October 11, 2013 / 5:18 PM / in 4 years

RLPC-Loan pricing falling for Europe's top companies

* 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 (Reuters) - 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 powerhouse.

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 and HSBC.

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 facility.

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)

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