Financial site: Economic, Markets and Commerse

Rlpc pricing differentiation enters europes leveraged loan market


Aug 4 Europe's leveraged loan market is experiencing real pricing differentiation where assets are being assessed on credit fundamentals, eroding the standard wholesale pricing model that has defined the market up to now. A healthy supply/demand balance, a vast amount of liquidity and a recent flood of deals, means credits are clearing with different interest margins and discounts. This has broken the mould of deals reverse-flexing in a quiet market and flexing up in a busy market."This is the first time there has been true pricing differentiation in Europe," a senior leveraged loan banker said. "The market is very busy but there is also an enormous amount of liquidity so it has created the perfect storm for the market to behave more maturely. When it got busy previously the entire market repriced irrespective of credit quality. In a quiet market, lower-quality assets would reverse-flex due to demand."Recognising yield and credit differentials is something that is common in the US market but has escaped the less liquid, less busy European market. The roughly 25 leveraged loans syndicated in July, coupled with large amounts of liquidity from new CLOs, credit funds and repayments, has prompted the European market to act more like its US counterpart when it comes to pricing risk."The European market has been perceived as being junior to the US market for years and this is the first evidence of a more mature European market," the banker said. "Managers have choice and are performing a function by selecting a credit over another credit, which is reflected in the pricing."

GONE DOWN WELL A number of deals were well-received by the market and reverse-flexed, including those of drug capsule-maker Capsugel, which reduced an interest margin to 275bp from 300bp, and French medical diagnostics company Sebia, which finalised at 325bp at par from initial guidance of 350bp at 99.75. Other deals did not fare as well. Healthcare firm Independent Clinical Services ended up paying 525bp with 98.5 OID from initial guidance of 450bp. Dutch TV company Endemol's 1.1 billion euro (1.48 billion US dollar) dividend recapitalisation widened spreads to 525bp on a euro first-lien from 475bp and the OID increased to 98 from 99. German plastics maker Styrolution also widened guidance on a euro first-lien to 400bp-425bp from 350bp-375bp, while the OID widened to 99 from 99.5.

Although pricing differentiation is a useful tool, investors doubt whether higher yields can clear some of the trickier assets. They also doubt whether good-quality assets will keep the investor bid if they reverse-flex too tightly."There are one or two credits that no one likes so they are cranking up the margin and putting more OID on, such as Styrolution and Endemol," an investor said. "At the other end of the spectrum, people are still being very greedy and trying to be super tight."TIMING CONSIDERATIONS

A 500 million euro term loan for institutional investors backing an acquisition of healthcare firm Generale de Sante reverse-flexed to 350bp from 375bp. The deal is on a ratchet and pricing could reduce further to 325bp if leverage falls below 3.5x. The reverse-flex led some investors to reduce or withdraw their initial commitments."The pricing on Generale de Sante was well below what leveraged investors can do," a second banker said. "Most investors need at least 400bp and this was 350bp with no floor. Given the rating of the company they could do it but it was more one for the banks in the end rather than the real leveraged institutional investors."Some arrangers began to factor in pricing differentials for deals later in July in an attempt to avoid pricing flexes and to get deals cleared before the summer. Germany-based automotive engineering company Amtek Global Technologies' 275 million euro, five-year Term Loan B launched at 550bp and is expected to carry a 98 OID."Amtek is a difficult deal and has all sorts of issues," a second investor said. "The pricing reflects that."The emergence of healthy pricing differentiation in Europe's leveraged loan market has been welcomed by arrangers and investors but some say its continuation is based on fragile dynamics and could be shortlived if deal flow falls in the fourth quarter."Lots of supply and lots of demand have driven the healthy dynamics that emerged in July and who knows if it will last going into the autumn," the first banker said. "The danger is that if the market goes back to a situation where there is a lack of supply, investors will once again have to take credits on terms that they would prefer not to." (1 US dollar = 0.7454 euro)

