RLPC-Low-ball M&A loan bids hit Europe's lenders


(Reuters) - Banks in Europe could soon find it much less lucrative to underwrite M&A loans as they bid increasingly aggressively to win precious mandates and are forced to dilute their share of ancillary business to sell deals on to other banks.

After a wave of cut-price refinancings and amend-and-extend exercises, banks hoped a pipeline of more profitable event-driven financings would enable them to hit targets and reap the rewards that come with leading new transactions.

Despite a slew of recent jumbo acquisition loans including Imperial Tobacco, GTECH, Dufry and Numericable, banks fear fiercely competitive market conditions could hit the money-spinning potential of such loans.

"The danger is that if the loan pricing erosion continues to filter down to M&A financings and ancillary business continues to be diluted, then nothing makes money," a senior banker said.

Desperation to win mandates has led some banks to accept borrower-friendly terms and offer sole underwrites, even on some of this year's largest deals. Even if the offer of sole underwriting has not been taken up, it has often been enough for banks to get their foot in the door and win a position at the top table.

"There haven't been enough deals around and therefore banks are prepared to do unnatural acts to make sure they secure mandates," a syndicate head said.

Some banks are offering sole underwrites of nearly 2 billion euros (2.59 billion US dollar) for Canadian pension fund PSP Investment's potential acquisition of broadcasting masts group TDF's French unit.

The loan, which is expected to total 1.5 billion euros, will be structured as a corporate, infrastructure, cross-over deal rather than a leveraged financing.

Earlier this year, the $14.2 billion bridge loan that backed Bayer's purchase of US-based Merck's consumer care business saw Mizuho Bank line up with BNP Paribas as well as Bank of America Merrill Lynch to provide an equal share of the underwrite.

Despite expected strong support from Bayer's existing core relationship banks, the underwriting banks had to make sure they shared the follow-on business with the banks that joined the facility in syndication.

In June, Barclays, BNP Paribas, Citigroup and HSBC were mandated to lead the first part of the refinancing of the bridge loan, the issuance of two hybrid bonds totalling 3.25 billion euros.

"Even if banks do take bigger risks on investment grade, they are not getting paid for it," the syndicate head said. "Leveraged deals pay better than investment grade, where it has become harder and harder to make money. This puts even more pressure on the leveraged market so more banks appear at the top and there is less money to be made per bank." (1 US dollar = 0.7724 euro)