LONDON Syndicated lending in Europe, the Middle East and Africa (EMEA) was broadly flat, down 1 percent year on year to $386 billion in the first six months of 2013, as borrower demand remained subdued amid volatile markets, Thomson Reuters LPC data shows.
With merger and acquisition (M&A) financings remaining scarce and demand for refinancing subdued, volume and deal flow remained muted, leaving banks under lent and desperate to book business in the second half of the year.
"Deal flow is a bit thin and we'd all like to see a bit more, but it is all part of the normal cycle, refinancing reached its peak in 2011 and there hasn't been much M&A, despite excellent market conditions," a senior banker said. "Banks are very liquid, mostly well capitalized, and remain very willing to underwrite any M&A transactions, should they arise."
Second quarter volume of $168 billion was 23 percent lower than the $217 billion seen in the first quarter, and 42 percent lower than the second quarter of 2012.
Loan volume in Western Europe fell 33 percent to $116 billion in the second quarter compared to the first three months of the year. Lending in Central and Eastern Europe rose 25 percent to $33 billion in the second quarter, mainly thanks to a surge in activity in Russia and Turkey.
Investment-grade lending to Europe's higher rated companies fell 6 percent in the first half of 2013 to $231 billion, while first half high-grade M&A loans were down 7 percent to $28 billion on last year's $30 billion as many companies remained wary of backing acquisitions with new debt in volatile markets, preferring to fund deals through existing cash and credit facilities.
Meanwhile, investment-grade refinancing volume was down 7.5 percent in the first half.
The lack of deals has led to increased pressure on pricing as competition between banks to win loan business hots up in Europe's strongest economies, especially in Germany, where banks have been actively increasing their presence.
Single A rated German chemicals company BASF (BASFn.DE) secured a 25 bps margin on its 3 billion euro ($3.90 billion)refinancing, which is the lowest pricing for a European deal so far this year.
Average triple B pricing has continued to be squeezed reducing to 66 bps in the second quarter from the 80 bps seen in the first quarter, as borrowers took advantage of the competitive market to lock in future liquidity at lower costs.
Lower pricing could encourage other borrowers to refinance early, banking sources said.
"There's a window of opportunity to get something done. Borrowers are looking ahead at 2014 and 2015 maturities to refinance while conditions remain good," another banker said.
Diversified natural resource company Glencore Xstrata (GLEN.L) dominated second quarter volume with its mammoth $17.34 billion loan refinancing, which was used to replace existing credit facilities at both Glencore and Xstrata. The deal garnered support from 80 banks in syndication as lenders piled into the deal to cement relationships with the newly merge company.
The deal was the largest corporate refinancing seen in Europe since 2006.
Glencore was also involved in the second largest loan in the second quarter, a $8.32 billion financing for a joint venture of Glencore and Vitol backing the purchase of crude oil from Russia's Rosneft (ROSN.MM). The prepayment facility helped Rosneft fund its acquisition of TNK-BP, a deal which had already been backed with $31 billion of loans.
First half leveraged loan volume of $74.64 billion was 22 percent higher than the first half of 2012.
The majority was used for refinancing purposes at $64.18 billion, as borrowers sought to refinance 2006-07 deals or conduct dividend recapitalizations. M&A-related deals only accounted for $10.46 billion, as buyers and sellers failed to meet price expectations.
"The theme throughout the year is that the leveraged loan market has been driven by refinancings to deal with a number of 2006-7 vintage deals. The lack of M&A has been disappointing as the debt financing is there to do them but there is still a misalignment between buyer and seller expectations, which led to a number of aggressive dividend recapitalizations instead," a leveraged banker said.
The largest leveraged loan of the quarter was the 3.3 billion euro loan backing German investor Joh A Benckiser's (JAB) 7.5 billion euro acquisition of Dutch coffee and tea company D.E Master Blenders 1753.
The largest sponsor backed buyout loan of the quarter was the 2.3 billion euro loan backing CVC's purchase of German metering firm Ista International.
The leveraged pipeline is growing with a number of financings set to be launched for syndication in the third quarter, including publisher Springer Science+Business Media; industrial ceramics firm CeramTec; global manufacturer Gardner Denver; and global IT operations management software provider BMC Software.
Leveraged loan bankers have been fighting to persuade European borrowers to tap the European market this year as many -- including livestock tracking device manufacturer Allflex -- have opted to go to the US for their financing needs, attracted by higher leverage and cheaper pricing. However, the recent wider market volatility in the credit markets could slow the migration during the third quarter.
French banks continued to dominate the EMEA syndicated loan bookrunner table in the first half of 2013, led by BNP Paribas (BNPP.PA) with an $18.5 billion share of the market from 83 deals. Credit Agricole CIB (CAGR.PA) is second with a $13.9 billion share of the market from 38 deals, while Societe Generale (SOGN.PA) was a close third with a $13.67.3 billion market share from 51 deals.
($1 = 0.7691 euros)
(Editing by Christopher Mangham)