Rpt cee money eu bank plan unnerving for prudent czechs


(Repeats to more subscribers, text unchanged)* Czech cbankers oppose European bank resolution directive* Proposal could ease process of shifting capital from Czech banks* Issue underscores that Czech banking system almost fully foreign ownedBy Michael WinfreyPRAGUE, June 22 Czech central bankers have taken affront at a push by some EU partners for a bloc-wide banking union that could threaten their country's uncommonly strong capital buffers and undermine the years of conservative policy that helped support them. The proposals could have deep implications for Prague and other newer EU members because the underscore that their biggest banks are simply assets held by foreign interests and not the stand-alone national champions that many domestic consumers believe them to be. This week, two central bankers criticised a proposal for a directive adopted by the European Commission on June 6 outlining a framework for bank recovery and resolution that is aimed at shoring up the EU's financial sector. Board member Pavel Rezabek zeroed in on a section governing intra-group financial support that would make it easier for big banking groups to shift assets among its cross-border units in case they or one of their units faces collapse. Experts say the measures will allow the unwinding of "too big to fail" banks by allowing them to spread risk among their units and remove the need of taxpayer-funded bailouts. But for the Czechs, it could undermine efforts to ensure defences against crisis under which the country's banking sector has built up an average capital adequacy of above 15 percent, almost double the minimum required under EU rules."This kind of mechanism is a moral hazard and in the next crisis can become a channel for the fast spreading of financial contagion," Rezabek wrote in daily Hospodarske Noviny. His colleague, deputy central bank Governor Mojmir Hampl, was more critical in an interview with Dow Jones Newswires. Referring to the proposed directive and other plans towards a banking union, he said, "these half-baked measures mean that for stable systems there will be new risks rather than mitigation of existing ones".

On Friday, the leaders of France, Germany, Italy and Spain were seeking to find common ground to restore confidence in the euro zone ahead of an EU summit next week. Economists say work to create a banking union could take two years. It is running parallel to the proposed banking resolution directive adopted this month - and seen as a requirement for a wider union - which could come into force next year. PUNISHING PRUDENCE The EU's 10 newest members sold most of their state banks to the private sector in the years following the fall of Communism, a crucial step in transforming from centrally-planned to market-oriented economies. The main buyers were banks such as Austria's Erste Bank and Raiffeisen, Italy's Unicredit, France's Societe Generale and Belgium's KBC, whose home governments are now mulling an EU-wide banking union.

The Czechs, however, are resisting and have insisted since the height of the economic crisis three years ago that Czech units of foreign banking groups would be insulated from a wider EU banking crisis because of their high levels of domestic funding and rules limiting exposure to their parents. But the EU directive, which must still be debated in parliament and then passed by EU states, could change that. In its current form, the draft law would allow a regulator in country A to ask a parent bank there to take funds from a unit in country B to help itself or another unit in country C. Supporters of the banking draft law have tried to alleviate concern by pointing to a phrase in the proposal."Transferring assets from a healthy entity could reduce its liquidity and capital and hence weaken the position of debt holders and depositors. Therefore the transfers should be executable only if they do not jeopardise the liquidity or solvency of the support provider."But a key question remains: whose definition of solvency or stability will be the standard?Probably not that of countries with solidly capitalised banks like the Czechs and their neighbours, the Slovaks, who could quickly see their lenders' capital targeted by foreign owners to help shore up troubled units elsewhere.

"This proposal opens the door to uncontrolled outflows of liquidity and assets," Hampl told Dow Jones. NATIONAL CHAMPION "ILLUSION" When contacted by Reuters, other bank regulators in central Europe said they would refrain from commenting on the proposed bank resolution directive until they saw a final draft. The Czechs have tried to mitigate the risks. On Wednesday, they announced measures tightening rules cutting the gross exposure limit for Czech units to their parents to 50 percent of their Tier 1 and 2 capital, from a previous 100 percent. But many consumers in the country of 10.5 million see the three largest Czech banks - Erste-owned Ceska Sporitelna, KBC unit CSOB, and Societe Generale's Komercni Banka - to be national champions rather than foreign subsidiaries. The central bank has not entirely discouraged that idea, touting the fact that "Czech" banks are more than fully funded by domestic deposits, compared to their regional peers where loans far out outstrip the cash in savings accounts. Deposits amounted to 134 percent of outstanding loans at the end of 2011, and most Czech banks are net creditors to their parent units. Rezabek himself wrote this week that "Czech banks currently hold virtually no assets from governments of highly indebted countries on their balance sheets". Once linked to their parents, however, that could be a different story. According to Karel Lannoo, CEO of the Brussels-based Centre for European Policy Studies, the idea that the banks are actually Czech is "only an illusion". He said big banks, such as Italy's Unicredit, would find little help from Czech subsidiaries, as their assets are a tiny fraction of the groups total. But when a bank would have to be liquidated somewhere, a European college of supervisors could meet and decide on a cross-border solution."They could force, say,