The banks learn how to say no

However, the focus of the market is changing and the mix of business being undertaken by many banks reveals a shift to new types of lending opportunities. Finely priced deals for traditional corporate borrowers are still being done, but an increasing number of banks are pursuing other sectors of the market which offer - they hope - greater returns.

Whereas bank liquidity was previously chasing traditional western European corporate borrowers, it is now being increasingly channelled towards the relatively high-margin business in the structured, project finance and emerging market sectors. Margins have already crashed in many sectors of the market, and are set to fall fast in new attractive areas where risk may already be underpriced.

Over the past year, syndicated loans have matured and are being managed more aggressively. Lenders may be awash with capital and liquidity, but an increasing number of firms are embracing the perceived benefits of active portfolio management. Don McCree, managing director of global syndicated finance at Chase Investment Bank, says: "Many more banks are now focused on performance and return. In the last nine months, we have seen these issues significantly affecting banks' behaviour in specific situations."

Competitors agree, but as one notes, there are still pockets of cheap pricing. Borrowers looking to access the syndicated loan market today are entering an environment different from that of six months ago. Bank finance may be cheaper but big lenders are looking to bolster flagging returns with additional services and fee-earning business.

Tim Ritchie, global head of syndications and loan distribution at BZW, notes while credit quality was always a big factor, the pricing which top corporates can achieve in the loan market today is as much a function of the depth, breadth and potential profitability of their bank relationships.

Pricing has fallen to record lows for most borrowers and longer tenors are easily achieved in both the developed and emerging markets. Fees are now a fraction of what they were and as William Fish, managing director in charge of European loan distribution at Citibank, says: "Front-end fees continue to be the subject of negotiations."

While the syndicated loan markets' traditional borrowers in western Europe and North America have continued to make pricing gains, it is in the emerging markets that the collapse in margins has been most dramatic. Spreads have gone into free fall with borrowers from the more sophisticated emerging market economies paying margins that nearly match those being paid by established Euroloan borrowers in western Europe.

Rarely, if ever, has the syndicated loan market seen such pricing compression between different types of credits. For example, the National Bank of Hungary, which raised a $350 million five-year term loan in August 1996, was able to turn to its lenders just a few months later seeking a reduction in the deal margin from 50 basis points to just 20bp over Libor. Since then other Hungarian borrowers have pushed margins even lower and are raising significant financings at below this level. The Hellenic Republic, which recently completed a $1.3 billion five-year term loan - its largest deal - has slashed its borrowing costs by nearly 50% to 25bp over Libor in just over six months.

Few emerging market borrowers have achieved the instant access to cheap bank finance that Polish entities have locked into at the outset of their international borrowing programme. The hunt for high-yielding assets by lenders has produced some spectacular successes in the emerging markets recently. For example, few bankers would have believed that Gazprom could have successfully raised $2.5 billion of eight-year money priced at just 2% over Libor for its inaugural foray into the market, or that the facility, arranged by Dresdner Bank, would attract $7.5 billion in underwritings from the market.

Reduced margins

Russia may be a high-risk zone for international bank lenders, but competition for mandates is reducing margins from the 5% or so above Libor paid for most of last year. The City of Moscow recently made its Euromarket debut for a $200 million three-year puttable term loan priced at just 3.5% over Libor. The facility, arranged by Deutsche Morgan Grenfell, Société Générale and West Merchant Bank, was twice increased from the $50 million initially sought. Vneshtorgbank achieved a notable success with its inaugural $120 million loan arranged by BZW . The facility, which was increased from $50 million, established the new pricing benchmark for this sector with a margin of just 3.7% over Libor.

First-time borrowers from countries such as Estonia, Lithuania, Kazakhstan and the Ukraine as well as African nations, such as Namibia, are establishing their presence in the syndicated loan market this year. Although premium pricing is being charged initially, cost savings are being quickly achieved as successive financings make lenders feel more at ease. Deals are getting larger and tenors longer. For the more established emerging market borrowers, five or even seven-year maturities are being achieved in what is developing into a two-tier market.