Tuesday, February 25, 2014

Thomson Reuters Syndicated Loans Review – Syndicated Loan Markets are up again!

Every quarter, Thomson Reuters publishes data of syndicated loans granted by banks worldwide. The company namely provides separate proceeds and fees data by bookrunner and mandated arranger as well as the number of deals.

The analysis of the Q4 2013 data shows that syndicated loan markets are on the rise again.

Bookrunner Proceeds

Industry Total

In 2013, total syndicated loan proceeds have increased, in any quarter, by roughly 25 %.

Over the entire financial year 2013, the major U.S. banks have increased their proceeds by 28 %. This evolution is even more spectacular for the leading European banks whose syndicated loan proceeds have increased by 68 %. In absolute terms, however, U.S. banks still generated almost 2/3 more proceeds in 2013 than their European counterparts.

The proceeds of the three major Japanese banks almost stagnated in 2012. Compared to 2012, they have experienced only a slight increase by 1 %. This means that, today, European players generate twice as much syndicated loan proceeds than the big Japanese players.

Finally, the market for bookrunners has slightly concentrated, as the proceeds of the top 25 banks have increased from 28 % in 2012 to 31 % in 2013.

Regional Players

In France, BNP Paribas is, today, the clear market leader: It generates twice as many proceeds as its rivals Crédit Agricole and Société Générale together.

The picture is roughly the same in the U.K., where Barclays earns almost twice the proceeds earned by its competitors HSBC and RBS.

The bookrunner market in Japan is more balanced: Mitsubishi UFJ (41 %), Mizuho (34 %), and Sumitomo Mitsui (25 %) divide the proceeds among themselves.

In the U.S., the market leaders are JP Morgan and Bank of America with 30 % and 27 % market share, respectively.

Bookrunner Fees

Industry Total

Comparing 2012 with 2013 figures, total bookrunner fees have increased, in any quarter, by roughly 25 %.

European banks have experienced the most spectacular increase (45 %) of bookrunner fees in 2013. The main U.S. and Japanese banks have increased their bookrunner fees by 22 % and 24 % respectively.

However, the biggest chunk of bookrunner fees still goes to the big U.S. players: They generate 33 % of the industry total in 2013, whereas European and Japanese banks generate 23 % and 8 % respectively.

As is the case for bookrunner proceeds, the bookrunner fee market is slightly more concentrated in 2013, compared to 2012: The share of the top 25 banks increased from 37 % in 2012 to 42 % in 2013.

Regional Players

The clear market leader in France is BNP Paribas. The bank generates twice as many bookrunner fees as its rivals Crédit Agricole or Société Générale together.

The situation is comparable to the U.K. where Barclays dominates the market and generates slightly more than twice the fees generated by its closest rivals HSBC or RBS.

The situation in Japan is more balanced: In 2013, Mitsubishi UFJ holds 41 %, Mizuho 32 %, and Sumitomo Mitsui 26 % market share.

In the U.S., the market leaders are JP Morgan and Bank of America. They both have 26 % market share in 2013.
Mandated Arranger Proceeds

Industry total

In 2013, mandated arranger proceeds have increased by 31 %. Big U.S. banks have raised their proceeds by 35 % and the major European players by 54 %. The proceeds of Japanese banks remained stable (1 % increase).

In both 2012 and 2013, the market share of the top 25 mandated arrangers remained stable at 70 %.

Regional players

In France, BNP Paribas is the major mandated arranger with 51 % market share. Crédit Agricole and Société Générale have only 28 % and 22 % market share, respectively.

In the U.K., Barclays holds 44 % market share, followed by HSBC and RBS with 28 % market share each.

The U.S. market is dominated by JP Morgan (26 %) and Bank of America (25 %), followed by Citi (16 %) and Wells Fargo (14 %).

In Japan, Mitsubishi UJF generates 42 % of mandated arranger proceeds, whereas Mizuho and Sumitomo Mitsui achieve 31 % and 27 %, respectively.

Mandated Arranger Fees

Industry total

Since 2012, mandated arranger fees have increased by 43 %. On a regional basis, the fees of big U.S. banks increased by 23 %, the fees of the main European players increased by 40 %, and the fees of Japanese banks increased only slightly by 2 %.

The market is more concentrated in 2013, compared to 2012: The top 25 players have increased their market share from 18 % to 31 %.

Regional players

The main French mandated arranger is BNP Paribas (51 % market share), followed by Crédit Agricole (28 %) and Société Générale (21 %).

In the United Kingdom, Barclays dominates the market with 51 % market share. HSBC and RBS generate 25 % and 24 % of the fees, respectively.

Bank of America (27 %) and JP Morgan (25 %) are the major players in the U.S., followed by Wells Fargo (13 %), Citi (12 %) and Goldman Sachs (10 %).

On the Japanese market, Mitsubishi UJF has 41 % market share, Mizuho 31 %, and Sumitomo Mitsui 28 %.

Mandated Arrangers Deals

Top 25

In 2013, the number of deals of the top 25 mandated arrangers has increased by 20 %.

U.S. banks show the highest deal flow: In 2013, Bank of America closed 1,754 deals, JP Morgan 1,592 deals, and Wells Fargo 1,294 deals.

Regional players

The main U.S. players are Bank of America (27 %), JP Morgan (24 %), and Wells Fargo (20 %).

In the U.K., three banks divide the number of deals evenly among themselves: Barclays accounts for 33 %, HSBC for 33 %, and for RBS 34 %.

In France, BNP Paribas closed 45 % of the deals, Crédit Agricole 30 %, and Société Générale 25 %.

