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Tuesday, 16th September 2025 |
| Syndicated loans 2005: that was the year that was |
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The syndicated loan market in 2005 once again confirmed its status as Europe’s No. 1 source of debt capital raising. In 2005, syndicated loan transactions in the Europe, Middle East and Africa market amounted to $1.4 trillion according to Dealogic Loanware, representing an impressive 48 per cent over the prior year. In this article, I would like to look at the reasons behind such significant growth, the basis upon which this volume increase has taken place and, finally, the outlook for 2006.
In the investment grade market, where 2005 volumes were in excess of $900 billion, there have been a number of contributing factors to the growth. Firstly, 2005 saw strong levels of market liquidity, perhaps best evidenced by the success of the largest syndicated loan transaction of the year, the ?18.0 billion Telefonica loan to finance its bid for O2, which attracted appetite in excess of ?30.0 billion in syndication. These levels of liquidity drove an acceleration in the number of refinancings of recently completed syndicated loans.
Borrowers sought to take advantage by improving the terms upon which they access debt finance. Of the total investment grade market borrowings referred to above, 47 per cent relates to refinanced debt.
While some of this refinancing activity includes loans that were naturally falling due for repayment, a feature of the market in 2005 was the number of 2004 transactions being refinanced on improved terms, such as those for Nestle and Carrefour. Liquidity has also led to structural and tenor stretch which was evident in 2005 transactions. 7 year and 5+1+1 year structures have become accepted as standard tenors for well regarded issuers, indeed the proportion of transactions with a 7 year component rose from 5 per cent in 2004 to 22 per cent in 2005. Pricing also reached new cyclical lows during 2005, again driven by the extent of available liquidity, with increased compression being recorded across the credit spectrum.
The uplift in Merger and Acquisition activity in 2005 also contributed loan volume growth. M&A related volumes were up 180 per cent on the prior year, supported by a number of jumbo transactions, such as the €11.4 billion loan raised by Pernod Ricard to finance its bid for Allied Domecq and the €9.0 billion raised by Saint Gobain in its bid for BPB. In Ireland we saw the large €3.8 billion Jefferson Smurfit/Kappa Packaging merger financing.
In the crossover-market (leveraged corporate grade transactions), volumes were driven to record highs. As margins and therefore returns fell in the investment grade market, traditional investment grade investors were prepared to consider higher yielding credits and this supply in liquidity, together with the increased level of M&A activity in this space, prompted more of these leveraged borrowers to seek financing in the syndicated loan markets.
So what does 2006 hold in store for the syndicated loan market? Well firstly, in the investment grade market, it would be reasonable to expect refinancing volumes to fall back from 2005 levels. Momentum in M&A activity is set to be maintained in 2006 and any drop in refinancing volume is likely to be taken up by new money deals. From a pricing perspective, in late 2005 we started to see the frequency of new pricing benchmarks decrease, indicating that pricing levels may be stabilising. The fact that situational financing commands a premium over relationship transactions suggests that 2005 may have represented the bottom of the current pricing cycle.
In the cross-over market, secondary/tertiary buyout activity in the leveraged market and the resurgence seen in new buyout activity are all expected to continue into the first six months of 2006. Whereas premiums in the investment grade market have reached a record low, any further compression is likely to occur in the cross-over market. When this is accompanied by looser covenants and protections, banks will want to be highly selective over which sectors they choose to compete in.
2005 was a hugely successful year for the syndicated loan market in Europe. With record volumes and competitive borrower terms having been achieved, it remains to be seen whether there will be a retracing this year of some of the steps previously taken. What is clear though is that the syndicated loan arena will continue to be a very attractive source of capital for European borrowers through 2006. |
Robert Roughan is a director at Barclays Bank Ireland plc
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