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European syndicated loan market is now worth over €600bn Back  
Increased demand for corporate borrowing has meant a proliferation of debt instruments over the past twenty years. Vanilla debt financing, such as syndicated loans, however, continues to prove a resilient means of tapping the market for liquidity writes Bill Fish.
Over the past five years, annual issuance in the European syndicated loan market has grown from €290 billion to €600 billion (c.1,200 transactions). This market was traditionally dominated by the relatively mature and transparent UK market since on the continent, most borrowers could secure favourable terms with their domestic banks on a bilateral basis. However, the bank loan market underwent a major step change in the late 1990s due in large part to the surge in M&A activity, particularly in the telecommunications, media & technology sector. The large borrowing programs undertaken by many continental corporates to fund their international expansion plans created a need for liquidity that exceeded the capacity in their home markets. These financing needs often straddled both the bond and loan markets as borrowers sought to match their funding with their short, medium, and long-term investment plans. The resulting increase in corporate credit ratings, combined with the introduction of the euro, aligned the continental loan markets more closely with the UK. Hence previous pricing discrepancies began to be arbitraged out of the Euroloan market.

The millennium brought a fresh set of challenges to many of these borrowers, who found themselves saddled with large amounts of bank debt in a deteriorating credit environment. As the bond markets closed (or became prohibitively expensive), many borrowers renegotiated terms with their banks in order to buy time to meet disposal targets and reduce their overall debt levels. Although the loan market overall demonstrated the resilience and flexibility of the product, there was a marked contraction of liquidity by domestic borrowers as whole regions and sectors slid into a recession.

Many domestic banks found themselves provisioning for large portions of their domestic loan book, prompting them to retrench from the market and actively curtail their lending activity. This seismic shift saw a tightening of domestic bank liquidity at a time when many borrowers required more funds, leading to an internationalisation of lending syndicates with the pricing implications that entails.

Recent history demonstrates that corporate borrowers will always require some form of loan financing, be it drawn term debt to fund a strategic acquisition or an undrawn revolving credit facility to serve as a backstop to a commercial paper program. The key benefit of a loan is flexibility. Documentation terms are tailored to the borrower, funds are usually available to be repaid and redrawn, and loan facilities can be cancelled in whole or in part at any time with no call premium. Syndicated loans are therefore particularly suited to support acquisitions, where quick access to funds and confidentiality are key issues. Establishing a benchmark facility in advance of any potential corporate activity enables borrowers to set acceptable terms and identifies a group of potential lenders for future acquisition needs.

Many borrowers are consolidating their syndicated loan facilities as a means of paring down their banking groups. This allows them to reward their key banking relationships with other fee-earning business such as advisory work or fixed income mandates to cross-subsidise a corporate borrower’s overall liquidity needs. The most obvious evidence of this trend has been the increase in participation by the bulge-bracket investment banks who have traditionally shied away from lending in the past. The demonstrated commitment by banks to their corporate relationships has led to a dramatic increase in the level of over subscription in syndication.

In today’s Euroloan market, successful transactions are characterised by several key principals:
• A fair and orderly bidding process where mandated lead arranger banks are selected on the basis of overall relationship with the borrower and the quality of their advice;
• A clearly objective in terms of facility amount, pricing parameters, credit support terms, and target bank group;
• An appropriate amount of ancillary business to offer relationship banks who provide liquidity, and the consistent denial of such business to those banks that don’t support the transaction;
• A defined group of pre-selected banks to manage the syndication process, including the negotiation of loan documentation and the execution of the bookrunning function; and
• A willingness to listen to market feedback on terms and conditions, as a useful backdrop for the next round of financing.

Back of an envelope estimates suggest that a bank which leads a corporate loan facility is three times more likely to be awarded a bond mandate than a non lead bank. Whether this is because the corporate continues to use select banks to manage all of its financing, or in recognition of the liquidity provided, is not always clear. What is evident is that with increased competition in the markets, banks cannot ignore the competitive advantage of lending to their key relationship accounts. The top ten mandated lead arranger league table banks now provide more liquidity to the loan market than any other group, highlighting the potential relationship between loan financing and other types of banking products.

The overall 2003 trend and outlook for 2004 suggests there will be fewer deals by number in syndicated lending, particularly in the UK. In the absence of negative credit events and with continued demand for fee income in the banking sector, overcapacity in the market will therefore continue to drive favourable conditions for corporate borrowers. In particular given the market is likely to become more accommodating for un-rated borrowers and with the continued promise of future business opportunities for borrowers generally, now is the time to tap unprecedented levels of bank loan liquidity.

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