Trade Finance
Syndications
14th April 2009
Our expertise
Powering your ambition
Disclaimer
This presentation has been prepared by Standard Chartered Bank (“SCB”) for restricted distribution. Neither SCB nor the distributors nor any of its
affiliates and/or their directors, officers, employees shall in any way be responsible or liable for any losses or damages whatsoever which any person
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This presentation is for information purposes only and is based on information available to the public from sources that SCB believes to be reliable,
but no representation is made that it is accurate or complete, and no information herein should be relied upon as such. Opinions and projections
found in this presentation reflect our opinion as of the presentation date and are subject to change without notice. This presentation is neither
intended nor should be considered as an offer or solicitation, or as the basis for any contract, for purchase of any security, loan or other financial
instrument.
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Syndications
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Life is not the same anymore:
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Options are limited:
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Banks in trouble
Capital is scarce
Basel II is limiting scope of operations
Return on Assets and Return on Equity are at the forefront of the lending decision
Volumes are down
Pricing is up
Leverage & Mezzanine are dead
Hedge Fund involvement in the market is waning
Underwriting capacity is scarce due to decrease in retail investors / risk appetite & capital
US/Europe seeing maximum tenor decreasing to 1-2 years.
Non-Performing Icelandic / Russian / Eastern European assets eating up excessive amounts
of capital due to Basel II requirements
Yet deals are still being done…
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Banks in Trouble
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Lehman Brothers = Gone
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ABN AMRO = RBS / Fortis / Santander
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RBS / Fortis / Lloyds / Citi = Part Nationalised
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Merrill Lynch = Bank of America
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Bear Stearns = JP Morgan
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Subprime / CDOs / RMBS / CMBS have destroyed balance sheets
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Writedowns have lead to massive losses eroding years of retained earnings
and resulting in expensive bailouts
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The future is uncertain!
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Capital is Scarce
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New World:
 Liquidity is tight
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Writedowns eat away at capital lowering lending capabilities
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Balance Sheets are weighed down by past lending
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Reversion to home markets
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Upward re-pricing of risk due on the grounds of credit and liquidity
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Rights-Issues – Done with varying degrees of success
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Basel II
BASEL II CAPITAL ACCORD
1. MINIMUM CAPITAL
• Sets minimum
acceptable capital
• Credit risk tied to
ratings
– Public ratings
– Internal ratings
• Explicit treatment
of Operational
Risk
2. SUPERVISORY
REVIEW
• Sets out rules and
powers for regulators to
police the complex
framework
• Regulators have
flexibility to set higher
capital requirements, if
necessary
3. MARKET
DISCIPLINE
• Enhanced Market
Discipline
• Greater and
Improved
disclosure of Risk
Management
Metrics
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Volumes are Down:
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Pricing is Up:
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Leverage is Dead
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Loan Syndication
 Yet
deals are still being done…
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Success in Europe
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Trafigura:
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ED&F Man:
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$520m, 27th March 09, 1 year RCF, 250bp (All-in) – Up from 80bp in 2008
$1,251m, 17th Feb 09, 1&2 year RCF, 350/412.5bp (All-in) – Up from 85/105bp in
2008
Stemcor:
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- $400m, 31st March 09, 364-Day, L+350bp (All-in) – Up from 155bp in 2008
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WHY?
–
–
–
–
–
These transactions are trade or commodity related
Short tenor
Well priced (approx 3x previous years all-in pricing)
Have strong relationships with banking group
Are self-liquidating
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Failure in Europe: Lending alone is not attractive
anymore
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Central & Eastern Europe:
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Only 1 successful syndication in H2 2008
– Out of 31 Financial Institutions
Why?
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–
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–
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Lack of relationships & ancillary business
Deterioration of credit (Sovereign / Corporate & FI)
Went to the market for USD when Costs of Funds where very high
Yield driven participation played a large part in previous financing
Result:
– Eurozone Banks have over $1.5 trillion of exposure to Central and
Eastern Europe.
– Erste, RZB, Soc Gen, UniCredit & KBC who were all active players in the
loan market, have the most substantial known exposures.
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National Focus:
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Banks are pulling back within their borders and focussing on core corporate
client e.g.. RBS, Commerzbank
Iceland:
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The collapse of Landsbanki & Kaupthing lead to the country defaulting
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Failure in Europe: Name alone does not sell
anymore
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Porsche - €10bn, 24th March 09, 1 year RCF, L+575bp All-in
(Implied Rating BBB):
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Drew down RCF in 2008 priced at L+45bp (All-in) when Lenders’ Cost of Funds
where greater than L+100bp, which angered Lenders.
Went to the market in Feb 2009 to raise €12.5bn, €10bn to refinance and an
additional €2.5bn for General Corporate Purposes (GCP).
Initially offered L+475bp and was shortly afterwards forced to increase fees by
50bp to attract Lenders.
Only managed to raise €8.55bn as of the day before repayment date.
Increased margin by a further 50bp and managed to secure €10bn for the
refinance but not additional €2.5bn for GCP.
Had to secure the facility with shares in Volkswagen (2008 RCF was unsecured).
Technically Defaulted as repayment of Existing Facility was a day late.
As a result, Porsche paid 10x the price of their previous transaction & had
to provide security as they misjudged the market!
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Bonds – Prices and Dangers
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Borrowers are being forced into Bond Market due to lack of medium term
liquidity in the Loan Market.
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High priced bonds lock-in high financing costs without prepayment flexibility
of loans.
