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Lpc emea lending slumps to four year low of us$914bn in

Jan 3 Syndicated lending in Europe, the Middle East and Africa (EMEA)slumped to US$914bn in 2016, showing a 21% year-on-year fall, according to Thomson Reuters LPC data, as refinancing activity tumbled and acquisitions remained patchy. Total EMEA volume in 2016 was the lowest since US$703bn raised in 2012 as global economic and political developments made companies reluctant to brave market volatility. Persistently low oil and commodities prices, the UK's shock vote to leave the European Union and the US election surpressed activity, despite the highly attractive terms on offer in the loan market."Although it was not a great year, there was a good level of M&A into and out of Europe. While cyclical corporate flow business was slow, it remained steady with a particular focus on the mid-market," a senior banker said. Although the year saw several cross-border multi-billion dollar acquisition financings, M&A loan volume dropped 15% to US$263bn in 2016 and activity remained sporadic and inconsistent. This was despite the ready availability of bridge loan financing and quick and cheap refinancing through the bond market, buoyed by the European Central Bank's corporate bond buying programme. German drug and crop chemical group Bayer financed its agreed US$66bn acquisition of US-based Monsanto with a US$56.9bn bridge loan, which was the largest EMEA loan of the year. The financing closed in October and Bayer quickly issued a 4bn convertible bond in November to part refinance the loan. Agrochemical related M&A had already featured in 2016 after China National Chemical Corp backed its acquisition of Swiss seeds and pesticides company Syngenta with a US$20.2bn non-recourse bridge loan, which closed in April. That financing was raised in conjunction with a US$12.7bn, one-year recourse loan syndicated in Asia. A US$18bn bridge loan backing Dublin-based rare disease drugmaker Shire's US$32bn merger with US peer Baxalta and a US$13.1bn bridge loan that funded French yoghurt maker Danone's acquisition of US organic foods producer WhiteWave Foods were both quickly refinanced with bonds.

Bankers are hopeful of a pick-up in activity in 2017, spurred by a US$20bn loan to finance British American Tobacco's proposed acquisition of the part of Reynolds American it does not already own and a £12.2bn(US$14.96bn) bridge loan backing Twenty-First Century Fox's bid for European pay-TV group Sky plc. REFINANCING IN RETREATMost investment grade companies had already locked in low-priced loans, which caused a 29% drop in refinancing to US$430bn in 2016, down from US$605bn in 2015. The refinancing focus moved from highly rated corporates to cross-over credits, smaller mid-market companies and other other larger companies with specific financing requirements. Global diversified natural resource company Glencore launched an early refinancing of a one-year loan in January after it was hit hard by a slump in commodities in 2015. The US$7.7bn loan was signed in May.

Swiss-headquartered LafageHolcim signed a 3.5bn loan in January which replaced existing credit facilities when its merger was completed. German auto supplier ZF Friedrichshafen closed a 3.5bn loan refinancing after the company's credit ratings were upgraded to BB+/Ba1 and peer Schaeffler refinanced 4.4bn of debt in its group holding companies as part of a wider deleveraging plan. A handful of plain vanilla refinancings for top blue chip companies were seen, including a 10.5bn-equivalent refinancing for Nestle and a 6bn self-arranged refinancing for French telecom company Orange SA, which was priced at only 25bp. LEVERAGED FALL Leveraged lending fell 15% to US$182.7bn in 2016 compared to a year earlier, despite an increase in dealflow in the second half as an influx of cash produced an upturn in refinancing and repricing activity.

