Magazine article American Banker

Risk-Based Capital Standards Taking a Toll in European Credit Markets

Magazine article American Banker

Risk-Based Capital Standards Taking a Toll in European Credit Markets

Article excerpt

Somewhat delayed in both timing and degree relative to the United States, capital constraints are now having an impact on pricing in the European credit markets.

Moreover, treasurers and finance directors of large Europeans corporations expect that margin will continue to widen from current levels over time.

Recent information gathered from a wide range of large companies in the United Kingdom and among the top tier of corporations across continental European markets (including the Nordic region) shows that margins could be expected to rise a further 1/8 0/0 from current levels if international credit facilities now in place were to be renegotiated during 1993.

Borrowers Surveyed

Specifically, respondents that have international term credit facilities -- either drawn or standby, with an original maturity of four to seven years -- were asked just what the all-in cost on these facilities would be if drawn (lending margin, plus facility and agency fees, plus front-end fees), expressed as an average blended margin per year over the London interbank offered rate or its equivalent.

They also provided the same information based on an estimate of what these costs would have been two years before and if the underlying facilities were to be renegotiated over the 12 months following the interview periods, which were December-February 1991-92 and 1992-93. The evidence is striking.

Continuing Pressure Seen

With information drawn from more than 250 of the large British companies that we investigated, all-in margins are estimated to have risen from just under 30 basis points in 1989-90 to over 50 basis points today.

Moreover, treasurers in Britain foresee continuing upward pressure on margins -- to 66 basis points -- should facilities now in place be renegotiated over the next year.

And, if the past is any indication, these projections are impressive in terms of their accuracy, with the anticipated margins of one year ago within 3 basis points of those actually realized.

Similarly, information drawn from over 150 of the largest corporations across continental Europe indicates that all-in margins have risen from roughly 20 basis points in 1989-90 to almost 35 basis points today, with a further rise to almost 50 basis points expected if facilities now in place are renegotiated in the year ahead.

It'a a Seller's Market Now

While these margins alone still do not provide adequate risk-adjusted returns on capital for the banking industry as a whole, they do represent a significant shift away from the almost unrivaled "borrower's market" that prevailed during most of the past decade.

They also incorporate a progressive differentiation in risk assessment as lenders become more discriminating about individual credits and potential exposure to country risks -- both conditions conspicuously lacking during the latter stages of the 1980's boom.

Illustrating this phenomenon is a comparison drawn from our surveys of the large corporate markets in Germany (still Europe's dominant economy despite the onset of recession) and the four Nordic markets (where economic conditions are at their lowest ebb in roughly 50 years).

Just two years ago, all-in margins separating the two areas were estimated to be less than 1/8 0/0, whereas today the differential is some 30 basis points. …

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