SYLVAIN DE FORGES, head of financial operations at Veolia Environnement, was speaking at the Euromoney Global Borrowers and Investors Forum in London last month. There are, he said, 31 banks in the company's loan syndicate group, and about eight in its M&A group, yet many more than eight of the 31 lenders want a piece of Veolia's advisory work. "This presents problems a few years down the road but no-one is addressing it," he said, adding, "Sometimes I'm very pleased not to be a banker."
Banks don't usually inspire pity in their clients, who are mindful of hefty fees. So when company's senior financial officials start feeling sorry for bankers, even if half in jest, you know things must be pretty tough out there.
In Europe's syndicated loan market, as in the US, borrowers are in the driving seat – and they know it. Prices on the core refinancing business are dropping to levels not seen since the mid-1990s, typical tenors are lengthening from one year to five, fees are falling and so are documentation standards. Because loan demand has been limited and banks that have cleaned up their balance sheets after the corporate scandals of the past few years have a surfeit of liquidity, they are desperate to advance funds.
Globally, borrowers don't have much need for new cash but this is particularly the case in Europe. According to Dealogic's syndicated loans market review for the first half of 2004, borrowing volumes in Europe, the Middle East and Africa fell more than in any other region – by 8% on the same period last year. And deal count dropped from 601 to 473.
Lower volumes plus lower fees and much lower prices – around 40% down over the past six months according to some market participants – are bad news for banks trying to meet growth and income targets, particularly when more and more are fighting for a slice of the pie. "It's painful from a return on equity perspective but banks with large balance sheets need to be putting their money somewhere. Now is not the time to be exiting names, you can only do that when the cycle turns," says one banker.
The pure commercial banks are finding things tough. "The current environment could create a big shake-up in syndicate groups. We're focussing on particular niches but what do regional commercial banks do that just offer loans to local institutions?" says one. "The margins on those deals are increasingly unprofitable."
Even the universal banks, which now have to be seen to be advancing cash to their clients if they want any of their ancillary business, are feeling the heat. Banks such as BNP Paribas, Commerzbank and Calyon, which want to expand their pan-European capital markets business, and so are being aggressive lenders, are bringing pricing down. "Competition for business has significantly increased-we are now competing with a dozen banks in Europe who claim to offer the same broad based investment banking platform as us," says Kristian Orssten, managing director and co-head of European loan capital markets at JPMorgan. As Veolia's de Forges points out, not all of their cross-selling efforts can succeed.
The fact that M&A-related financing, which offers higher fees, has also failed to pick up, has been a blow. "We thought there would be a 20% to 25% pick-up in the market in 2004 because of M&A-related financings," says Orssten. In fact, Sanofi-Synthélabo's e16 billion loan signed this January was one of the few large-scale acquisition facilities in Europe. Orssten says: "The pick-up hasn't happened and if you strip out the Aventis-Sanofi transaction, dealflow has been very disappointing; instead the market is increasingly chasing aggressively priced corporate refinancings."
Chasing returns lower down the credit curve
It does not look as if this will change soon, particularly when corporates are refinancing existing credit facilities early because of tight pricing. "If a borrower is not prepared to stick with its one-year deal and decides it will term it out to a five-year early, it is clearly not going to be in the market for a while," says one banker.
Clearly, banks can't survive on this sort of business alone. "If I was doing just investment-grade loans, I wouldn't be on budget," says Bill Fish, managing director and head of global loan product at Dresdner Kleinwort Wasserstein. Instead, DrKW, like others, is targeting the rapidly growing and more lucrative leveraged market. This is still much smaller in Europe than the investment-grade business.
It's not all gloom and doom. Bankers point out that pricing was inflated to create capacity for the large M&A transactions of 2000 and 2001 and held up by the variety of accounting scandals and company bankruptcies after September 11. "Really, we're back in neutral gear now, having been up in 2001 and 2002," says Fish.
And Tim Ritchie, head of global loans at Barclays Capital, sees signs of an increase in investment activity in the mid market, where there is slightly less price competition. The bank is looking at other areas where it is not just competing on price, such as structured lending in specialist sectors and M&A-related activity.
Even if demand for loans revives, Ritchie is not confident that the banks will make as much from lending to large corporates as they have in the past few years. He says 1999 and 2000 "will be remembered as a time when banks did very well out of corporate acquisition lending in Europe. Even if the scale of financing picks up, revenue opportunities are unlikely to be the same. There is much more confidence in the market now that scale can be achieved and that loans can be refinanced in the capital market."
Pricing is one thing; risk management is another. Once again, banks are making concessions to lower-rated borrowers to win their business. "We have always been able to get away without financial covenants but there are more changes occurring to documentation further down the credit curve," said Graham Wood, senior vice-president, corporate finance international, at E.On, speaking at the Global Borrowers and Investors Forum.