LONDON- First quarter syndicated lending in Europe, the Middle East and Africa (EMEA) fell 25% year-on-year to US$200bn from US$267bn, reflecting a fall in M&A activity and refinancing compared with the beginning of last year, Thomson Reuters LPC data shows.
Increased scrutiny of large cross-border acquisitions and convoluted bidding processes has meant many M&A loans have been underwritten but have yet to syndicate, resulting in the lower volume numbers for the region.
However, those deals are expected to launch soon and will boost second volume numbers. Borrowing conditions remain favourable for companies, with funding available at highly competitive prices, while all the capital markets remain open for business.
“The market is in good shape. There is a lot of activity across the spectrum, with sizeable bids like Melrose for GKN and Comcast for Sky, helping drive activity. But there are also a lot more US$1bn or US$2bn bridges to bonds, providing good corporate flow. We are actually expecting more activity this year,” a senior loan banker said.
M&A loan volume dipped 45% to US$54.1bn in the first quarter, in stark contrast to the US$97.9bn raised in the first quarter of 2017 when volumes were buoyed by the syndication of several large-scale M&A deals.
The first quarter of 2018 saw some large-scale bridge loans, including a €6.1bn bridge loan for France-based commercial real estate company Unibail-Rodamco UNBP.AS . The loan is the largest M&A financing since the beginning of the year and backsd the acquisition Australian shopping mall owner Westfield WFD.AX .
Meanwhile, French aerospace and defence group Thales closed a €4bn bridge loan backing its acquisition of Dutch cyber security firm Gemalto.
Refinancing, the traditional driver of activity in EMEA, was 20% down in the first quarter at US$129.9bn ahead of the expected start of the next cycle expected towards the end of the year.
Spanish and Italian telecom giants Telefonica and Telecom Italia returned to the market for the largest refinancings of the first quarter, taking advantage of a relatively clear market and competitive conditionals to agree loans on improved terms.
Telefonica closed a €5.5bn refinancing in March, while Telecom Italia completed a €5bn loan in January.
Loan volume in Central and Eastern Europe, the Middle East and Africa reached US$30.33bn, up from US$26.14bn in the same three-month period last year. However one jumbo deal -- the US$16bn syndicated loan refinancing for the Kingdom of Saudi Arabia -- accounted for over half the total.
Leveraged loan volume of US$58.4bn in the first quarter of 2018 is 26% down on the same period last year after a sharp decline in refinancing activity.
Refinancing and repricing activity accounted for US$48.18bn of volume in the first three months of the year, almost a third lower than the US$69.61bn in the first three months of 2017.
However an increase in leveraged buyout activity saw a 16% jump in new money deals year-on-year, with volume of US$10.2bn in 1Q18, compared to US$8.8bn last year.
“First quarter last year there wasn’t real volume or activity it was just repricings and refinancings. The volume last year was a storm in a tea cup while this year’s volume is a real ground swell of activity,” a syndicate head said.
Despite a steep drop on last year’s inflated first quarter volume, some US$58.37bn of activity in the first quarter still produced the second-highest first quarter leveraged loan volume since the financial crisis.
“Refinancings are down massively and that’s distorting the numbers but M&A is up and we always want new money deals so it has been quite a positive first quarter,” a second syndicate head said.
The largest deal of the first quarter was a €4.7bn-equivalent leveraged loan financing backing KKR’s buyout of Unilever's spreads business Flora Food Group. The company managed to raise €2.8bn-equivalent from European investors, including a €2bn tranche, the largest single-tranche euro-denominated term loan B since the financial crisis.
It allocated in March after attracting around 80 major investors into the jumbo cross-border deal.
“Flora was interesting in that it was not an easy credit and it was aggressively structured and despite that it was fully placed. It should give encouragement that the market has capacity to absorb scale,” the first syndicate head said.
The new issue pipeline for the second quarter looks healthy, with a mix of jumbo cross border deals and sizeable European deals to come including €5bn-equivalent of senior leveraged loans backing the buyout of Akzo Nobel's chemicals business, as well as an US$8bn-equivalent term loan backing Blackstone Group’s BX.N acquisition of a majority stake in Thomson Reuters’ Financial and Risk unit. Both loans form part of wider debt financings.
Blackstone is buying a 55% stake in F&R, which includes LPC.
Other significant deals to come include a £1.75bn-equivalent leveraged loan backing Motor Fuel Group’s £1.2bn acquisition of MRH, the UK's largest petrol station and convenience retail operator.
The second quarter looks set to continue in much the same way as the first quarter, as bankers and investors focus on new issuance as opposed to re-jigging existing portfolio credits.
“There is significant new deal activity going on with a decent number of deals of significant size. The new volume activity will put a cap on repricings and refinancings because all the managers will be absorbing the new issue pipeline and won’t have time to rearrange their deckchairs,” the first syndicate head said.
(Additional reporting by Sandrine Bradley; Editing by Christopher Mangham) ((firstname.lastname@example.org; +44 020 7542 3197; Reuters Messaging: email@example.com))