Daimler AG (DAI), Vitol SA and other European companies are refinancing about $40 billion of credit lines at lower interest rates as regulators propose rules that may drive up the cost of the debt.
Daimler, the third-biggest luxury automaker, is raising a 9 billion-euro ($12 billion) revolving credit facility and offering a lower interest margin than its outstanding deal, according to data compiled by Bloomberg. Vitol, a commodity trader with revenues of more than $300 billion, is seeking more than $5 billion to replace existing debt that pays higher interest margins.
The amount of syndicated loans this year has declined by 6 percent, allowing some of Europe’s largest companies to negotiate lower interest rates on credit lines as banks compete to arrange deals. Regulators at the Basel Committee on Banking Supervision are proposing rules requiring lenders to increase provisions for undrawn revolving credit facilities which will make them more expensive for banks to provide.
“The main advantage of refinancing is that it covers the period of uncertainty during the expected implementation of Basel III, which gives peace of mind,” Roland Boehm, the Frankfurt-based global head of DCM loans at Commerzbank AG, said in an interview in Commerzbank’s London office on Sept. 11. “Pricing on loans are good, but these are undrawn instruments usually.”
Daimler’s loan is being marketed with an interest margin of 27.5 basis points, or 0.275 percentage point, more than the European interbank offered rate, less than half the 60 basis points it pays currently, Bloomberg data show. Vitol is borrowing one- and three-year loans carrying margins of 80 and 90 basis points, respectively, compared with the 137.5 basis-point rate on the debt it’s replacing.
Nestle, the world’s biggest food company, is replacing $13 billion of loans and maintaining the 10 basis-point spread on the one-year portion and 12.5 basis-point margin on the five-year piece. Deutsche Post AG (DPW), Europe’s largest postal service, is seeking a 2 billion-euro revolver paying interest of 30 basis points more than Euribor, 25 basis points less than its current facility.
“Over the last two years spreads on loans have significantly tightened,” said Hans-Peter Rupprecht, corporate treasurer of Siemens AG (SIE), which raised a 4 billion-euro credit line last year. “On the one side, banks don’t really like lending to us at these rates, but on the other, they need to do it because of the competition.”
European syndicated bank lending has fallen to $498 billion this year across 714 deals from $531 billion representing 868 transactions in the same period in 2012, Bloomberg data show. There are more than $1 trillion of revolving credit facilities outstanding in the region.
“Demand for high-grade corporate relationships remains core to lenders, therefore pricing remains a relationship issue,” Ian Fitzgerald, chief executive officer of Loan Specialist Advisory Services Ltd. and former head of loan markets at Lloyds Banking Group Plc, said in a telephone interview.
Regulators’ proposals to boost provisions for revolving credit facilities, a type of debt that allows money repaid to be borrowed again, are part of tougher capital measures known as Basel III. The lenders’ capital levels will be tested using a leverage ratio -- equity as a proportion of total assets -- from 2015 and become binding by 2018.
Lenders of backup credit lines to companies must ensure access to funds equivalent to 30 percent of the loan, even if it is undrawn, according to a January report from the Bank of International Settlements. Banks currently don’t have to allocate anything against the credit lines.
“Allocating about 30 percent of high-quality assets to back these facilities should have a cost implication for banks, and therefore will have negative implications for provision of credit in this area of the market,” Loan SAS’s Fitzgerald said.
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