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Corporate banking overview 2003: corporate bond market emerges, and, at last, PPPs Back  
The corporate bond market re-emerged as an alternative to conventional debt in 2003, writes John Reynolds, with capital raised via the bond market by Kerry Group, Greencore, Independent Newspapers, Greencore, and Waterford Wedgewood during the year. 'A market that was once neatly divided between large quoted public and private sector businesses and the state sector is now more complex and diffuse', he says.
TThe corporate banking market is defined by the activity of corporates at a point of time. In 2003, the market was populated by a reducing number of Irish public companies, an increase in the scale of property lending; a new breed of once public now private corporate vehicles; and hybrid consortia-driven ventures seeking positions in the at-last emerging public private partnership arena. A market that was once neatly divided between large quoted public and private sector businesses and the state sector is now more complex and diffuse.

In a general sense, the corporate banking market was static in 2003 achieving at most c.2 per cent growth when other forms of lending are stripped out of bank published numbers. Within that stasis was a very significant element of refinancing or replacement lending with a markedly different corporate context than heretofore.

Large Irish corporates
Acquisition driven Irish corporates who have attained scale through domestic and global purchases found it more difficult as a consequence of their increased scale to identify and put away larger acquisitions. This is because potential acquirees of that size are within the radar screen of the super multinational segment. For that reason, what has become known as the CRH model of serial bolt-on acquisition has proved very successful for a number of Irish companies such as Grafton Group plc. CRH broke their own mould in Europe with the e600m+ acquisition of Cementbouw.

Public to private
2003 again saw the privatisation activity continue with no less than five public to private buyouts completed. Alphyra and Riverdeep attracted a reflectively high level of venture capital equity given their less traditional business sectors. The Nesbitt family buyout of Arnotts was another significant privatisation transaction during 2003. Sherry Fitzgerald also joined in this trend away from the market. An emerging phenomenon has been the increasing absence of venture capital houses in leveraged buyouts with private investor’s capital and bank mezzanine debt replacing institutional/venture capital debt. An interpretation of this might be the competition, which always exists for the ultimate profit share between VC’s and management teams, and the desire for banks to share in this return.

The trend for public companies to go private has been a fact of life for a number of years and in 2003, the first signs of what the future holds for the privatised vehicles became evident. The Valentia/Eircom refinancing facilitated the release of equity to the original investing group and is a possible pre-cursor to its refloatation or disposal. Public speculation regarding a similar reversion to the market by the Smurfit Group would be a further example of this phenomenon.

Corporate bond markets
Re-emergence of the corporate bond market as an alternative to conventional debt was confirmed through the capital raising by Kerry Group, Greencore, Independent Newspapers, Greencore, Waterford Wedgewood and most recently ESB. Whilst such funding can prove useful in diversifying the funding base of a company, it also has the attraction of extending the maturity profile of the company’s debt. However, the flexibility and responsiveness of the conventional debt market continues to be favoured by acquisition driven enterprises.

Property finance
While it is traditionally viewed as a separate niche of financing activity, the extent of large scale real estate property development finance which occurred in the Irish banking market in 2003 is closer to the corporate banking model than traditional property finance. Development companies active within the construction sector such as Castlethorn and Treasury Holdings have a scale in excess of the average Irish corporate as normally defined. Of particular note in this regard would be the c. €400m development financing of the Dundrum Shopping Centre project and the c. €300m development finance package for phases of the Spencer Dock area.

Project finance and public-private partnerships
A significant number of Irish and overseas corporate entities as well as banks have invested huge energy and planning resource into chasing positions in the project finance and public private partnership market. Infrastructure financing, be it in road, renewal energy facilities or the variety of other heretofore state provided services e.g. education/medical care, has emerged as a highly active component of the corporate banking market. To date, wind energy has attracted involvement from large-scale developers such as ESB, RES/B9, Viridian and Airtricity among others. NTR’s sphere of involvement extends widely from wind energy to waste management to, obviously, roads. With the involvement of Viridian in Huntstown and the recently announced award of CER accreditation to the consortium behind the Tynagh proposal, energy as an area of heightened interest is providing a new forum for large-scale corporate banking activity in Ireland.

Corporate banks
If the corporate banking market has the above features, what was the Irish corporate bank’s position in 2003?

Firstly, the number of relevant banks in Ireland has not changed dramatically over the course of the past 10 years. At any time during that period, there have been c.10 active supporters of the Irish corporate debt market. The identity however of the grouping would have changed with a number of foreign-owned banks having ebbed and flowed as regard their enthusiasm for Irish corporate debt. A consistent core grouping, however, in this market has been that of AIB, Bank of Ireland, Ulster Bank and IIB Bank along with Anglo Irish Bank in property finance.

Secondly, in 2003 the extent of competition in Ireland for relatively few prospects meant that the terms and conditions which applied to Irish financings were and continue to be frequently better from a borrower perspective than would apply to comparable transactions in the UK, Continental Europe and certainly the USA. As a result, a frequent complaint from syndicate specialists based in London or elsewhere when they look at Irish originated transactions is the extent to which such transactions are felt to be ‘non-conforming’ with the financing norms elsewhere and hence difficult to syndicate.

Essentially this means they are either more tightly priced and/or more borrower friendly in terms of loan conditions. Favourable banking terms have been further sustained by a traditional reliance on relationships in the Irish banking market to an extent that has in many ways left UK and other foreign markets. As the scale of financing requirements enters the e500m+ range for an individual corporate transaction, relationship banking ceases to be as relevant and the more transaction orientated investment banking players from overseas enter the fray. The pros and cons of this reality from a corporate borrower’s perspective is a matter of much subjective debate.

In conclusion, 2004 promises revived economic growth, further public to private corporate activity, and the emergence of a new generation of indigenously managed, Irish owned corporate entities, probably privately owned in the short-term.

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