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Wednesday, 24th April 2024 |
| Borrowers need to manage their relationships, but must also look out for new lenders |
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| Julian van Kan and Simon Alloca offer advice to corporates considering raising funds via a syndicated loan. |
Whilst many regard the syndicated loan as the first step on the road to the use of capital market products, it is also the one product that is most consistently used by corporate treasurers.
Over the past 15 years, the only thing that has remained static in the loan syndication market is the definition of the product itself - a process by which more than one lender comes together under a common loan agreement, terms and conditions, to provide a loan facility to a borrower. Such a facility will be orchestrated by a mandated lead arranger, with a facility agent to administer the facility throughout its life.
The loan agreement is a ‘living’ document and its design and execution must be such so as to satisfy both borrower and lender alike. In addition to the standard boilerplate clauses, which now follow a ‘code’ prescribed by the Loan Market Association, the agreement will also include the necessary conditions precedent, undertakings, representations, warranties and event of default provisions.
Not unlike other capital market products, three things drive the syndicated loan market; the borrower, facility purpose and the lender.
At its inception the syndicated loan market was principally used by sovereigns to finance the development of infrastructure and other projects. Today, there is barely a borrower class not represented in this market. Bank lenders have traditionally been broader than bond investors in their appreciation of borrower class given the absence of the need to rely on ratings.
In Ireland for instance, the main users of this market have traditionally been corporate entities including the likes of ESB, CRH, Independent News and Media and Bord Gais. Today the most regular users are the financial institutions such as Irish Nationwide Building Society, EBS and Anglo Irish Bank. Whilst many borrowers have access to a wide range of funding sources, including the bilateral loan market, borrowers elect to come to the syndicated loan market for its flexibility and efficiency. The syndicated loan market is therefore viewed by borrowers as being a complementary source of funding.
The borrower type has changed significantly over the past five years. In particular, with the development of the former ‘emerging markets’ in Europe we have seen governments move their funding to the bond markets that became more receptive to their paper given improved rating fundamentals - a good example of this are Greece, Hungary and the Czech Republic. We have also seen an explosion in the financial sponsor driven leverage market which now accounts for approximately 8.0 per cent of the loan capacity in 2003 versus 5.0 per cent in 2000 - one can also refer to the substantial €3.8 billion syndicated loan facility in favour of Madison Dearborn Capital Partners to finance the acquisition of Smurfit in November 2002.
As already mentioned, the syndicated loan is a complementary funding tool or source for borrowers, and with the continued development of funding techniques, it has also been viewed, and used as a funding bridge to other forms of financing such as equity or the longer term bond market.
Its development as a funding bridge accelerated during the late 1990s with large M&A financing such as Vodafone and France Telecom. Almost overnight, we saw syndicated loan sizes go from an average €218.5 million in 1995 to €461.2 million in 1999. Whilst the bank market was able to provide sufficient liquidity for these facilities, there was clearly a need for bank lenders to reduce exposure so that they could reallocate their balance sheet capacity with the client for additional business opportunities. In almost all cases, the loan facilities did not only bridge other funding sources (for either practical or regulatory reasons), but also bridged disposals arising from the acquisition.
Today, as before, the syndicated loan market, given its flexibility can be used for a multitude of purposes, however in the main such purposes are often veiled under the standard ‘general working capital requirements’. As such they are also used as standby facilities by borrowers to ensure that they have access to sufficient liquidity at all times.
Without any doubt, the most significant change we have seen in the syndicated loan market in recent times is the availability of lenders. Lender appetite has changed as a function of bank mergers, risk appreciation, portfolio management or product delivery shifts.
A favourite statistic of mine is that of the top 100 bank investors in 1991 only 58 of these remain today. It is interesting to note that this reduced number of investors are lending considerably more than ever before. This decline in numbers is essentially a function of mergers within the banking sector and it is expected that this will continue both on a local and cross border basis.
When a borrower tells me that they want to manage his bank group down via a syndicated loan, my first response is always ‘you don’t have to help it, it will happen on its own’. It is therefore important that borrowers manage their relationships, whilst always keeping a watchful eye open for new lenders - clearly this gives rise to another tension and that is the need for lenders to have ancillary business. As we all know, borrowers only have so much to offer, however a good relationship manager will find a way of providing added value to a client.
Unlike the US, diversification across lender classes in loans is restricted by withholding taxes (WHT) in Europe - that is to say, only a bank can lend money free of WHT (subject of course to cross border treaties etc). However we are now seeing increasing interest from the non-bank institutional market who are now able to lend via the use of CLOs and the like. In the case of leveraged transactions (particularly in support of financial sponsor driven transactions), the use of mezzanine debt structures has also broadened the lender base. Today non-bank financial institutions make up almost 20 per cent of the leverage loan volume compared to less than10 per cent in 2000.
Having said this, the largest single most positive development in our market, in terms of broadening liquidity, has been the growth of the secondary loan market. As with other debt instruments, loans are tradable, however perhaps not as liquid given the restriction on transferability in loan agreements.
We understand that many treasurers are suspicious of the idea of having their loan assets traded, but it is important to realise the level of liquidity that it generates going forward should be seen as a positive thing in the context of a shrinking primary loan distribution market.
What makes the syndication of a loan work is the blend of the ingredients discussed above. The appointment of a credible mandated lead arranger is critical - they need to understand the borrower and its market, and will therefore be able to fully appreciate the requirements of the facility. Once that is clear, the marriage between the borrower and potential lenders needs to begin with the bringing together of existing and potential new lenders.
Whilst the syndicated loan is the first step in the capital markets world, it must be remembered that it is still a relationship exercise where all parties need to be satisfied.
It is the finding and execution of these solutions that are key to the way any good syndication house should work. |
Julian van Kan is head of loan syndication and trading, Europe Middle East and Africa, and Simon Allocca is head of non-French investment grade origination at BNP Paribas, London.
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| Article appeared in the November 2003 issue.
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