[MUSIC] Hello, my name is Antonio Olano, and I'm the Global Head of Loans Syndicate for Société Générale, based in London. >> Hello, my name is Marina Mulcair, and I'm head of European Leverage Loans Syndicate, also based at SG, London. >> Hello, my name is Agnes Decourcelle, and I run the Project and Asset Bank Loan Syndicate at Société Générale, based in London, and I'm also an EDHEC alumnus. >> In this section, we will be covering the different parts of the syndicated loan market by asset class type, and Jose Antonio will be starting with the corporate loan market. >> The corporate loan market is the part of the market that caters to large companies. Large corporates routinely use the syndicated loan market, as their financing needs are often too large to be provided by just one bank. We can divide this market into two main types of transactions, revolving credit facilities and acquisition finance facilities. So the first category are revolving credit facilities or RCFs, as they are commonly known. To start with, we should clarify that the bulk of financing for the largest investment grade companies comes from the debt capital markets, typically issuance of bonds and the equity capital markets. Having said that, most large European companies do have a syndicated RCF. These RCFs often remain undrawn as their key purpose is to provide liquidity when needed, notably at times of stress, either in the business of the company or in the financial markets. The amount of the RCF is decided by the borrower, based on its needs, and can be quite large, up to €10 billion. Mid-cap companies also have RCFs, but draw on them much more frequently to finance their working capital or their investment needs. As they have less access to capital markets than the larger companies, they rely more heavily on bank financing. The number of banks providing these RCFs varies from just a few to up to 40 for the largest transactions. RCFs usually group the main relationship banks of the borrower with whom they do business across geographies and financial products. For example, cash management, leasing, foreign exchange, hedging, bond issues, M&A advisory, etc. Providing an RCF is typically not very profitable for banks, particularly with well-rated companies but participating in them is key to cement the relationship and have access to the ancillary businesses mentioned before. RCFs will typically have a maturity of five years, and includes two extension options of one additional year. So they can stay in place for seven years. But companies tend to refinance them in advance, either because their requirements have changed or to always maintain several years to maturity, given their importance to secure access to liquidity. Most of the times RCFs are syndicated as club deals, so they're not underwritten, with the borrower deciding which banks to invite and for what amount, depending on their relationship level. One or a few banks will often assist in putting together these club deals, by acting as coordinators and handling key tasks, such as helping draft the loan documentation. A recent development: sustainability linked loans: Over the last three years, many companies have decided to use a sustainability linked loan format or SLL, for their RCFs. Under a SLL, the margin paid by the borrower will vary, based on key performance indicators on defined ESG topics. This provides a further incentive to these companies to meet their ESG goals, as it reduces their interest payments if they are successful in doing so. In addition to RCFs, the second main type of facilities are acquisition finance facilities. Whilst RCFs are there to support the day to day business of a company, corporate borrowers will also often use syndicated loans when making large acquisitions. This can be under the form of bridge loans, which have short maturities of one to two years, and which are meant to be repaid by capital market issuance, (either bonds or shares) and/or asset disposals. Also term loans, with maturities ranging from three to five years, or finally, a combination of both. Acquisition finance typically requires a single bank or a small group of banks to underwrite the full amount of the facilities. As buyers often need confidentiality, they may be aiming to acquire a publicly listed company or they may be in competition with other bidders for the same asset, as well as certainty of funds. Once the transaction has become public, the underwriters will invite other relationship banks to join the syndicate in order to reach their desired level of commitment in the transaction. >> Let me start with the basics of the leveraged loan market. The European leveraged loan market is actually quite large, with volumes reaching 130 billion euros in 2021, which was a record year for issuance. Volumes in this market are driven by leveraged buyout activity, with LBOs representing up to 85% of volume. The top three industry sectors for issuance in recent years have been Healthcare, which includes clinics, pharma and labs, Computers and electronics, which includes software and Services. Which can be a broad spectrum of non manufacturing businesses. Given the higher risk nature of leveraged loan transactions, they are typically rated in the single B category. Therefore, below investment grade. Leveraged loans, also known as term loan B or TLBs for short, are floating-rate instruments, paying a spread or margin above a benchmark reference rate such as Euribor. The maturity of TLBs is usually between five to seven years. In 2021, the average yield for euro-denominated TLBs rated single B, was 4.25%. While banks are major lenders to investment grade companies, they take a more measured approach in lending to non-investment grade companies. Because of this, non-banks, or as we call them, institutional investors or funds, represent the majority of lenders in the leveraged loan market, now accounting for around 75% of the investor base. Institutional investors are normally buy-and-hold investors, which can keep their positions as long as they are satisfied with the underlying performance of the company. Nevertheless, there is a private secondary loan market for TLBs, where they can be traded. Most large banks have loan trading desks, which can match potential buyers and sellers. The main category of institutional investors are CLOs, which stands for collateralized loan obligation. A CLO is a kind of investment fund that invests in a pool of leverage loans, covering a wide range of companies and industries. The CLO