Under the blue and green lights at Lloyds’ annual loan market shindig last week, bankers seemed to have abandoned their rose-tinted glasses, writes Tom Freke, editor of loanradar, the online news and analysis site for the syndicated loan market.
“People were sure that something was just about to go wrong… But not just yet, and not at their bank.”
The pipeline of loan deals for early 2008 is very strong, says Freke, with a range of big loans expected to launch, including major new M&A facilities.
Sure, the overhang of leveraged loans isn’t going away any time soon, but that hasn’t stopped a series of emerging market, infrastructure and investment grade deals sailing through the market. And while we’re clearly seeing a turn in the credit cycle, this doesn’t automatically equate to a value-destroying crash, says Freke. “If it did, loan teams might be having more difficulty putting together deals.”
But there’s little sign of such difficulties in the non-leveraged world. This month has seen BHP Billiton informally line up a $70bn loan, Rio Tinto launch $40bn and Nestle wrap up a €6bn loan. No sign of liquidity problems there.
Some explain the gap between what lenders are saying and doing as a “phoney war”. Only in 2008, they say, will loan bankers really feel the effect of the summer’s credit crunch. Maybe so. The bond market is clearly worried, having closed to new business last week, but many think the loan market is more resilient.
“The loan market is always open to business,” one banker told Freke. “When all the other markets have gone away, it is always the banks the borrowers come to — this is where we come into our own.”
“It’s all about arrangers and borrowers working hard to emphasise the importance of the relationship,” said another banker. “If you don’t have the borrower putting in the calls, making it a priority for lenders, giving them a reason to come in, then these deals can all too easily fall away.”
Yet another observes: “Where are deals still being done?… Turkish banks, French and German corporates, smaller mid-market companies and those CIS banks willing to put in the work. What’s the common thread? Relationships and old-fashioned syndication work.”
The main difference, afterall, between loans and bonds is relationships. A bond is often simply a loan without a relationship attachment. As such, the link between the borrower and lender in the bond market is as long-lasting and trustworthy as any no-strings dalliance, notes Freke.
An interesting example of this is the Sberbank deal. Sberbank, the dominant state-owned Russian savings bank, which has just agreed to finance the acquisition by Urals Energy, an Aim-listed Russian oil and gas company, of 39 per cent of TaasYuriakh Neftegazodobycha, a privately owned Russian company with assets in the oil-rich east of Siberia, for a total of $1bn-plus. Sberbank is asking banks to participate in a $750m three-year loan paying an annual all-in of L+60bp.
CDS pricing of comparable Sberbank debt puts pricing north of 100bp.
Some say the gap between prices indicates the loan market is mispricing debt. However, explains Freke, bankers say the gap is partly because the loan market level is “real” rather than theoretical, and that the Sberbank relationship has a high value in the market. It is, after all, the dominant state-owned Russian savings bank.
And given the importance of relationships in fourth-quarter deal flow, it is probably no coincidence that non-bank lenders, where relationships play a secondary role to yield, have played little part in recent loan syndications.
Non-bank lenders’ entrance into the market came when excess liquidity prompted a search amongst funds for arbitrage opportunities and a hunt for hidden yield. Now that excess liquidity seems to be a thing of the past, many of these lenders are becoming choosy about their future participations.
But given the time of year, uncertainty is still the dominant characteristic of the market. Things will only begin to take a firmer shape in 2008, and this is one reason why so many deals are now being pushed into the New Year.
So the first quarter of 2008 will be a key time for the syndicated loan market. Only then will it become clear whether there really is continuing demand for debt. And by then it is likely that the short-term credit market problems will be resolved, one way or another.
Until such time, syndicated loan bankers have reverted to type — lending into relationships while being cautious of new or aggressive structures.
