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 Major syndicated loans
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Syndicated loans are large financing facilities granted to a borrower by a group of financial institutions who share the lending risk between them. They combine the commercial financing relationship between a bank and its client with the features of market traded debt. The bank that arranges and places the syndicated loan will generally have considerable experience in this field and a strong relationship with the borrower. The market for syndicated loans began in the 1970s and has become a major source of international financing; sources estimate that it accounts for around one-third of total financing, including all types of funding such as equities, bonds and short-term commercial paper.
How the market works
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Carol Shymanski, Head of the Global Loan Syndication Group at Calyon |
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In a major financing deal, arranging the syndication of a loan involves working like the conductor of an orchestra. The deal must be structured so that it will fit the client's needs whilst at the same time be well received by the market (banks and investment funds). |
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Major corporate clients will almost automatically consider a syndicated loan for sums above a few hundred million euros. Syndication splits the lending risk between large numbers of investors, at a price (margin and fees) determined by the market. It is an efficient way of raising funds quickly and on the best terms. For borrowers, the advantage is that they can raise larger amounts and expand their group of bankers whilst at the same time only having to sign a single contract.
For lenders, syndication allows a diversification of the lending portfolio from both a geographical and sectorial point of view. In addition, lenders get the benefit of the facility agent's expertise in management of drawdowns and of other events in the lifetime of the loan after the facility agreement has been signed.
The syndicated loan market was originally developed in the USA in the 1970s as a means of financing leveraged buy-outs (LBOs). It has since gone on to become the leading vector for all sorts of financing. In Europe the market expanded rapidly in the UK and then on the continent, particularly in France. The market's rapid growth can be seen from the fact that in 1993 the total volume of the market worldwide was USD 1.4 trillion, whereas in 2005 it has exceeded USD 3 trillion (Dealogic).
Today, three global markets of borrowers coexist:
- The USA, which is still the biggest market by volume but which dropped below 50% of total world volumes for the first time this year.
- The EMEA (Europe / Middle East / Africa) zone, which currently represents 40% of the world market. 90% of this market is in Western Europe, although the markets of Eastern Europe and the Middle East are also very active.
- Asia, with around 10% of the world market, has recovered strongly since the crisis at the end of the 1990s.
What are borrowers looking for on the syndicated loan market?
According to Carol Shymanski, the rapid growth in syndicated facilities is certainly due in part to the trend over the past fifteen years, across all sectors of the economy, towards industry consolidation. For a borrower, the choice between a syndicated loan and negotiable debt instruments often comes down in favour of the first. Syndicated loans are the only means of raising, rapidly and with few formalities, sums greater than are available on other markets, like bonds and equities, or through private placements.
These loans may be used to cover a whole range of uses by the borrower: refinancing, undrawn lines of credit supporting commercial paper and treasury note programmes, acquisitions, LBO financing, project and other structured financing. The arrangement commission paid by the borrower is determined by the complexity of the deal: the most profitable deals for banks are leveraged acquisitions.
Recent market trends | |
A market seeing rapid growth in volumes
- The total worldwide volume of the syndicated lending market grew strongly in 2004. In the EMEA zone, growth ran at an impressive 52%, thanks especially to high volumes for refinancing deals.
- 2004 also saw a number of other developments:
- A fall in lending margins;
- An increase in loan maturities, with 7-year terms becoming more common, compared with an average of 5 years over recent years;
- a growing number of 'club deals';
- strong growth in LBO volumes in Europe, where this segment accounted for more than 10% of the region's syndication market for the first time ever.
Further volume growth in 2005
The total volume of syndicated loans has continued to grow in 2005 to reach USD 3.4 trillion, the highest volume ever raised in the syndicated loan market, an increase of 30% compared with the previous year (Dealogic). However the number of deals has risen more slowly, indicating a rise in the average size of each loan.
EMEA
The EMEA zone has posted record levels of activity in 2005, with a record total volume of USD 1.4 trillion, an increase of 54.5% from the USD 904.3 billion of 2004 (Thomson Financial). Europe accounted for the lion's share of this, with USD 1.3 trillion (Thomson Financial), taking the region from 29% to 38% of the world syndicated loans market. This volume growth was driven by refinancing of existing loans before maturity, as borrowers sought to take advantage of the narrowing of margins that began in 2004 and continued into 2005. The market for leveraged acquisitions (particularly LBOs) has been exceptionally strong in 2005, with high levels of gearing and stiff competition between banks for mandates, reports Michael Sheren, head of Leveraged Syndications for the EMEA region, adding that this market closed 2005 with unprecedented volumes. In fact the leveraged market volume in the EMEA region outperformed 2004 volume by 75% (Thomson Financial).