Manager will analyze the credit risk of a leveraged loan, and can take a decision to invest, typically between 1 million and 20 million euro in each individual loan. The overall size of a typical European CLO is between 300 million and 500 million euro. The CLO is then structured as a securitization, sliced into various tranches, which are sold to different end-investors, from large retail banks, which take the top rated tranche, to hedge funds, which take the lower rated tranche. These end-investors receive payments from the pool of leverage loans which the CLO has invested in, according to a waterfall structure. Many large well known asset managers run CLOs, with Blackstone, KKR And Carlyle being some of the largest in Europe. Other investors in the term loan B market include various asset managers and credit funds, which are mostly open-ended pools of investment. Compared to a CLO, credit funds have more freedom in choosing investments and more flexibility. For example, lending in less liquid currencies. Large private investors, such as sovereign wealth funds, pension funds and high net worth family offices, will often indirectly invest in leverage loans via a credit fund manager which provides the specialized analysis required, and will manage their money in a leveraged loan portfolio. It's important to remember that retail investors, that is private individuals, are restricted from directly investing in the leverage loan market under European regulations, due to the higher level of credit risk and complexity of structuring, which requires specialized skill and experience to understand. As ESG goals become more important for both leveraged loan issuers and investors, the market has seen the introduction of sustainability linked TLBs in the last few years. Companies which agreed to set two or three measurable ESG objectives, which are monitored annually during the life of the TLB, are rewarded for meeting those targets via a small reduction in the margin charged on the loan. Conversely, if the targets are not met, there is a penalty, with the margin increasing. The ESG objectives differ depending on the type of company. For example, a manufacturer may set targets around emissions, whereas a services company may set objectives around its social impact or governance. >> Now, let me give you an overview of non-recourse asset financings. At Société Générale, we finance a wide range of assets and projects. The structure is usually on a non-recourse basis. It means we have limited recourse to the sponsor, and rely on the asset and its cashflow to service and repay our debt. In real estate finance, the most common asset classes we finance are, offices, logistics and residential assets. To finance the acquisition of an office asset in Paris, the debt is usually sized compared to the value of this asset. Typically, the debt amounts equals 50% to 60% of the asset value, as the bank will want to have a significant buffer, in case of market movements to get its money back. The tenor of the loan is generally 5 to 7 years, and the structure includes some protections, with a set of financial covenants, such as a maximum loan to value, called LTV. And minimum debt yield, which is the ratio between rent over debt amount, or interest cover ratio, the ratio between the rent over the interest payable. The main security for the bank is the asset itself. The bank will have a first ranking mortgage and the cash flow derived from the asset, ie, its rent. The main lenders for this type of transactions are usually banks, but could attract liquidity from institutional investors as well, depending on the pricing of the transactions. The focus for the lenders in the real estate sector are the location and the quality of the asset: Is it a newly built asset or recently refurbished?, the quality of the tenants, the length of the leases, quality and the track record of the sponsor and asset manager. Moving away to other asset-backed financings, Société Générale is active in shipping aircraft & rolling stock transactions. Typically, for each transaction, we consider the asset life, whether it is rather new or old, and who constructed it. The debt is typically sized on the loan to value, and can go up to 12 years in some cases, depending on asset expected life and/or underlying lease contract. The lenders' universe mostly consists of banks, except some institutional investors on private placements in the rolling stock sector, and it can be more limited than project finance depending on the sub-sector or country (knowing that the market for shipping an aircraft are global). On the project finance side, the infrastructure sector is quite wide. It used to be focused on core infrastructure, transactions like airports, toll roads, schools, hospitals. However, these types of transactions are nowadays rather limited, and the focus today is rather on digital infrastructure like optic fiber, data centers, telecom towers, as well as projects or companies focusing on energy efficiency, like smart meters, district heating and cooling or electric vehicle charging points. The typical transaction seen on the digital infrastructure side, a optic fiber roll out deal structured as five to seven year term loan and/or capital expenditure facilities. These transactions are mainly sized on the amount of plugs to be rolled out in regions or countries and typically include conditions to draw down the debt such as a certain number of plugs to be commercialized before drawing the debt. The lenders' universe is a mix of banks and institutional investors, with infrastructure debt funds. On the renewable side, the main sub-sectors are onshore and offshore wind and solar photovoltaic projects. The projects can be greenfield when we are financing the construction of the project, or brownfield when the project is already in operation. The key analysis of the project is around the risk of construction and the revenue streams over the loan life. Until recently, the project revenues were contracted with utility providers, but we now see an increase in markets or merchant risk. Tenors tend to match the offtake contracts, which is the contract with utility providers, and typically go up to 22 years. The Lender's universe is composed mainly of banks, due to the long construction period, which is up three to four years on offshore wind, for example, and relatively tight pricing. Given the clear ESG angle, liquidity is quite deep. We hope you enjoyed our presentation today, thank you for your attention. [MUSIC]
