| Syndicated loans in the Irish market grew by 50 per cent in 2005 |
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| Brendan McGrath looks back over corporate banking transactions of the past year, and highlights the growth of syndicated lending, which grew by 50 per cent in the Irish market to reach €13.3 billion, and private placements, as Irish corporates become more demanding. He also examines the changing relationships banks now have with their corporate clients. |
The extraordinary success story that has been the Irish economy over the past 10 to 15 years has posed major challenges for Irish banks as they developed strategies to provide innovative financing products for those individuals and corporates – small, medium and large – that have driven that growth.
The old tried and trusted formulae that might previously have characterised the relationship between a corporate and its bank have had to evolve with the changing circumstances. Not so long ago, banks might simply have developed a product and offered to its customers with the hope that it fulfilled their requirements.
But those days of a ‘one size fits all’ approach to business lending, is now well and truly gone, and unless banks are able to provide a tailored and customised approach to meet customers’ financing needs, then they are simply not going to survive in a corporate banking market where both domestic and international banks are competing intensely for business. More and more, banks are offering a ‘one stop shop’ solution, where a corporate’s financing requirements are drawn from a variety of products – typically a mix of conventional loans, invoice discounting, leasing and mezzanine finance.
The increasing demands that corporates place on their banks, have increasingly led to the development of a relationship-based approach where banks get to know their customers’ businesses at a far more detailed level, and also establish very strong working relationships with the people within those corporates who are driving the growth. ‘Relationship banking’ might seem something of a clich?, but it characterises the partnership that now exists between a corporate and its bank.
That certainly is the approach adopted by Bank of Ireland Corporate Banking, to the extent that the division accounted for some 15 per cent of group profits in the year to March 2005, and were involved in a series of headline deals across a variety of business areas.
That growth in its business has seen Bank of Ireland Corporate Banking expand its footprint from what was once the core Irish market into the UK, France, Germany and the United States, and seen it increase its staffing level by about 40 per cent in the past 18 months.
And as it has expanded its business, Bank of Ireland Corporate Banking has identified some clear trends in how financing for business has evolved and is continuing to evolve. By way of example, the following specific financing sectors are just three areas where changes are taking place on an almost daily basis and where banks are reacting with innovative financing products:
• Syndicated loans
• US private debt placement
• Property lending
With demand at a consistently high level, the European syndicated loan market grew by some 47 per cent in 2005 to $1.3 trillion. The Irish market put in an even stronger performance, with published figures (some deals go unreported) increasing by 50 per cent last year to $13.3 billion. Not surprisingly, much of this growth has been driven by merger and acquisition activity (i.e. the UTV acquisition of The Wireless Group plc), where there has been a notable increase in the average deal size and where major Irish corporates such as Kerry, Smurfit and Independent News and Media remain active globally.
But it has also been driven by a fundamental change in the structure of mid-sized Irish business over the past 10 years, from predominantly family-owned business with growth ambitions to more dynamic growth-oriented businesses. There has been an increase in the number of management buy-outs while new opportunities which barely existed 10 years ago, such as investment in infrastructure, waste management and private healthcare, are presenting new opportunities for banks. In Bank of Ireland’s case, the €255 million syndicated facility for NTR plc, and a €200 million syndicated facility arranged for Greenstar are examples of these ‘new’ opportunities that have emerged.
US private placement
The US private placement has become another favoured source for stable long-term financing for Irish corporates and in the past year alone Bank of Ireland Corporate Banking and its placement agent in this market, Macquarie Securities (USA) Inc, have completed two headline deals for Irish corporates – a $200 million placement out to 12 years for Kingspan Group and a $325 million deal out to 10 years for Grafton Group.
In the case of both deals the interest rates achieved were tightly priced and extremely competitive.. The added bonus for both Kingspan and Grafton was that as well as obtaining fresh capital at premium rates and lengthening their debt maturity profile, the placements, which were largely with US insurance companies, brought entirely new investor groups to the companies.
Financing through the US private placement market, which is worth some $30 billion annually, is likely to become more attractive for Irish corporates in the years ahead for a variety of reasons.
The market is very flexible in terms of maturities and issue sizes – anything up to 30 years maturity and issues between $25 million and $1 billion. In addition, the market is dominated by long-term investors such as insurance companies who tend to hold the investment until maturity and are not investing for a quick turn. Currently, market conditions are very positive for new issuers and there is an imbalance between institutional demand and the supply of quality new issues. This has resulted in more aggressive pricing and less restrictive covenants than has been the case in the past.
Property
Anybody who takes even the most cursory look through the business and property pages of the newspapers will be well aware that Irish property investors have become major players, not just in the home market, but also on a global level. The past 12 months in particular have been marked not just by the growth in property lending but also by the constantly-evolving refinement of property finance offerings.
In Bank of Ireland’s case, the single most important development was the merger of its property offerings in corporate banking and strategic business banking to develop a dedicated property finance team. This created a unified face for Bank of Ireland in the property market and allowed it to eliminate unnecessary duplication of activities.
And as Irish property players moved abroad, the bank’s Property Finance Group moved with them, and was involved in headline transactions as diverse as the Savoy Hotel and Knightsbridge Estate acquisitions in London, and the Cartier headquarters acquisition in Paris.
Looking ahead, Bank of Ireland Corporate Banking anticipates further growth in the UK following the hiring of a new team of property bankers from one of its competitors. This specialist team will have the task of growing the UK property business. Other significant transactions were completed in France, Germany and the United States and plans are well-advanced to base more property teams in mainland Europe and the US over the next 12 months.
This article can only give a flavour of the dramatic developments that are taking place in a vibrant Irish corporate banking market. Banks are having to be increasingly innovative with their products and the concept of relationship banking is becoming more firmly established in the Irish banking lexicon. Bank of Ireland Corporate Banking has grown its business significantly in recent years, and according to chief executive Tom Hayes, it is determined to maintain its leadership position. |
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| Article appeared in the April 2006 issue.
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