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Are Lenders Concerned About Sabic’s GE deal?

14 Aug

http://ftalphaville.ft.com/blog/2007/08/10/6451/loan-radar-three-of-the-biggest-headache-deals-for-bankers/

Loan Radar: Three of the biggest ‘headache deals’ for bankers

The most common response among  syndicated loan bankers to present market upheavals – and probably  to the fact that many have wrapped their deals and are trying to take summer holidays – is to stay cautious, ensure exposures are carefully calculated and hold off   until September before taking on new risks, notes Tom Freke, editor  of Loanradar.co.uk, the syndicated loans and hedge fund  newsletter, in an August comment.

For such bankers, the current turmoil may be an ideal excuse for a break after many weeks of back-to-back deal-making.  But for those with large deals still in the market, it is one giant headache, he says.

“This week, three deals  have been the subject of much discussion, all of which are large and  require bankers to make difficult decisions about how they see the state  of the loan market in the weeks to come.”

The first of these deals is  the £3.6bn  refinancing package for Tata Steel’s takeover of Anglo-Dutch  steel maker Corus, a deal which launched in the market  in July but met reluctance from institutional investors.

For potential underwriters  of the deal, the problem has not been one of credit risk but of market  risk, says Freke. Bankers are unsure the deal will pick up support in  the wider market as it is something of a hybrid, he adds, quoting one  banker saying: “It’s a bit leveraged, a bit emerging market and  a bit European corporate”.

As the FT reported on Thursday, ABN Amro, Citigroup and Standard  Chartered, which are leading the debt sale for Tata Steel UK, expected  to offload about two-thirds of the debt to other banks “without  great difficulty”. But a £1.5bn higher-yielding loan meant for  institutional investors was struggling with an interest margin of 2.25  per cent over the London interbank rate, according to people familiar  with the deal.

Now, part of the debt has just  been restructured and repriced, reported Loan Radar on Thursday. The  £1.5bn seven-year tranche has been split into three equal-sized facilities  with tenors of five, six and seven years, interest margins have been  adjusted up on a sliding scale, and a front-end fee of 75bp has also  been added. The restructured facility went out to lenders on Thursday.

The conclusion to be drawn,  says Freke, is that by contrast with the trends of the last couple of  years it is now the banks that are being relied on for liquidity, with  many funds having withdrawn from the market, at least until volatility  eases.

As a result, banks considering  joining the Tata deal have been calling round to gauge the likely level  of response. “The herd mentality of the market being what it is,  if enough banks believe others will participate, the deal will easily  get done.”

Another deal that appears to  have suffered from present market conditions is the £3.4bn loan backing  the acquisition of the UK wireless assets of National Grid by Arqiva,  a part of Australia’s Macquarie Bank.

First launched before the markets  went haywire, the deal received good support from funds for the higher-yielding  junior and TLA2 tranches but banks proved less keen on the senior tranches,  according to Freke.

“The deal has been closely  watched by the market as it is one of the largest infrastructure-style  financings to have been offered to lenders,” he says. “If  these kinds of loans end up not selling then it places a question mark  against some of the structures and strategies put forward by sponsors  in recent times.”

Arrangers of the deal closed  the senior phase of syndication last week and will go back to lenders  in the autumn, confident that the company’s recent success in landing  a pair of big contracts will help demonstrate the attractiveness of  the business to hitherto reluctant banks.

The third deal called into  question is the $5.4bn facility backing Sabic’s acquisition of GE Plastics.  While the Saudi company is “one of the market’s most attractive  borrowers at present”, says Freke, the highly leveraged non-recourse  structure of the deal has caused some concern among lenders.

And such concerns are  enough for the funds to limit their support for the deal, meaning that “banks are likely to have to shoulder much of the burden of supporting  the facility”, he notes. Although so far, arrangers  of the deal “appear relatively unconcerned”, he adds.

“Many banks know the value  of the Sabic relationship, and here’s a deal paying L+150bp and more,”  said one source. “And Sabic has made it clear it would be reluctant  to let a subsidiary company go under.”

Tata, Arqiva and Sabic are  three deals that require lenders to make three difficult decisions at  a time when many would prefer not to, says Freke. “With high levels  of volatility, uncertainty makes decision-making difficult – but, bankers  say, not impossible”.

“While much of the leveraged  market has run scared from the frightening headlines, many loan bankers  in the emerging market and investment grade spaces seem far more insouciant,  and most are now wrapping deals and looking forward  to the autumn’s pipeline of new transactions”, he says.

However, with ever-more frightening  headlines, we suspect  there may be more bankers than those just working on the top “headache”  deals who might not be so chilled.

Says Freke: “They will  have their work cut out if they wish to achieve the easy oversubscriptions  of a few months ago… But everyone knew then  that those times could not last – and who knows,  maybe by the time these deals are done, pricing could have even begun  to rise.”

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Posted by on August 14, 2007 in The Business

 

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