquisition financing was buoyed by a strong bond market enabling borrowers to quickly replace bridge loans with longer-term debt.
In January, British American Tobacco closed the largest loan of the first quarter, placing US$25bn of bridge loans and £5.68bn (US$7.08bn) of forward starting revolving credit facilities backing its acquisition of the remaining 57.8% stake in Reynolds American it did not already own.
In March, UK consumer goods group Reckitt Benckiser syndicated US$21.2bn-equivalent of loans supporting its US$17.9bn acquisition of US baby formula maker Mead Johnson Nutrition Co.
Other sizeable acquisition financings were seen for Swiss pharmaceutical firm Lonza that closed US$6.2bn of loans backing its acquisition of US capsule maker Capsugel; and French aviation, space and defence technology firm Safran, which placed a €4bn bridge loan backing its acquisition of Zodiac Aerospace.
REFI RISE
Refinancing activity, the traditional driver of EMEA lending, rose 23% to US$115bn in the first three months as a number of European companies took advantage of rock bottom pricing to refinance or amend existing facilities.
“The feeling that pricing has bottomed out means borrowers are now looking at structures, extending maturities or adjusting covenant levels, rather than going for full refinancings” the banker said.
The biggest refinancing of the quarter was an amend-and-extend of Italian car maker FCA Group existing revolving credit facility. The credit line was increased to €6.25bn (US$6.68bn) from €5bn previously and maturities extended.
Meanwhile, macroeconomic and political fears weighed heavily on lending in Africa, Central and Eastern Europe and the Middle East, which was 58% down year-on-year at US$14.4bn, the lowest quarterly volume since the first quarter of 2009. REPRICING WAVE The increase in leveraged loan volumes was driven by a 94% increase year-on-year to US$31.79bn in refinancing activity, while in contrast M&A driven-activity slumped by 72% to US$4.69bn, its lowest quarterly volume since the fourth quarter of 2012.
New money deals also fell 46% year-on-year to US$3.59bn.
“What we saw in the first quarter this year is not unprecedented, but it is very unusual,” said one leveraged loan banker. “Those of us with long memories remember the market in that kind of heat - but not for a decade.”
Pricing has dropped dramatically over the course of the quarter to a low of 300bp for Single B rated borrowers, while documentation terms have deteriorated as investors struggled to stay invested in a market starved of new paper.
“Whether you were trying to ramp a CLO that you had just priced or spend inflows from pension funds and other sources – it’s been pretty tough,” said one loan investor. “As a result borrowers have taken advantage and taken margins right down to the bone.”
There are some signs that the refinancing momentum may be slowing, after investors pushed back against a handful deals that priced at 300bp. However, there is little indication there will be an imminent pick-up in supply from M&A-driven activity, unless a string of larger potential buyouts come through to the loan market.
“The auction pipeline is not very strong,” said a second loan banker. “On the more bilateral situations we are looking at you never know if they will happen.”
Bank of America Merrill Lynch topped the first quarter EMEA syndicated loan bookrunner league table, with a US$18.99bn market share and 28 deals. Deutsche Bank claimed second place with US$16.53bn and 25 deals, while HSBC was third with a US$15.44bn market share and 31 deals. ($1 = 0.9362 euros) ($1 = 0.8027 pounds)
(Editing by Christopher Mangham)