* Loan pricing drops by nearly a third for top companies
* Blue chip companies tempted into early refinancings
* French, UK and Scandinavian firms to follow Germany's lead
By Alasdair Reilly
LONDON, Oct 11 Tumbling loan pricing is tempting
highly rated European companies such as German utility E.ON back
into the syndicated loan market to refinance existing loans well
before maturity to lock in low rates, bankers said on Friday.
Loan pricing for highly-rated European companies has fallen
by around a third since the beginning of the year, Thomson
Reuters LPC data shows, which has allowed blue-chip companies to
cut borrowing costs significantly.
German companies are able to access the lowest loan interest
margins in Europe, as E.ON's DE> new 5 billion euro
($6.78 billion) loan shows, although French companies are
catching up quickly.
Unrated French lens-maker Essilor which is
considered to be a strong single A rated credit, matched pricing
of 25 basis points (bps) in August on German chemicals firm
BASF's 3 billion euro loan which was signed in March.
BASF's loan is widely credited with starting the current
round of pricing decreases, most of which have been reserved for
German companies as banks scramble to lend to Europe's economic
E.ON's loan refinancing is priced at 27.5 basis points
(bps), matching German carmaker Daimler's 9 billion
euro loan refinancing that signed in late September. E.ON and
Daimler are both rated A-/A3.
E.ON has been able to nearly halve pricing on the 6 billion
euro loan from 2010 that is being refinanced, which paid an
interest margin of 47.5 bps over Euribor.
The new five-year loan, which is being co-ordinated by
Commerzbank and UniCredit, has two one-year extension options,
and is expected to remain undrawn.
The loan will act as a back-up facility for E.ON's
commercial paper programme, and also serves as a liquidity
reserve and for general corporate purposes.
Average pricing for single A rated European companies fell
by 31 percent in the third quarter to 28.75 bps and triple-B
rated loans saw a similar 27 percent drop in margins to 48 bps,
Thomson Reuters LPC data shows.
Competition to lend between banks is creating increasingly
favourable conditions for borrowers, but E.ON's decision to
match Daimler's margin instead of pushing lower suggests that
the pricing squeeze could be slowing, bankers said.
"They (E.ON) could have gone cheaper, but this was a
sensible move under the circumstances. Pricing is where it is
and will probably remain where it is for the foreseeable future"
a senior banker said.
More European companies including French, Scandinavian and
UK firms are also expected to refinance loans early to take
advantage of cheaper pricing or amend and extend existing loans,
which could push loan volume higher.
With the spectre of deleveraging receding rapidly, banks are
eager to lend, even to undrawn liquidity backstop loans for
highly-rated clients. These standby loans make less money than
drawn term loans and have to be subsidised by other business,
including bond fees.
A+/A1 rated German engineering firm Siemens
secured a $3 billion loan from a group of 31 banks at the end of
September which raised more than $5.7 billion in commitments
from the market, despite paying a competitive margin of just 20
bps over Euribor.
Siemens cut its borrowing costs by a third from the 30 bps
the company paid on a 4 billion euro five-year facility that was
arranged in April last year.
Baa1/BBB+ rated Deutsche Post signed a 2 billion
euro revolving credit that refinanced an existing loan that was
due to mature in December 2015.
That financing, which has a five-year maturity with two
one-year extension options, was coordinated by Commerzbank with
bookrunners and mandated lead arrangers Citigroup, Deutsche Bank
Deutsche Post's loan paid 30 bps over Euribor, significantly
lower than the 55 bps paid on the borrower's existing loan
facility, which was arranged in December 2010.
As pricing for highly-rated companies seems to reach a
floor, signs are emerging that margins for lower rated
non-investment grade companies are also coming under pressure.
Average BB rated margins dropped 9 percent in the third
quarter to 267 bps, according to the data.
"This is the next part of the market where we expect to see
a significant fall in pricing and a subsequent increase in
opportunistic refinancing," a banker said.
Irish paper and packaging firm Smurfit Kappa, which
is rated BB/Ba2, recently completed a corporate refinancing 750
million euro term loan and a 625 million euro revolving credit
The company was able to cut 150bps from the margin of the
750 million euro term loan and 125bps from the 625 millon euro
revolving credit to 225bps and 200bps respectively.
($1 = 0.7373 euros)
(Editing by Tessa Walsh)