France accounts for 29% of the Western European market. It has overtaken the UK in 2005, to claim the title of Europe's largest market and the second largest in the world behind the USA. The jumbo deals in France over this period included EDF (EUR 6bn),
Sanofi Aventis (EUR 8bn),
Arcelor (EUR 3bn) and Suez (EUR 7.9bn) for all of which Calyon acted as MLA and/or Bookrunner.
Other trends observed in 2004 have continued in 2005, most notably the growing number of deals with maturities of over 5 years and the continued narrowing of margins, particularly for French borrowers. According to Jean-François Balaÿ, head of Western European Origination, margins are now likely to bottom out for so-called "plain vanilla" deals (simple financing for general-purpose corporate needs), and perhaps even increase somewhat if acquisition financing bounces back in 2006.
North America
The volume of syndicated loans in North America rose by 16% to USD 1.6 trillion in 2005 (Dealogic). Leveraged deals accounted for more than one-third of total volume.
As in Europe, North America saw a narrowing of lending margins, but these still remained higher than in Europe or Asia.
Asia & Pacific
The Asian syndicated lending market is dominated by Japan, which accounts for 60% of the region's volume. The Japanese market consists primarily of yen-denominated deals with Japanese banks. The rest of the Asia & Pacific region has been very active during 2005, with USD 179 billion, up 18% from the 2004 volume (Dealogic). The busiest countries so far this year have been Hong Kong (with 20% growth), South Korea (100%) and Australia (21%). By contrast, syndicated loan volumes in Taiwan have fallen by 30% (Thomson Financial).
The narrowing of margins that has been seen around the world has been particularly marked in Asia.
Calyon's expertise in syndicated loans: a rational growth | |
In 2005, Calyon joined the elite World Top 10 Bookrunners list, ranking 8th Global bookrunner, as well as 5th bookrunner in the EMEA market. According to Thomson Financial, Calyon's market share increase was most notable as the French bank doubled its volumes from USD 42.9 billion to USD 88.2 billion, a market share increase of 1.5%.
Calyon's syndicated loan activity is a global business line covering:
- the EMEA zone, covered by more than 40 specialists based in Paris, London and Madrid;
- Asia with 8 specialists based in Hong Kong;
- the Americas, with a team of 19 specialists based in New York. Each of these three teams is structured to be able to offer clients expertise in the following functions:
Origination & structuring: responsible for researching and structuring mandates to finance the general needs of our clientele of major companies and institutions as well as financing for major acquisitions. As part of this function, dedicated specialists in structured financing (project financing) and LBO financing work with the customer managers for these clients on all aspects of setting up loans that could affect their placement, and draw up underwriting recommendations for the lending committee.
Distribution: responsible for placing the syndicated loan amongst the banks invited to take part. Specialists in Distribution have considerable bookrunning experience and cover all active investors in the market.
Secondary market: this area is seeing strong growth and offers mid-sized banks and investment funds the opportunity to lend to borrowers who are normally only accessible to very big banks in the primary market.
The main strength of our syndicated lending business is in Europe. But the group's decision to structure syndication as a global platform spanning three continents, coupled with Calyon's substantial underwriting muscle and expertise in dealing with investors, allows us to offer our major clients financing that is placed simultaneously in several markets, with:
- Origination teams with in-depth knowledge of their sectors and an emphasis on the client relationship;
- Significant market share in syndication of products such as project financing and leveraged financing;
- A knowledge of the market that guarantees the best prices at any given time;
- Widely recognised placement capacity.
As Lise Kessler, head of Corporate & FIG Distribution EMEA, notes, "market conditions this year have favoured those banks which, like Calyon, have financial muscle and are committed to building long-term client relationships." She adds, "our market share has increased significantly in the EMEA zone, and the number of repeat mandates we have won this year, in a market where role rotation is the norm, indicates the high level of confidence our clients have in our syndication abilities."
Calyon's rankings in Bookrunner League Tables tell the same story:
Thomson Financial 2005 Bookrunner League Tables by volume:
N°8 Global Bookrunner
N°5 Global Bookrunner excluding US
N°5 EMEA
N°12 EMEA Leveraged Loans and EMEA Sponsored loans
N°4 Asia-Pacific (excl. Japan and Australia)
Bloomberg 2005 Bookrunner League tables by volume:
N°5 EMEA
N°1 France
N°7 Eastern Europe
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