Syndicated loan market goes from boom to bust

Most Polish corporations dropped or delayed plans to issue syndicated loans during the first quarter after learning that banks were upping rates at the beginning of the year. As a result, the demand for foreign-denominated syndicated loans screeched to a halt, and bankers are unsure when it will speed up again.
"Banks are discovering what happens when they push for higher margins on these (syndicated) loans - corporations simply don't borrow," said John Ong, managing director of Bankers Trust in London, referring to the syndicated loan market in Poland.
Polish corporations issued $350 million worth of foreign-denominated loans during the first quarter of this year, roughly the same amount that was issued during the first quarter a year ago. But that figure is deceiving: Most of the syndicated loans closed this year were part of deals that were initiated in 1997, analysts said.
And rates are going up. ABN Amro estimates that a Polish company with an investment grade credit rating would be unable to issue a foreign-denominated syndicated loan for less than 50 basis points above the London Interbank Offer Rate (LIBOR). Six months ago that corporation could have issued a loan at just 20-30 basis points above LIBOR. (A basis point is one-hundredth of a percent.)
"The amount of new activity on the syndicated loan (market) has fallen dramatically," said Andrzej Koperski, senior manager of the structured finance unit at ABN Amro in Warsaw. "Corporations have adopted a 'wait and see' attitude, in the hope that banks will begin offering the same conditions they did in 1997."
What triggered this more expensive approach? Most bankers in Warsaw blame the currency crisis that occurred late last year in Asia, which caused banks across Europe to think twice about making loans to emerging markets. Interest rates rose dramatically - in some cases by as much as 100 basis points - across Central and Eastern Europe.
That gave foreign banks a reason to ask for higher spreads, which had reached record lows in Poland at the end of 1997. Last year the average spread on a three-year (dollar-denominated) syndicated loan, for a Polish company with an investment grade credit rating, was just 30 basis points above the London Interbank Offered Rate (LIBOR), according to Bank Creditanstalt in Warsaw. That was just 10 basis points higher than the rates offered to state-owned companies with top-notch credit ratings.
"Even without an Asian crisis, there would have been a correction," said Michal Cader, deputy director of structured finance at Societe Generale in Warsaw. "These spreads were not sustainable."
So far in 1998, the largest syndicated loan, to Rafineria Gdanska, was closed just last week. Dresdner Bank Luxembourg arranged an eight-year, CHF 170 million ($120 million) loan with a banking syndicate comprising 11 banks, including Bank Creditanstalt, Credit Lyonnais and Wielkopolski Bank Kredytowy (WBK). The final rate on the loan was 42.5 basis points above LIBOR.
"We consider it a victory that we concluded a transaction of this size at a time when bankers are reluctant to lend," said Stanislaw Pokojski, finance director at Rafineria Gdanska, which plans to use the borrowed money to increase its gas and oil production by 50%.
Still, the loan was not an easy one to arrange. Dresdner Bank began contacting banks that might be interested in joining the syndicate as early as September 1997. When the Asian crisis hit, many banks that originally expressed interest backed out.
That left management at Rafineria Gdanska with a choice: Either arrange the loan at a higher interest rate or wait several months until the market calmed. "The banks kept demanding higher margins and fees. Ultimately we decided it was better to wait it out rather than accept worse conditions," Pokojski said.
As a result, the loan spent nearly five months in general syndication, a process which normally takes three to five weeks. "It was a much longer process than we had anticipated. Fortunately, we had enough cash flow that we could continue our development process while we waited for the loan to come through," he said.
Troubles in Asia also caused problems for Polkomtel (Plus GSM), one of Poland's largest cellular phone operators. The firm had originally given a mandate to Bank of America, CS First Boston and Bank Pekao in August of last year. But according to banking sources in Warsaw, Bank of America dropped out of the deal in January because it was not confident it could attract banks in the wake of the Asian crisis.
Bank of America reportedly invoked the "material adverse change clause" contained in most syndicated loan contracts. This clause enables banks to back out of loan transactions because of unforeseen changes on the market. "It's highly unusual for a bank to pull out of a leading role in a syndicate. It's the absolute last thing you want to happen if you're trying to establish a reputation in a new market," said an official with one foreign bank in Warsaw, who did not want to be named.
Officials with Polkomtel said they are going ahead with the loan, but with Deutsche Morgan Grenfell and Bank Handlowy as the joint arrangers. The seven-and-a-half year loan will consist of two tranches, worth DM 660 million and zl. 300 million ($85.71 million), respectively. The loan is set to close within a month at a rate of 130 basis points over LIBOR, said officials with Polkomtel.
But the horizon may not be filled with storm clouds for the syndicated loan market. Jacek Murawski, finance director at coffee producer Tchibo, believes the strengthening zloty will ignite the syndicated loan market during the second quarter. Most companies, he noted, are paid in zlotys and earn their revenue in zlotys. As they pay back foreign banks in foreign currencies they won't have to convert as many zlotys to make those payments.
"The syndicated loan market is in a slump now, but it should recover in three to four months," he said.