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Euro crisis puts company funding in tight spot

By Josie Cox and Alex Chambers

LONDON, Nov 25 (IFR) - European companies are in for a tough time next year. The euro zone debt crisis is sparking caution on all fronts, as consumers keep their cash in their pockets, corporate treasurers take a knife to investment plans and investors desperately seek a haven for their wealth.

Banks are curtailing lending to shore up their balance sheets in the face of more stringent capital requirements and caution in the markets means the pool of capital for buying company bonds will be smaller.

Companies needing to refinance their borrowing over the next year will be caught between the loan market 'rock' and the bond market 'hard place', driving up the cost of borrowing, and putting another damper on corporate investment and, by implication, economic growth.

What is certain, is that companies will be leaning on the bond markets more as syndicated loans dry up.

"Our policy is to have a fifty/fifty balance of bank loans to bonds, but in the current environment we have a bias toward bonds," said Jean Chausse, group treasurer of French retailer Auchan, which this week launched a 3 pct, 600 million euro, five-year bond with a coupon 0.4 pct higher than where its existing bonds were being quoted.

One bank active in the loans market said average fully used loan pricing for single A-rated companies has risen by 50 percent from around 80bp to 120bp over money market benchmarks. That 120bp is still well below where most banks are funding themselves in the wholesale market, highlighting the pressure banks are under to curtail loss-making loans.

"It is clear that a number of loan market participants are acting in a more selective fashion," said Mark Lewellen, head of European corporate origination at Barclays Capital. Many banks have announced programs for shrinking risk-weighted assets.

"In investment grade, there will be an inexorable shift in corporates accessing the bond market," said Michael Grayer, managing director at Lazard, adding that some had yet to fully factor in the impact of bank balance sheet deleveraging on their own funding costs and strategies.

Lazard estimates that there are almost $600 bln of investment-grade corporate loans maturing in 2012 and 2013, and around $150 bln and $220 bln of corporate bonds maturing in 2012 and 2013 respectively.

"At the moment it is paramount for corporate treasurers to be wholly focused on which is the most efficient way to satisfy funding requirements," the group treasurer of a major bluechip company said.

"It is important to be flexible with regard to the cocktail of funding options available and take where you can -- in this case it will increasingly be bonds," he added.

EXPENSIVE NEW BANK CAPITAL RULES

As part of the euro zone's bid to stem contagion and halt the threatening crisis, banks will have to reach minimum core tier 1 capital ratios of 9 pct as early as end-June 2012, based on the systemic risk they would pose to the economy if they failed.

"At every occasion of renewal or extension we will not commit because we are deleveraging, because of the cost to balance sheet capital and funding costs," said one senior official at a major European bank.

Depending on the size, type and exposure of the bank, requirements differ, but almost all are deleveraging by selling assets and scaling down commitments to existing loans or refusing to lend at all.

Loan pricing is rising and likely to continue to do so next year, and while banks have previously lent cheaply to top companies because of extra business that can come their way, they are increasingly unwilling to continue.

A study published by Standard and Poor's in September estimated that loan funding costs for euro zone corporates will likely balloon by 30-50 billion euros per year once the new banking regulations are fully implemented by 2018.

Incremental borrowing costs resulting from the increased capital requirements and liquidity charge could be between 50bp and 70bp for investment-grade credits and between 92bp and 164bp for high-yield borrowers, the rating agency said.

FRENCH FLIGHT SPREADS

French companies were among the first to swing to bond funding this summer as their domestic banks got caught up in the euro zone crisis. Bankers are confident the trend will continue, and say it has already started spreading to other countries.

"We've seen the wave of French corporate issuance. Now other treasurers have woken up to the possibility that credit could be unavailable," said Christopher Marks, global head of debt capital markets at BNP Paribas.

Marks said that corporates' traditional strategy of drawing on bank credit lines when bond markets were effectively closed or very expensive is over. "That dynamic has come to an end."

But the euro-denominated corporate market has already taken a beating in recent months, along with everything else, and investors are demanding additional new issue premiums.

"Investors are asking what is my risk-free asset or my limited-risk asset? It is not government bonds, therefore it cannot logically be a spread product benchmarked off government bonds, e.g. corporates," said Zia Huque, head of syndicate at Deutsche Bank.

Despite the volatility he said he was encouraging corporate clients to refinance now if they needed to, rather than wait.

(Additional reporting by Natalie Harrison, Tessa Walsh; LPC; Writing by Chris Wickham; Editing by Helen Massy-Beresford)

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