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Recent Issuances:
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Volvo (A-) 5 year EUR 700m – 987.5bp
BMW (A) 4 year EUR 100m – 800bp
BMW (A) 3 year EUR 1,250m – m/s+387.5bp
Metro (BBB+) 6 year EUR 1,000m – 762.5bp
Daimler (A-) 3 ½ year EUR 1,000m – 687.5bp
EDF (AA-) 10 year EUR 2,000m – 650bp
(2007 10yr EUR 1,000m – 500bp)
(2005 4yr EUR 400m – 300bp)
(2007 3yr EUR 100m – m/s+5bp)
(2004 5yr EUR 750m – m/s+40bp)
(2007 3yr EUR 2,000m – 437.5bp)
(2006 10yr EUR 1,000m – 412.5bp)
Bad market conditions + increased borrowing costs = increased price =
Decreased Demand
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LIBOR / Cost of Funds / Liquidity Premium
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While 3mth USD & EUR LIBOR are at near record lows 1.16% (USD) /
1.47% (EUR), this doesn’t reflect the full story.
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By virtue of the LIBOR fixing mechanism at least 4 of the 16 banks on the
USD panel should be willing to lend at below the published rate and 4 at the
rate.
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However Cost of Funds are greater than LIBOR.
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The difference is the liquidity premium banks need to pay to published LIBOR
Rates. No Lender will tell a Borrower their Cost of Funds out of fear of the
associated stigma of being considered a “weaker credit”.
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As long as Cost of Funds > LIBOR, Margins will need to be higher to
compensate for the liquidity premium.
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Cost of Funds premium is less of an issue in Euro and GBP transactions.
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The Credit Decision
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The decision historically relied on just 3 questions:
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Can we lend to this Borrower?
 How much can we lend to this Borrower?
 How long can we lend to this Borrower for?
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Now these 3 questions have been joined by:
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How is this deal priced in comparison with similar deals?
 How does it look under Basel II?
 What’s the Return on Assets?
 What's the Return on Equity?
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Result:
Increased Pricing / Lower Tenor / Tighter Covenants
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Risk Weighted Asset (RWA)
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Under the Basel II Advanced IRB method, an International Bank’s
participation will be partially dependant on return on RWA.
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A $100m fully-drawn loan with no collateral for a company with an ‘internal’
rating equivalent to B+ would have a RWA of $160-190m for 1 year
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A $100m undrawn Revolving Credit Facility under the same conditions
would maintain the same RWA%, however this is only applied to 10% of the
committed limit i.e. $16-19m for 1 year.
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A $100m fully-drawn loan with $100m of hedged Crude Oil as collateral with
the same ‘internal’ B+ rating would have a RWA of $30-40m for 1 year
Result: The higher the RWA, the higher the pricing to meet internal
return constraints
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Ancillary Business
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Ancillary Business has (for a long time) been a reason for
participating in underpriced syndicated loans.
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Losses from Secondary sell-down could be offset against revenues
generated from other aspects of the relationship.
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This has led to Financial Institutions / Corporates in certain markets
being able to borrow at unrealistic prices.
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While these relationships are still highly valued, facilities now need to
make sense on a standalone basis:
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Price, Tenor, Return on Assets, Return on Capital, Cost of
Funds etc.
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Covenants
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Covenant-light started appearing in corporate
syndications in 2006, partly due to the strength of
private equity firms and partly due to almost
unending liquidity. Covenant-light loans relaxed the
protection and corresponding reporting of key ratios
(Gearing, EBITDA, MAC etc).
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However covenants remained tight in Africa – not to
the detriment but the benefit of the overall market.
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Africa – why is it different?
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2008 was a record year for Africa
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Real Deals – sensible deals with substance:
 Telecoms, Energy, Mining etc
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Sonangol ( Receivables backed)
Ghana Cocoa Board( Receivables backed)
AngloGold (Commodity Corporate)
Lonmin (Commodity Corporate)
USD 2,500m
USD 1,000m
USD 1,000m
USD 400m
Maturities – Africa is the only place where 3-5 years is still
marketable for Corporates. For FIs while
commercial lenders may only offer 1 year,
DFIs
are willing to do up to 5 years.
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Advantages of Local Currency Facilities
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Local currency markets have the depth to accommodate larger
facilities.
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Utilise the greater liquidity in local currency markets.
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With high EUR & USD loan pricing, local currency could be the
cheaper option.
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SCB is present in Africa and can assist you with this.
A few examples from 2008:
 Syndicated Loans: Celtel Tanzania, Kenyan Power & Lighting Corporation, Telkom Kenya
 Debt Securities: Union Bank of Nigeria, Blue Financial Services Botswana, African
Development Bank (UGX Note)
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Africa - The Knock on Effect :No one is an island
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Decrease in Non-African Banks participating in African
Facilities due to focus on core corporate clients.
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In 2006-Q108, 164 Non-African FIs participated in US$/EUR
African Deals. In the last 12 months….only 47!
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Decrease in players partially due to mergers and
nationalisation
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KBC / HSH / ING & Landesbanks in Germany are out of the
international market
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A number of International Banks are moving away from FIs
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Africa is still open for business
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SCB is still with you, as are certain other banks
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Development Finance Institutions:, African
Development Bank, African Export Import Bank,
FMO, DEG, KfW, Proparco and of course IFC.
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Opportunities in Energy, Mining, Commodities &
Financial Institutions
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The Global Market is tough, but Africa can emerge
stronger than ever.
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