Conditions are easing in Europe's syndicated loan market as cash from the European Central Bank starts to filter through, boosting liquidity and freeing up new money to lend, although dollar funding remains scarce and expensive.
The European Central Bank's long-term repurchase (LTRO) facility, which has given banks long-term cash in exchange for collateral, is also easing the pressure to sell loans to raise capital to hit mid-2012 targets, loan bankers said.
The provision of liquidity by the ECB has clearly taken some pressure off bank funding although for certain banks, U.S. dollar funding still comes with a premium, said Kristian Orssten, managing director and head of JP Morgan's European loan and high-yield capital markets group said.
Banks are still deleveraging by lending selectively but the strong rally in the corporate and high-yield bond markets has helped to improve sentiment in the loan market, which hit a low in late 2011 when banks effectively stopped lending.
January's credit market rally has pushed the iTraxx crossover index nearly 200 basis points tighter to 565 from 746 at the start of the year and a flood of bond issuance has eased the refinancing pressure on the loan market.
Relatively few new loans have been syndicated so far in 2012 but bankers said that the frantic firesales of syndicated loans which were seen in the fourth quarter have abated.
Banks don't need to sell assets any more. The immediate pressure abated as of January - there's not as much urgency now, a secondary loan trader said.
Banks including BNP Paribas
Deleveraging European banks are still lending selectively in euros and making sure that income from other business such as bond and equity mandates, foreign exchange or clearing services subsidises the cost of loss-making lending.
Dollars are still difficult for European banks to fund however and banks are still charging companies a premium of up to 50 basis points (bps) for the ability to draw dollars.
HARD LINE SOFTENING
Signs are emerging however which suggest that the tough line that banks took with their corporate clients is softening as funding costs ease and new liquidity arrives in the loan market.
The ECB and the LTRO have helped a lot - the loan market had seized up and now its easing up. From a liquidity perspective, it's a lot better, a senior loan syndicator said.
Some banks raising funds from the ECB are seeking to use the three-year money which they can borrow at one percent to lend to companies at around two percent for a drawn loan.
While this is not as profitable as lending to sovereigns, it is attractive as it is less risky and is certainly more rewarding than parking funds at the ECB.
This is cheap government funding at 1 percent for three years. You can onlend it and make a turn on it, a head of loan syndicate said.
More financial benefits may accrue from corporate lending, particularly with new loans which have been tailored to meet the ECB's collateral requirements.
Several recent loans, including a 2 billion euro loan for Italian utility Enel
The ECB's move is also helping to stretch loan maturities to medium-term tenors from short-term maturities. One Italian bank said this week that it is willing to lend for three years after receiving LTRO money, banking sources said.
As the ECB cash continues to filter through to the loan market, bankers expect to see stronger bank appetite to lend, particularly around investment-grade merger and acquisitions (M&A) loans and improved uptake on revolving credits is also expected.
My sense is that banks are more attuned to doing business and supportive of clients than in November and December when it was pretty ugly, the senior loan syndicator said.
Loan pricing is still moving upwards, but the possibility of a big jump is now being discounted. With few new loans to use as datapoints, the market is seeing a wider range of views on pricing.
Bankers are wary that the price discipline which had been seen before the end of the year could disappear amid competitive pressure, but welcome the strong improvement in sentiment.
I'm not as pessimistic as I was two months ago when banks were not able to do anything, I feel more comfortable than November or December. There is still no doubt that decent deals will find liquidity, the syndicate head said.
(Editing by David Cowell)