Corporate loan activity has slowed down for a number of reasons, according to international bank SMBC. During its session at the ACT Annual Conference, it pinpointed M&A activity falling 60% in the last quarter, challenges in the banking sector reflected in the collapse of Silicon Valley Bank (SVB) and geopolitical turmoil from the war in Ukraine.
But while the pace of refinancing is expected to pick up now, corporate borrowers are faced with a challenge created by fewer banks supporting transactions, with the potential to dent choice and competitiveness. In his presentation Mark Pegrum, co-head of corporate organisation, LCM, EMEA at SMBC, said over the last decade the average number of banks in an investment grade corporate’s bank group fell from 12.3 to 11.3.
Pegrum said that as a result there could be a “re-assessment of the relationship between borrowers and bankers”, given the possibility of greater numbers of corporates expecting to refinance in the next 12 months.
“There’s no question that some refinancing has been parked in the first part of this year, so we're likely to see more refinancing. And then we should see more corporate M&A in the second half of the year, which has been at very low levels, moving from a very low base,” he said.
In the context of this background and gradually increased pricing – Pegrum had seen “anything from a five to 10 basis point increase in the margins” in the UK investment grade space in the last year – the need to prepare early for a refinancing has become increasingly important.
“It really can take a lot longer than you think, perhaps 12 months, before you get a financing in place,” said Pegrum. “Consider what it is that you need. Should you shake up your approach? What are your objectives? Are you looking to maximise liquidity? You might want to expand your banking group or conversely, you might think it's a good time for you to rationalise your banks,” he added.
Oliver Whiddett, group treasurer at logistics group Brambles, said during the session that in a recent refinancing the FTSE 250 firm had consolidated some of its bilateral banking agreements into one syndicated facility.
Whiddett said the strategy was to “take advantage of strong market conditions, consolidating facilities together, quickly reduced refinancing risk, taking the opportunity to potentially increase liquidity”.
Brambles’ refinancing also offered a chance to refresh the bank group, bringing a new institution on board.
Benefits also came in the form of an ESG perspective. “Being one of the world's most sustainable companies, we decided to bring sustainability-linked elements into our banking facilities, aligned to our public targets,” Whiddett said.
“I would always say you should try to link your KPIs to your already public targets. You shouldn’t make up the KPIs just for a loan,” Whiddett added, explaining that working with his firm’s sustainability team upfront to identify KPIs and build milestones helped to deliver the process efficiently.
On that note, SMBC’s Pegrum said: “ESG focus has become very relevant. We’ve probably seen 50% to 60% of all transactions having some sort of sustainability-linked structure.”
Lawrie Holmes is a business and finance journalist