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Scratching around for good deals

Syndicated loan arrangers were given pause for thought when UK trade secretary Ian Lang blocked National Power's agreed bid for Southern Electric on April 24, just a day after its £2.2 billion three-year acquisition financing had entered syndication. One banker said: "We had all asked ourselves at the beginning of this year, how we were going to keep busy and had all said: 'M&A finance.' That has worked, so far. But I am already wondering what on earth we are going to do next year."

Banks in the syndicated loan market are, as ever, struggling to make a decent return. Margins on loans to good-credit borrowers remain obstinately low - sometimes near the so-called psychological limit of 10 basis points over Libor and 5bp in commitment fees. It is almost impossible for banks to lend at lower rates without losing money. Although margins have little room to decline further, "rates available on the capital markets mean high margins are unlikely to return", says a banker at Deutsche Morgan Grenfell.

And with so many corporates obtaining vanilla loan finance at last year's favourable rates, volumes are low. Arranging banks cannot rely on a steady stream of fee earnings to compensate for low margins.

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