RLPC-Rising European bank funding costs threaten M&A
Posted By Admin on September 7, 2011
* Europes dollar squeeze puts dampener on cross-border Mamp;A
* European banks say no to uneconomic loans
* Interest margins, utilisation fees boosted
By Tessa Walsh
LONDON, Sept 6 (Reuters) – European banks are trying to pass
on increased funding costs to companies in Europe, the Middle
East and Africa on expensive dollar loans and are scaling back
lending which could reduce money available for big international
Mamp;A deals.
Rising dollar funding costs are also forcing banks to take a
tougher view of client relationships and re-examine the return
on equity (ROE) models they use to calculate what they earn from
lending.
Dollar funding costs have trebled after US mutual funds
scaled back three, six and nine-month dollar lending to European
banks with exposure to Europes sovereign debt crisis.
European banks facing higher dollar borrowing costs are
asking for a premium on drawn and undrawn dollar loans or are
deciding not to lend to uneconomic loans as BNP Paribas
and Commerzbank opted to do on SABMillers
$12.5 billion acquisition loan.
To the extent possible, given the higher funding cost, we
are trying to transfer part of the funding increase to clients
by asking for a higher margin on dollar drawings, a European
loan banker said.
The EMEA market has a significant amount of dollar lending,
primarily in cross-border acquisition financings and
multi-currency loans backing US commercial paper programmes.
Borrowing in the Russian and Middle Eastern loan markets is
almost exclusively dollar-based.
Most European banks are facing dollar funding costs of
130-140 basis points (bp) but the marginal cost of buying
dollars in the open market can be as high as 200 bp, based on
credit default swap (CDS) rates, bankers said.
This deepens the losses that banks are making on cut-price
loans and some banks are choosing to cut back on uneconomic
exposure.
As well as the two high-profile dropouts from SABMillers
loan, European banks recently halved dollar commitments to
Express Scripts $5.5 billion pro-rata tranche of its
acquisition financing backing its purchase of Medco in
the US.
A $900 million loan for French supermarket operator Casino
Guichard Perrachon was signed last week which
contained no French banks, in a marked departure from the
companys previous loan.
In certain situations where its not a big relationship or
a large funded commitment, we may well see banks not being able
to make it work, a senior loan syndicator said.
DRAWN AND UNDRAWN LOANS
The problem is most acute on dollar loans that are drawn
down or used, which includes Mamp;A loans. European banks are
asking for a premium of 20-25 bp on the interest margins of
drawn dollar loans.
Commodities companies are heavily dependent on drawn dollar
loans and oil trading firm Vitol has increased the
pricing on its $4.5 billion refinancing in a concession to
lenders, bankers close to the deal said.
Russian oil firm Bashneft may also have to
increase the margins on its $300 million loan from around 200
bp to 275 bp to help the deal through general syndication,
banking sources said.
The problem spread to undrawn revolving credit loans last
week, which are used as liquidity insurance by highly-rated
companies, but are rarely drawn.
German carmaker BMW is discussing redenominating
its upcoming $8 billion loan refinancing from dollars to euros,
although it would retain the right to draw in dollars.
Nearly all European banks – including French, Spanish,
Italian, UK and German lenders – are asking for increased
utilisation fees on undrawn revolving credits.
Utilisation fees, which boost returns if loans are ever
drawn, have increased to 30 bps-50 bps from 15 bps-30 bps before
the summer, bankers said.
The changes afoot in the EMEA loan market reflect a
new-found determination by European banks to limit losses and
extract more from relationships as banks tolerance for
loss-leading relationship lending erodes.
Bank shareholders are being asked to pony up more money for
maintaining the same level of lending. Either you have to get
more out of that lending or you re-rate the whole financial
sector, the senior syndicator said.
(Reporting by Tessa Walsh. Editing by Jane Merriman)
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