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* Highest annual total since 2015
* Refinancing makes up 62% of activity
By Alasdair Reilly, David Brooke and Prudence Ho
LONDON, Jan 3 (LPC) - Syndicated lending in Europe, the Middle East and Africa in 2018 broke the trillion dollar mark for the first time in three years as volume rose 17.4% to US$1.05trn due to increased refinancing activity and stable levels of M&A financing, according to LPC data.
Annual volume is the highest since US$1.16trn was raised in 2015, as companies moved to secure medium-term liquidity or made acquisitions to consolidate market positions ahead of a highly uncertain 2019.
The number of deals completed also increased by 13% in 2018 to 1,647 deals from 1,453 in 2017.
Despite the lead up to a potentially disorderly Brexit, the ending of the EU’s quantitative easing programme, rising interest rates, fears of a US-China trade war and other macroeconomic concerns; continued competition between lenders meant a benign market for borrowers, which were able to secure financing on highly attractive terms.
However, some banks looking to boost the profitability of their lending operations were disappointed by the level of activity in EMEA.
“The investment-grade loan market fell short of expectations. Although volume was up, refinancing and amend and extends really drove activity meaning the overall fee pool was down,” a senior banker said.
“There was no steady stream of blockbuster M&A deals to fall back on. We had expected more.”
Refinancing, traditionally the main driver of the EMEA syndicated loan market, was up 16% in 2018 to US$654bn, making up a substantial 62% of the market.
German car maker Daimler signed an €11bn (US$12.5bn) revolving credit facility in July, which replaced its existing €9bn credit line on significantly improved terms.
Commodity and natural resource companies Vitol and Glencore also returned for their annual multi-billion refinancing operations. Glencore agreed a US$9.085bn loan refinancing in March while Vitol signed a US$9.4bn loan refinancing in October.
Nestle completed its annual loan renewal in October and agreed a new €6.5bn-equivalent short-term facility and a one-year extension of an existing €4.5bn-equivalent five-year facility.
Despite a busy year for M&A transactions in EMEA, loans backing acquisitions increased by just 4.5% to US$251bn in 2018 as many companies side-stepped the loan market for all-share deals, asset swaps or funding acquisitions through existing cash and credit facilities.
In April, ACS majority-owned German builder Hochtief completed the largest loan of 2018 by signing a €18.18bn financing backing its joint takeover, with Italian transport infrastructure company Atlantia, of Spanish toll-road operator Abertis.
The acquisition was completed in October with the two partners putting in place €9.95bn of non-recourse loans in place for a new holding company.
In March, French insurer AXA Group backed its US$15.3bn cash acquisition of global property and casualty insurer XL Group with a €9bn backup bridge loan.
AXA did not intend to use the bridge loan, planning to finance the acquisition with around €3.5bn of cash on hand, around €6bn from a planned US IPO and related transactions and around €3bn of subordinated debt.
In April, GlaxoSmithKline (GSK) completed a US$12.9bn-equivalent bridge loan backing its US$13bn buyout of Novartis’ 36.5% stake in its consumer healthcare joint venture. The up to two-year loan financing included a bridge to debt capital markets and a bridge to disposals.
In December, GSK lined up a further US$9.42bn loan to back its acquisition of US cancer drug specialist Tesaro. Part of that financing will be used to refinance £3.5bn of April’s bridge loan.
In Central and Eastern Europe, Middle East and Africa, loan volume in 2018 reached US$184.2bn, up 47% from US$125.2bn in 2017.
CEEMEA volume was dominated by lending to Middle East borrowers, which raised US$96.5bn in 2018, more than double the US$47bn total in 2017.
Middle East lending was boosted by two huge loans for Saudi Arabian borrowers. Sovereign wealth fund Public Investment Fund signed an US$11bn loan in September, which followed a US$16bn loan for the Saudi government in March.
In 2019, bankers are anticipating a record US$50bn-$70bn financing to back oil and gas giant Saudi Aramco’s purchase of a stake of up to 70% in Saudi Arabian Basic Industries Corp.
The deal was put on hold following the murder of journalist Jamal Khashoggi in the Saudi consulate in Istanbul on October 2, which sparked a political row and hit the investment climate in the Kingdom.
A slump in European leveraged volume in the fourth quarter meant the year finished on US$206.7bn, 19.2% down from US$255.8bn recorded for the full year 2017, according to LPC data.
The fourth quarter saw US$30.05bn in issuance, just over half of issuance in the same period a year earlier (US$57.13bn) and the lowest fourth quarter total since 2011 (US$14.2bn). It is the lowest quarterly total since the second quarter in 2012.
Loans continued to be the product of choice for the leveraged market in the fourth quarter, as volume exceeded high-yield bond issuance of US$19.38bn.
Overall, 2018 proved to be the third most active year for sponsors and bankers since the global financial crisis, even as Brexit uncertainty continued to overshadow the market and a US-led trade war ramped up.
Refinancings in the leveraged market in 2018 totalled US$94.6bn, substantially down from US$161bn in 2017, dragging overall volume lower.
However, M&A activity rose in 2018 compared with the previous year, reaching US$65.3bn from US$50.1bn in 2017.
2018 saw an increase in new money, event-driven deals as investment-grade corporates offloaded subsidiaries to a hungry private equity market.
“It was the year of the carve out,” said one leveraged banker.
Multi-billion loans funding Carlyle’s acquisition of Akzo Nobel and KKR’s buyout of Flora Foods Group were some of the largest leveraged deals in Europe in 2018, and were new names to the market.
A €2.7bn leveraged loan funding Macquarie’s acquisition of Danish telecoms company TDC was the biggest in Europe in 2018, highlighting the robust demand from investors.
Activity in the second half of 2018 tailed off, however, as investors became more selective about credits amid rising volatility.
“The outlook is difficult to read,” said one investor, citing Brexit and the prospect of trade wars in 2019.
“All these uncertainties could affect fundamental growth and cause huge volatility that we have already seen in the equity markets.”
Volatility hit the leveraged market in December. Borrowers repriced deals higher to lure investors and some sterling-denominated deals struggled to close.
UK cinema chain Vue pulled a £300m (US$377.67m)and €480m term loan B in December, while trust and custodial services provider Vistra scrapped a €196m loan-funded dividend payout.
Other deals in December priced upwards. Health and devices manufacturer Nemera cleared a €325m loan at 400bp over Euribor — a 25bp increase from the proposed offer, while UK private school operator Cognita priced its €403.76m and £200m TLB at 425bp and 500bp over Euribor/Libor — both at the wider end of guidance.
BNP Paribas topped the 2018 EMEA syndicated loan bookrunner league table, with a US$52.30bn market share and 220 deals. Credit Agricole CIB claimed second place with US$51.96bn and 234 deals, while JP Morgan was third with a US$42.34bn market share and 85 deals.
($1 = 0.8797 euros) ($1 = 0.7943 pounds)
Editing by Christopher Mangham