LONDON, June 30 (Reuters) - The Europe, Middle East and Africa (EMEA) loan market is braced for a tough second half of the year after Britain’s vote to leave the European Union sent shock waves through the region.
First half issuance hit a 12-year low of US$368bn, according to Thomson Reuters LPC data, as volatile markets kept borrowers away. Bankers fear uncertainty following the referendum decision could hit loan volumes further in the remainder of the year.
“It’s impossible to predict what’s going to happen, but I expect it to be a lot quieter than expected or hoped for,” one senior banker said.
“However, there is no panic. The loan market will continue to do what it has always done — adapting to changing circumstances and continuing to support clients. That is very much the mantra of the market,” the banker said.
Loan volume was down 31% compared to the first six months of 2015 as refinancing — the traditional driver of EMEA lending — plunged 56% to US$147bn. Most European companies had already refinanced in the last couple of years at attractively low rates.
Meanwhile, M&A financing was down 31% in the first half to US$74bn as acquisition activity remained sporadic, although a flurry of potential financings from Germany — including a 60 billion euro bridge loan backing Bayer’s bid for Monsanto — could boost second half figures.
Another senior banker said it would be a “bumpy rollercoaster” for the next couple of months which would act as a restraint on M&A activity.
“The knock on effect is the market is going to very uncertain for some time,” he said.
Second quarter activity was sporadic with just a handful of multi-billion loans completed, the largest of which was a 4.8 billion euro (US$5.35bn) loan backing the merger of Coca-Cola’s three main bottling companies in Western Europe, followed by a 3 billion euro-equivalent financing for South African pharmaceuticals company Aspen Holdings and a 2.9 billion euro refinancing for South African retail group Steinhoff.
While banks are still digesting the fallout from the Brexit result, they remain highly liquid and eager to do investment grade deals as they struggle to meet tough budget targets.
While higher rated borrowers on the continent are expected to be largely unaffected in the longer term, some UK borrowers could face pricing increases on their loans and more restricted access to the bond market, depending on currency, sector and size.
“Pricing over a whole range of asset classes related to the UK could rise, which could filter down to loans. Loans are not as elastic as other asset classes like bonds and equities — it doesn’t react as fast and sometimes not at all,” a third banker said. “It’s based on relationships like no other asset class, but banks could be looking to lighten up on UK risk and reduce exposure and that could push UK loan pricing up.”
The European leveraged loan market remains in the doldrums after recording its lowest first half volume in six years. Leveraged loan volume reached just US$68.25bn — a drop of 47% on the US$129.1bn raised in the first six months of 2015.
Mirroring the pattern seen in the overall EMEA loan market, leveraged refinancings plummeted 59.6% year-on-year to US$30.2bn from US$74.7bn, while M&A-driven issuance fell 35.6% to US$29.1bn from US$45.2bn.
It is the lowest first-half volume total since 2010, when the market was still recovering from the fall of Lehman Brothers and the wider credit crisis.
The dismal start to the year is unlikely to improve in the second half as the shock of referendum result hits confidence and investor appetite.
“It’s hard to be particularly bullish on the second half,” said one leveraged loan banker. “Are sellers going to sell and buyers going to buy even if the debt is available?”
The year began with a flurry of M&A-driven primary deals in January, but the glut of supply coupled with global volatility forced many deals to flex and sent secondary pricing to a three-year low of 97.8% of face value in February.
Supply has failed to recover since then, while on the other hand demand has grown due to strong CLO formation and a series of repayments to loan investors pushing secondary pricing back up.
There was a surge of refinancing deals in June as companies sought to reprice their debt at more attractive terms while secondary pricing was near par.
UniCredit topped the first half EMEA syndicated loan bookrunner league table, with a US$16.72bn market share and 76 deals. Barclays claimed second place with US$14.29bn and 27 deals, while HSBC was third with US$12.6bn and 63 deals. ($1 = 0.8971 euros)
Editing by Christopher Mangham