Debt Side Story Newsletter December 2011
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Transcript of Debt Side Story Newsletter December 2011
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NEWSLETTER
DECEMBER 2011
KPMG LLP (UK)
Debt Side Story
The autumn has been a volatile period in global nancingmarkets, with the ongoing Eurozone concerns loominglarge. In this issue we have covered a handul o currentmarket trends.
Eurozone contagionThe Eurozone debt crisis has been a
central ocus or all orms o media and
bar room discussion over recent months.
Recent visible impacts have included:
Continental sovereign downgrades;
bank asset writedowns; acutely reduced
interbank lending; and heightened
investor uncertainty.
These symptoms have resulted in many
banks experiencing diculties, both with
their own unding position and their
capacity to lend in advance o the arrival
o US$ 2 trillion o maturing European
corporate debt in 2012.
We have recently seen certain European
banks reducing US dollar lending books,
driven by reduced inward unding rom
US institutions. Moreover, limited and
more expensive access to capital markets
and increasing regulatory capital
requirements are increasing the cost o
bank unding, restricting the fow o credit
to the real economy.
Eorts to resolve the sovereign crisis
and to stabilise unding markets are still
underway as we head towards the end o
the year, and all market counterparties
remain cautious.
...consider their undingstrategy or 2012 with an eyeto syndicate composition,renancing timetables andthe need to diversiy undingsources...
Thus as we watch the eurozone crisis
unold, there is much ood or thought or
borrowers, who might take a moment to
consider their unding strategy or 2012
with an eye to syndicate composition,
renancing timetables and the need to
diversiy unding sources.
Leveraged logjamCompanies approaching leveraged
renancing throughout the autumn
months have continued to experience
diculties in accessing debt markets,
which have exhibited illiquidity and
volatility.
Well advanced renancing
preparation will continue tobe key to placing borrowerson the ront oot orrenancing discussions.
This current logjam prevailing in the
leveraged loan market has been driven by
a combination o a loss o condence due
to the sovereign debt crisis and transaction
structures signed earlier in the year being
more aggressive than the current market
would allow. Such structures have resultedin a level o o-market debt still held by
underwriting banks which was expected
to be sold into the institutional loan and
high-yield bond markets.
Purchases o such debt have been
incentivised through increased
discounting, upwards fexing o pricing and
restructuring o terms over recent weeks.
Discounts on loans oered by selling
banks have been seen as high as 9%
o nominal value.
With the current economic downturn
remaining, it appears that the leveraged
logjam will subsist into the near uture.
Well advanced renancing preparation will
continue to be key to placing borrowers on
the ront oot or renancing discussions.
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Going back to forward startsThe European loan markets have recently
seen a re-emergence o the orward start
acility (FSF), a product last prevalent in
the market in early 2009 in an environment
o severely restricted liquidity immediately
ollowing the collapse o Lehman Brothers.
I some lenders within a syndicate will not
grant a maturity extension or a renancing
process is deemed to have too high an
execution risk at a point in time, the FSF
allows borrowers to maintain their level o
existing acilities through to maturity, while
securing an amount o extended maturity
unding, albeit at a reduced level.
FSFs are separately documented acilities,
committed rom signing, but only available
on prepayment and cancellation o the
existing acility. Current lenders who are
rolling over receive mark-to-market pricing
on their commitments under the FSF,
providing a yield refective o current
market conditions. Existing lenders not
participating in the FSF receive no uplit, but
their original commitments in the existing
acility remain in place until maturity.
Given the current lack o liquidity in the
market and inherently volatile pricing
atmosphere, it is not surprising that
borrowers and lenders alike are
reconsidering these structures. Recent
examples include UK residential rm
Grainger Plc, Italian construction rm
Astaldi and Spanish utility Endesa.
Ancillary business Emptyyour wallet?Whilst ancillary lines have always been
important or a borrowers relationship
bankers, these additional acilities are
increasingly driving the appetite and
participation o lenders. Borrowers should
not underestimate the importance o their
ancillary requirements and spend when
deciding how to divide business betweentheir syndicate and appropriately
incentivise their relationship banks.
At the larger end o the market, the
incentive o uture advisory or capital
markets business is increasingly a pre-
requisite or sourcing competitive terms
and at the smaller end, hedging, deposits,
cash management, leasing and even
corporate credit cards can make the
dierence or potential lenders.
Basel III pricing models arebecoming increasingly relianton ancillary returns to ensuremargins remain competitive.
The lack o ancillary business is a
particularly pressing issue in the current
environment given the impact o increasing
regulation on banks return requirements.
Basel III pricing models are becoming
increasingly reliant on ancillary returns toensure margins remain competitive. The
worrying thing or borrowers is the
disconnect between the ancillary haves
and have nots.
The market might benet rom a two tier
structure, allowing smaller lenders to
participate at margins that meet minimum
hurdles whilst the traditional ancillary banks
ght it out or a more keenly priced tranche
with embedded benets. In the meantime,
borrowers can expect to see continued
disparity between lenders in renancings.
Premium BondsFollowing a six week slowdown in
issuance over the summer months,
the European corporate bond
market has shown some signs o lie
in recent weeks; however entrance
to the market is coming at a price.
The market has started to nd some
momentum in the last couple omonths, with some issuers reacting
to an uncertain tomorrow by
choosing to issue into already
turbulent markets. Successul
issues in this period have generally
been rom established, well liked
names and have been characterised
by new issue premia.
In more benign market conditions,
new issues would generally be
priced based on the secondary
curve (potentially with a small newissue premium). In the month to
mid-October however, new issue
premia or European A and BBB
rated issuers were averaging
c.20-55bps. Some issuers even paid
a more extreme price to secure
unding; Enel (A-), an Italian utility
was estimated to have paid a
premium o c.70bps on top o its
pre-announcement spread or a
bond issued on 21st October.
However, spread isnt the only actor
to consider in these uncertain times
as basis costs remain low. Issuers
will consider these market
conditions in the context o their
unding and timing requirements
and should maintain a nimble
approach and be positioned to
access windows o market
availability as they open.
In the next edition of the Debt SideStory... On Credit Watch EU
proposals on credit rating agencies.
KPMG Debt Advisory has a long track record of providing specialist, independent advice across the full spectrum of debt
products and markets. If you want to know more, please give us a call.
Neill Thomas
Partner, Corporate Finance
T: +44 (0)20 7311 4757
David Reitman
Partner, Corporate Finance
T: +44 (0)20 7694 3113
Peter Bate
Director, Corporate Finance
T: +44 (0)20 7311 8307
Simon Mower
Manager, Corporate Finance
T: +44 (0)20 7311 8967
The inormation contained herein is o a general nature and is not intended to address the circumstances o any particular individual or entity. Although we endeavour to provide accurate and timelyinormation, there can be no guarantee that such inormation is accurate as o the date it is received or that it will continue to be accurate in the uture. No one should act on such inormation without
appropriate proessional advice ater a thorough examination o the particular situation.
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