Total volume was the lowest since US$117.4bn of deals raised in 2012 amid a general decline in leveraged acquisitions and non-event driven activity."We had a strong finish. I'm not convinced there's a whole batch of new business in there, there was quite a lot of refinancing and opportunistic stuff that inflated the numbers," a loan banker said. Leveraged M&A activity financing private equity firms and leveraged companies' acquisitions of US$68.3bn made up 37% of all leveraged lending, but was 18% lower than US$83.4bn in 2015. The remaining 63% totalled US$114.4bn, showing a 14% drop on US$132.8bn in 2015. The first half of 2016 saw volume of US$79.8bn as pricing widened on uncertainty. Volume rose to US$102.9bn in the second half as an inflow of money caused a repricing wave. Recapitalisations climbed to US$7.4bn in 2016, showing a hefty 124% year-on-year increase from US$3.3bn in 2015, as sponsors tried to take advantage of excess investor liquidity to extract value from existing portfolio companies. A 4.97bn refinancing, repricing and new money loan for global tea and coffee company Jacobs Douwe Egberts in November, part of a larger cross-border financing, was the biggest European leveraged loan of 2016, followed by a 2.589bn refinancing for Dutch cable company Ziggo in August, which formed part of a larger US$3.6bn-equivalent cross-border loan. JP Morgan topped the EMEA syndicated loan bookrunner table in 2016, with a US$47bn market share and 87 deals. BNP Paribas claimed second spot with a US$40.2bn market share and 195 deals, while HSBC clinched third spot with a US$37.5bn market share and 155 deals.

Mideast debt covered sukuk may meet demand for asset backed structures

* Unit of Kuwaiti firm introduces structure* Private placement in Britain is very small* Major obstacles to adoption in Gulf* But proponents say it resolves asset backing debate* Could serve as tradable money market instrumentBy Bernardo VizcainoDUBAI, Feb 21 A new type of sukuk, introduced by a British unit of a Kuwaiti firm, could make inroads in the market by offering greater security to investors through a structure similar to conventional covered bonds. Providing recourse to a pool of assets if the originator becomes insolvent, covered bonds found a new lease of life in Europe and the United States during the global financial crisis as investors sought liquid and safe investments. The structure could now play a role in Islamic finance, if tax and pricing issues can be resolved to the satisfaction of investors. It was used for the first time by London-based Gatehouse Bank, a subsidiary of Kuwaiti firm Securities House , through a private placement in December.

A five-year, 6.9 million pound ($10.4 million) sukuk, backed by a property in Basingstoke which the bank acquired in July 2011, proved the structure's viability and its ability to obtain necessary tax treatment under British rules. In a conventional covered bond, investors are entitled to claims not only on the issuer but also on assets backing the structure, giving them two layers of security. The Gatehouse sukuk works in a similar way; it incorporates a purchase undertaking by the bank that gives primary security to noteholders, while in case of default they have secondary security on the property, according to Farmida Bi, London-based partner at Norton Rose, who worked on the deal. The Gatehouse sukuk is based on an ijara (lease) contract, which is commonly used in Islamic finance, but which in most cases doesn't give investors recourse to underlying assets. Plain vanilla ijara structures are asset-based because they do not involve a full transfer of underlying assets to the investor. By adding the second layer of security, the Gatehouse sukuk effectively became asset-backed, said Bi.

Some scholars have called for Islamic finance to move from asset-based structures towards asset-backed ones, which they see as closer to the risk-sharing principles of sharia law."The structure answers the question of whether sukuk are asset-based or asset-backed," Bi said. The Gatehouse sukuk pays a 3 percent annual distribution and offers quarterly redemption options, said Shahid Feroz, associate vice-president at Gatehouse.

ENHANCED The conventional covered bond market is now a common means of financing in Europe; investor-placed benchmark issuance there reached 130 billion euros ($174 billion) in 2012, according to Standard and Poor's. The enhanced security of covered bonds has attracted the interest of insurance companies. Their proponents argue that covered bonds align the interests of issuers and investors, as the issuer remains committed to ensuring the quality of the underlying assets. There are major obstacles to the widespread use of covered sukuk, especially outside benign tax environments such as Britain - which account for the fact that the structure was not used earlier. In the Gulf, it is not clear that issuers would be willing to commit their assets to provide such a level of security, while Gulf investors may not be willing to accept the relatively low returns offered by covered sukuk. But covered sukuk have one major, potential advantage for the Gulf; because of their security, it is possible - if they are issued in much larger volumes - that they could be used as tradable Islamic money market instruments, of which there is currently a shortage in the region."The sukuk is a liquid and tradable note, and can be used as a short-term, three-month deposit instrument," Feroz said."We do see an investor appetite for sukuk backed by quality assets with stable long-term income streams. Sukuk demand is very healthy, and we see that trend accelerating even further."