Lpc european leveraged loan earnings remain low despite deal glut

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Dec 1 A flood of European leveraged loans has done little to alleviate the pressure on earnings from deals, with fierce competition for the few underwrites available and a pricing squeeze on best-efforts loans. Sponsors are unwilling to pay up, given the amount of liquidity available and are demanding more work from banks for less money. A majority of the 20 or so deals in the market are being conducted on a best-efforts basis, both repricings and add-ons for well known and less favourable credits. Best-efforts deals have always been far less profitable than underwrites but banks are now having to push the fees earned on a best-efforts basis lower, in order to attract business."People aren't making a lot of money which is a challenge in itself," a senior loan banker said. Banks are either offering flat fees for best-efforts deals of around 200,000 to 300,000 - far less than the levels previously charged of around 500,000 to 1.0m two years ago, or they are agreeing to earn around 50bp-75bp of the overall deal size, compared to 100bp-150bp in 2014-15.

"It is very competitive right now because the market is strong. If a deal is a seasoned performer then that repricing is a no brainer and doesnt take a lot of work, so you can understand in this market if it doesnt pay a lot. But a trickier deal, that entails a lot of work, you should get paid for," a second senior banker said. Some banks have even started to offer to do best-efforts deals for free, with one bank getting a sole mandate on a recent loan, pushing other banks off of the line up. Banks are agreeing to the terms for various reasons, including keeping the workforce busy as they have to justify headcount amid cuts in banking.

Other banks are doing the work for league table credit or to get themselves in a good position to get appointed on the next profitable deal by a sponsor."Taking a hit to make an investment in the next deal is a good motivation," the first banker said.

NEW YEAR CHEER Banks have been hoping January will bring about a change, with better paid event-driven underwritten loans in the pipeline, including an approximate 5bn-equivalent cross-border loan backing UK software company Micro Focus International's acquisition of Hewlett Packard Enterprises' software business and around 1.5bn of loans to back a potential sale of European web hosting provider Host Europe Group to web hosting firm GoDaddy. Other potential financings are for companies currently in a sale process including a 1.4bn loan for German bandage and plaster cast maker BSN medical and 1bn of loans for French laboratory business Cerba. There is also 1.5bn of loans to back buyout firm Lone Star's acquisition of German building materials maker Xella. But even these underwritings may not be the golden chalice many banks were hoping for as some banks are starting to undercut on these fees too."The French banks are offering sponsors lower fees and less flex on underwrites," a loan investor said.