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trends of the last couple of years it is now the banks that are being relied on for liquidity, with many funds having withdrawn from the market, at least until volatility eases.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.”