By Alasdair Reilly and Prudence Ho
LONDON, Sept 30 (LPC) - Syndicated lending in Europe, the Middle East and Africa in the first three quarters of 2019 was down 25% compared with the same period last year, reaching US$594.7bn, the lowest nine-month total since 2012, according to LPC data.
Volumes have been hit by a mixture of potential trade wars, rising geopolitical tensions, chaos over Brexit and end-of-cycle technicals.
The number of deals completed in EMEA year-to-date dipped by 24% from the same point in 2018, with 977 loans completed.
Loans to Europe's highest-rated companies totalled US$372bn in the first three quarters, which was 15% down on the same period in 2018. Activity tailed off on in the third quarter to US$77.6bn as wider economic and political uncertainty weighed.
Overall refinancing activity, the traditional driver of EMEA lending, decreased by around 17% to US$416bn in the first three quarters with most larger companies having already replaced their medium-term liquidity facilities in previous years.
The largest refinancing of the quarter was for Italian mobile operator Wind Tre, owned by Hong Kong-listed CK Hutchison, which completed a €10.4bn bridge loan in July to refinance €10bn high-yield bonds. The bridge loan is being refinanced through a €3.77bn-equivalent loan and a planned issuance of unsecured bonds.
In August, Swiss pharmaceuticals firm Roche refinanced its existing back-stop credit facilities with a single US$7.5bn five-year committed credit line, while in early July British American Tobacco extended its existing £3bn 364-day revolving credit facility for a further year.
M&A lending in the first three quarters slumped to US$125bn, over 38% down on the same period of 2018, the lowest level since 2013 as companies looked to share swaps and existing cash piles to fund acquisitions.
Despite the low volumes, bankers remain optimistic over future activity citing market liquidity and the flexibility the loan product offers borrowers.
“Volumes are what they are and the number of deals is down. But there is plenty of liquidity in the market and with so much cash sitting with private equity and corporates, they can’t just sit on their hands forever,” a senior banker said.
“If you are lucky enough to be on one of these deals, the glass is definitely half full.”
The third quarter did see a series of jumbo acquisition loans including London Stock Exchange’s US$13.2bn-equivalent bridge loan in September backing its acquisition of data and analytics company Refinitiv, the parent company of LPC and IFR.
German chip maker Infineon Technologies closed a €9.5bn-equivalent financing backing its acquisition of US-based Cypress Semiconductor, while auto supplier ZF Friedrichshafen closed a €7.3bn syndicated loan with a group of 15 banks backing its US$7bn acquisition of commercial vehicle systems group Wabco Holdings.
Other large deals are being lined up, including for eyewear maker EssilorLuxottica, which is backing its acquisition of Dutch optical retailer GrandVision with a €8bn bridge loan. Austrian sensor specialist AMS is backing its bid for German lighting group Osram with an around €4.4bn fully underwritten bridge loan.
In Central and Eastern Europe, the Middle East and Africa, borrowing in the third quarter fell to the lowest quarterly total since the first three months of 2004. Just US$11.8bn was raised by borrowers in CEEMEA in the third quarter, continuing a low volume trend in 2019.
So far this year, CEEMEA borrowers have raised US$83.8bn, which is the lowest total for the first nine months of the year since 2009 and just over half the US$150.8bn raised in the same period last year. Driving that fall is a dramatic drop in lending activity in the Middle East, where the third quarter total of US$3.8bn is the lowest for any quarter since 2003.
European leveraged loan volume for the first nine months of the year is at the lowest level for seven years, despite market activity picking up in recent months.
Year-to-date volume has dropped 36% to US$112.2bn compared with the same period of 2018, while third quarter volume of US$32.3bn was 35% lower than the same three-month period last year.
Loans continued to be favoured by private equity sponsors seeking additional flexibility and cheaper pricing and volume was higher than high-yield bond issuance, which was US$20.89bn in the third quarter.
Market dynamics this year are very different from last year, when the market was dominated by jumbo deals, including the US$13.5bn financing package backing a Blackstone-led consortium’s acquisition of data business Refinitiv, and a US$7.6bn financing backing Akzo Nobel’s spin-off of its chemicals business.
“There is lot of liquidity, it’s just lack of paper in the market this year,” said a leveraged finance head.
The imbalance of supply and demand has driven pricing down, with the most recent deals closing with tightened margins. Bankers believe this trend will remain for the rest of the year.
“The desire to invest is strong, despite economic risks and political challenges,” another leveraged finance head said. “And investors are picky. They would rather back a good credit with bad documentation than have a good documentation with a poor credit.”
The pipeline for the fourth quarter is dominated by public-to-private deals and repricing.
UK-listed theme park operator Merlin Entertainments has launched £2.193bn-equivalent seven-year term loan to back its acquisition by an investment vehicle of Lego’s founding family and private equity firm Blackstone.
Another public-to-private deal on the launchpad is £2.517bn of loans for Advent’s buyout of UK defence and aerospace group Cobham. A US$3bn-equivalent of debt financing backing advertising and public relations company WPP’s data analytics unit Kantar has also launched.
However, there are more challenges to complete public-to-private deals because of potential rejections from shareholders and regulators. A €2.72bn leveraged loan backing the buyout of German online classified group Scout24 was pulled in May after the deal failed to get enough support from shareholders.
“They are highly vulnerable to not happening. The downside is you can do a lot of work without a pay day,” the second leveraged finance head said.
Credit Agricole topped the EMEA syndicated loan bookrunner league table with a US$35.09bn market share and 147 deals. BNP Paribas claimed second place with US$30.43bn and 136 deals, while Bank of America Merrill Lynch was third with a US$24.58bn market share and 60 deals.
Editing by Christopher Mangham