Despite the continued turbulence in the world of sovereign debt, the outlook for treasurers wishing to access the European banking markets has not been better since close to the heights of the pre-crisis credit boom. But…
…given the fragile state of many key economies and the stage of the business cycle, these boom-time prices are unlikely to persist for much longer. Average EMEA loan margins reached a low of around 50 basis points (bp) in the middle of 2005 and remained there until around the fourth quarter of 2007. During the crisis they blew out to around 250 bp but have fallen steadily since then to around 65 basis points.
As a recent report by RBS pointed out: “The European loan market has shown unprecedented strength over the past 12 months, with banks willing to lend money at low margins (similar to those seen pre-crisis) in order to secure ancillary business.” One loan banker goes further: “This level of pricing is surprising and is not sustainable. It is extremely low for where we are in the cycle.”
In addition, while three-year money was corporates’ best value tenor during and immediately after the crisis, now five-year tenors are available cheaply again.
Previous Treasury Insight articles have pointed out the attractiveness of the Eurobond market as a source of diversification as well as cheap, uncovenanted funding. But the sterling market in particular looks very interesting as quantitative easing has kept gilt prices high and credit spreads have come right in as crisis fears have receded. The result is a historical low all-in cost of debt – more cheap funding for corporates.
And investors continue to, as they would say, ‘seek higher value down the credit spectrum’. Triple-B and double-B issuers are accorded a warm welcome with spreads for some issuers down 200 bp from even the early part of 2009. This spread compression has not been accompanied by any change in covenant levels to the extent that double-B issuers can demand pretty much the same package as an investment grade issuer.
This is all great news for corporates because it means that both sides of the funding markets are now open for them in size and at attractive pricing. Those who wish to diversify away from bank lending can access bond markets that are now receptive to unrated as well as rated companies and to mid-sized corporates, and not just the leviathans. Treasurers keen to maintain their bank lending groups but who worry about re-financing spikes in 2012, 2014 and 2016 can take out existing facilities early and re-finance in the loan markets at the best rates they have seen for three years and before rates start to rise again.
The bad news is that these conditions are likely to get worse soon. On the macro-economic side, since most data is months old and subject to revision, statements of what is happening ‘now’ in the economy are almost always, by definition, forecasts. The key European economies could already have worsened. Also, taking 2008 as the bottom, and the business cycle as five years from trough to trough, we are already at the mid-point, which usually signifies the top. By autumn at the latest the cycle will be turning and markets will anticipate this.
On the markets side, the situation is best summed up by those in it. “I know as a banker I’m bound to say this,” says a loan arranger, “But I really do think this is a window of opportunity that will close very soon.”