Syndicated Loan Market is on a Roll

By Bryan Richardson and Ted Howard

Downward pricing trends and supportive banks are creating a favorable environment for syndicated loans.

With the release of Basel III rules that maybe not as bad as had been threatened, conditions for corporate funding have improved dramatically over the last few months. With low rates expected to stay low and lots of willing buyers, companies—particularly in investment-grade level—are issuing bonds at near pre-crisis levels and access to bank credit has also improved.

Easier access to funding has certainly been the case in the syndicated loan market. According to figures from Loan Pricing Corporation, after a precipitous drop-off in 2008 that continued into 2009, the level of issuance at the half-year mark of 2010 was nearly as high as all of 2009. In fact the market has improved more than predicted, especially if a company has the right credit rating.

According to BNP Paribas, which presented its views at a recent NeuGroup Engineering and Construction Treasurers’ Peer Group (E&CTPG) meeting, lending appetite is back and growing with issuers having refinanced more than $300bn so far this year across all sectors.

And for companies that are rated BB and above, it gets even better: deals have consistently been oversubscribed, leading to better pricing. Indeed, capital constraints have largely abated and pricing continues to come in; and the banks that are in the market are “alive and kicking and making their presence known,” according to BNPP.

State of the market

With all this in mind, here are a few details about the current market to consider before heading out to the boom town.

Refis on the move. Prior to this year’s surge in refinancings, some issuers had expressed concerns over what BNPP described as a coming “wall of maturities,” as well as worries over the supply and demand imbalance for 2012-2014 maturities that would likely follow. But these
concerns have now largely moderated, with many deals refinanced and right-sized and “amend and extend” activity also stepping in to support the weaker credits.

Thus far in 2010, issuers in the engineering and construction (E&C) space alone have re-financed approximately $3.7bn, according to BNPP.

The banks that are in the market are “alive and kicking and making their presence known.”

The price is right. And what about pricing? It is more attractive and could go lower still. That’s because with debt deals consistently oversubscribed there logically has been pressure on pricing, which has fallen by 50 basis points across the board since February.

Being a strategic client depends on the bank’s share-of-wallet with the company

There have been some variations on this trend based on credit ratings, but with no change among banks seen currently, the expectation is that pricing will continue to fall a bit further. More significant price reductions are being prevented due to the dramatic change in banks’ cost of funds as seen in 5-year CD rates, which have moved from low double digits to low triple digits basis points.

Duration is getting longer. While 5-year deals are not yet commonplace, they have begun to appear for smaller transactions and BNP Paribas expects them to return for larger transactions soon. Nevertheless, longer tenor deals continue to command a pricing premium.. Pricing, and notably upfront fees, is more attractive in 4-year tenors than for longer maturities: there have been successfully executed 4-year transactions by E&C issuers in the second and third quarters of 2010.

Does your bank consider you a strategic client? Although there are expectations customers will be a “strategic client” and offer up other business for banks, some issuers have suggested that in the current environment, the list of strategic clients is expanding again.

Still, whether or not the company actually is a strategic client depends on the bank’s satisfaction with its share of the company’s wallet—thus, it is critical to find out where the company stands with each of its banks. Companies that don’t meet the share of wallet criteria will likely need to pay more in upfront and undrawn fees and/or spread to access banks’ capital.

On the other hand, a true strategic client will benefit from superior support and more flexibility from its banks, BNPP noted. Generally speaking, banks are simply being more careful about how they allocate their capital.

Banks’ lists of strategic clients are expanding.

There are multiple bookrunners. Depending on the size of the transaction, using more than two lead banks is now normal for most deals. The trend now is to have a smaller, “top-heavy” syndicate with more bookrunners, each with credit allocations as high as 15 percent.

Banks have personalities. In terms of viable syndication banks, the list has shrunk in the US and Europe coming out of the crisis, leaving bookrunners with fewer reliable places to go for debt participation.

According to treasurers, two regions to avoid are Japan and China, both of which were described as very “on/off” in their interest levels. Further, Chinese banks, when they do participate, are notorious for slowing down the process and causing pricing to be higher. Treasurers who have experienced this say they would not use a Chinese bank again.

But that view isn’t shared by all. One treasurer pointed out that one advantage of using a Chinese bank is that it helps improve the company’s view of China in a strategic sense. “The bankers like to talk about what is going on locally,” the treasurer said. In this way, treasurers get a good boots-on-the-ground view that they can share with management.