U.S. Banks Impact Pricing Overseas

Armed with expertise in leveraged loans and a reputation for innovation, North America's biggest banks are clearly making their presence felt in the European loan market, where the euro has spawned a legion of merger-related transactions.

However, loan pros at a recent IIR Ltd. conference in London stressed that it's going to take some time before Europe adapts to a U.S.-style lending culture. One clear gap between the two markets is the comfort level with noninvestment-grade risk, something most foreign banks and investors haven't dealt with historically.

U.S. banks are also encouraging their European counterparts to demand higher pricing on transactions, a change that requires putting yield concerns ahead of relationships - not an easy task for overseas players.

According to Brenda Mills, head of syndication at ABN Amro, banks like hers are having to ask themselves: "How do you price a deal for your favorite client?"

To be sure, this dilemma is nothing new, and it isn't limited to banks in Europe. There are numerous cases in which U.S. lenders-typically commercial banks-have opted to do low-yielding, almost unprofitable revolvers in order to keep the client happy. But that's becoming more rare in the States, as banks are under pressure to gain strong returns on capital. There's currently less of this pressure on European banks, but panelists at the conference warned it's just a matter of time before European shareholders are equally demanding.

"With banks consolidating, liquidity each and every day continues to potentially shrink," said Charles Wickham, managing director of European leveraged finance at Merrill Lynch International. "You have to explain to clients that there's a finite amount of capital out there, and deals need to be priced according to risk."

"These are difficult conversations," he added, "but it happens in the States, too."

But it's perhaps more important to address in Europe, since the overseas market is still heavily weighted toward investment-grade issuers, those companies whose bank debt provides the least yield. (Conversely, in the U.S., there's plenty of high-yielding term loans to go around.) Moreover, liquidity overseas is still suspect, in part because it's often available only in bunches.

"In each country there are certain pockets of liquidity," said William Fish, managing director and head of syndicated loans at Citibank. "It's tough to get paid for what you're doing."

Another way to attack the issue is to re-evaluate which clients constitute meaningful relationships, something a number of banks have started doing. "Banks that are too concerned with relationships will get taken over," said one European loan pro.

Bankers said the Olivetti SpA/Telecom Italia transactions earlier this year were a prime example of the push for higher pricing in Europe. Not only did the deals show that Europe could support such huge funding needs, but the generous fees and spreads showcased the potential for more yield. Fish noted the deal for Repsol as another case where the deal was priced up.