* Companies continue to shun loans
* Increase in M&A fails to mask shrinking market
* Leveraged loans volume hit by pulled auctions
By Alasdair Reilly and Claire Ruckin
LONDON, Sept 28 (Reuters) - Syndicated lending in Europe, the Middle East and Africa slumped 35 percent year on year to $509 billion in the first nine months of 2012 as demand for loans stayed low amid the eurozone crisis and a sharp summer slowdown, Thomson Reuters LPC data shows.
The lack of deals in the third quarter continued to raise fears of overstaffing and possible job losses as banks' income remained under pressure while loan pricing remained flat.
Only 861 deals were completed in the first nine months, 25 percent fewer than the same period of 2011.
Third quarter volume of $135 billion was the lowest quarterly volume seen in the last three years. Lending fell 37 percent from $216 billion in the second quarter, and was 48 percent lower year on year as the summer holidays and the added distraction of the Olympics took a toll.
Only 241 deals were completed in the third quarter - the lowest level of activity seen this year.
Lending across the region fell in all regions in the third quarter. The Middle East saw the largest fall with a 53 percent drop on the previous quarter, followed by Central and Eastern Europe with a 47 percent drop.
With most large corporates already having refinanced existing loans in the last couple of years, the key issue facing the market was the lack demand as companies remained wary of new loans and M&A activity remained depressed in volatile markets.
"The trouble is that many European companies are awash with cash, apart from a few standby financing to show certainty of funds it's hard to see much requirement for proper acquisition financings, plus companies haven't really been ready to push the boat out in this market," a senior banker said. BOND REFINANCING
Demand was also hit as companies turned to the corporate bond market to meet their drawn funding needs. Corporate bond issuance increased by 67.5 percent year on year in the first nine months of the year to $171 billion.
Although investment-grade loans far exceeded corporate bond issuance at $336 billion in the first nine months, loans were 34 percent lower than the $508 billion raised in the same period of 2011.
$92 billion of investment-grade loans were signed in the third quarter, 37 percent lower than the second quarter, while corporate bond issuance climbed 55 percent to $58.3 billion.
High-grade refinancing volume fell to $50 billion in the third quarter from $69 billion in the second, but M&A activity climbed 64 percent from the second quarter to $32 billion in the third quarter, after a number of sizeable M&A financings were completed.
The largest deal of the quarter was brewing giant ABInBev's $14 billion loan backing its acquisition of Mexico's Grupo Modelo, followed by Nestle's $8.5 billion bridge loan backing its takeover of Pfizer Nutrition. German industrial gases firm Linde also wrapped up syndication of a $4.5 billion loan to back its acquisition of Lincare in the U.S.
LEVERAGED MARKET The European leveraged loan market slowed dramatically in the third quarter, bringing leveraged loan volume to $72.44 billion in the first nine months - 42 percent lower than the same period of 2011, while high-yield bonds rose 20 percent to $83 billion.
Market volatility in the summer stalled scuppered buyout auctions, which reduced the pipeline of primary loans and new deal launches.
The sale of European frozen food group Iglo and German measuring equipment maker Schenck Process collapsed and the sale of Dutch telecom KPN's Belgian mobile business BASE and vending machine business Selecta were also put on ice.
"Volatility leading into third quarter meant that you had several stalled processes over the summer which led to low volumes. The overall atmosphere and uncertainty meant most people were unlikely to push the button," a syndicate head said.
High-yield bond volume of $24 billion overtook $15 billion of leveraged loans in the third quarter, as the high-yield bond market re-opened in September after being closed for four months.
The largest leveraged loan of the third quarter was the $923 million buyout financing backing private equity firm Hellman & Friedman's acquisition of energy analysis group Wood Mackenzie. The loan's pricing was cut after the deal saw strong demand from investors.
Banks were under pressure to generate fees from new deals as deal flow fell and offered aggressive dividend recapitalisations to companies including Iglo and UK roadside rescue business RAC when market sentiment improved in September.
"In the absence of M&A, sponsors will look to work their investments, and if dividend recaps are available they absolutely will be considered," the syndicate head said.
Stronger market conditions in September saw several auctions starting which could boost fourth quarter volume, including Dutch trust and corporate management business Intertrust Group, Danish retailer Matas, and UK-based United Biscuits' salty snack business.
Early talks are being held on several multibillion buyouts including a potential 6-8 billion pound ($12.95 billion)sale of British retailer Marks & Spencer and the potential sale or flotation of motoring services firm the AA and over-50's insurance and travel company Saga.
Deutsche Bank led the EMEA syndicated loan bookrunner league table in the third quarter, with an $18.6 billion share of the market from 79 deals. BNP Paribas was second with $15.5 billion and 103 deals and JP Morgan was third with $14.9 billion and 45 deals. ($1 = 0.6176 British pounds) (Reporting by Alasdair Reilly & Claire Ruckin)