The major Japanese player is Mitsubishi UFJ (42 % closed deals), followed by Sumitomo Mitsui (31 %) and Mizuho (27 %).

Additional visualizations of the data are available here.


Thomson Reuters Global Syndicated Loans Review – Last update Q4 2013

Sunday, February 16, 2014

2013 FATCA Riders for LMA loan facilities – Grandfathering, risk allocation, and technical aspects

What is FATCA and how should you deal with it in loan agreements?


FATCA means “Foreign Account Tax Compliance Act”. The legislation intends to provide U.S. tax authorities with better insights into U.S. citizens’ cash flows from and to the U.S. It leaves foreign (from a U.S. perspective) financial institutions with two options: They can meet reporting requirements on the cash flows or pay a 30 % withholding tax.


The loan market association (LMA) has been founded in 1992. Its mission is to “improve liquidity, efficiency and transparency in the primary and secondary syndicated loan markets in Europe, the Middle East and Africa”. It is most well known for its standard loan documentation that it recommends to its members.

Therefore, it makes perfectly sense that this association thinks about how to deal with FATCA legislation in loan agreements. As a result of its considerations, the LMA has published, in July 2013, 23 pages of clauses (“FATCA riders”) which amend the association’s standard loan documentation to make it compliant with the new U.S. tax legislation.

As of today, the LMA has identified three main issues – grandfathering, FATCA risk allocation, and technical FATCA aspects.


Grandfathering simply means that FATCA legislation will not apply to cash flows under loan agreements signed prior to a specific date. If you look at it from the other angle, existing loan agreements will continue being governed by old tax legislation.

I don’t know what this has to do with your grandfather. Perhaps you can think of it as the legislator being respectful about the experience and wisdom of your grandfather, thus preventing him from losing any pre-acquired rights through new rules.

Grandfathering is not something that you have to regulate in your contract. It is something that the legislator himself fixes. Thus, LMA’s role is limited here to bolstering up grandfathering legislation. The association proposes that banks introduce additional stipulations in loan agreements, such as

  • ensuring that no obligor is a U.S. entity;
  • providing for prepayment of the loan if FATCA applies, unexpectedly;
  • forcing a borrower or guarantor to resign if FATCA applies to him.

FATCA risk allocation

In a loan agreement, you have two parties – lender and borrower. Consequently, you can allocate FATCA risk either to the borrower or to the lender.

As you might expect, FATCA risk is usually shifted to the obligor by providing for a gross-up: This simply means that the borrower will reimburse any amount paid by the bank or the agent under FATCA to U.S. tax authorities. In addition, the Loan Market Association suggests that the obligor should represent, in the loan agreement that it is not subject to FATCA withholdings. If this representation turns out wrong, this will constitute an event of default under the loan agreement.

FATCA risk can be shifted to the lender. In legal terms, this means that each party of the loan is entitled to make FACTA related payments while, at the same, not being obliged to increase any payment under the loan agreement.

Technical FATCA aspects

The LMA proposes some additional, more technical, FATCA stipulations for loan agreements:

  • To change the FATCA status of a party, its consent shall be required.
  • All lenders will have to consent to any accession or resignation of a borrower or guarantor if this changes FATCA relevant circumstances.
  • Each party will be allowed to make FATCA payments, if required.
  • Every lender or agent should be entitled to withhold FATCA portions of payments.
  • The agent shall be able to request FATCA relevant information from obligors and other lenders.
  • Upon request, any party should confirm that it is subject to or exempt from FATCA regulation.
  • The agent will need to resign if it is subject to any FATCA withholding.
  • FATCA related issues should be subject to special majority decision-making rules.
  • Payment mechanisms such as distribution and waterfall shall give special consideration to FATCA related payments.

To conclude, let me turn back to my question above (What is FATCA and how should you deal with it in loan agreements?): FATCA is a U.S. legislation which requires foreign financial institutions to provide information about foreign lenders to U.S. tax authorities or to pay a 30 % withholding tax. You should deal with this in your credit agreement by making sure that FATCA doesn’t apply, shifting the risk on the borrower, and regulating technical aspects such as decision-making on FATCA and payment mechanics.


  • LMA FATCA Guidance dated 9 February 2012
  • LMA FATCA Riders dated 16 July 2013
  • U.S. Internal Revenue Code, Chapter 4 – Taxes to enforce reporting on certain foreign accounts

Monday, February 10, 2014

European Monetary Policy Instruments – “Everything that your own bank does.”

Future ECB Headquarters in Frankfurt am Main

Achieving a single monetary policy entails defining the instruments and procedures to be used by the Eurosystem in order to implement such a policy in a uniform manner throughout the Member States whose currency is the euro.”

This the introduction of 123 pages of guidelines that the European Central Bank (ECB) has written to inform people about its monetary policy instruments. A fantastic teaser that encourages to keep on reading, I think!

I will try another one: On three pages, I will try to explain, as simply as possible, how the ECB puts its monetary policy in practice.

The ECB does everything that your own bank does: It buys and sells securities in financial markets, it lends money to banks, and it accepts deposits. There are two major differences: First, the ECB doesn't do this primarily for profit, but to “keep price stability and support economic policies in the EU”. Second, it can, in addition to the above services, impose minimum reserve requirements on banks. This is a little bit like private banking: You will not be accepted as client if you have only a few 1,000 € to invest.

The ECB uses its own terms to describe monetary policy instruments:

  • Buying and selling securities in financial markets become open market operations.
  • Deposits and lending become standing facilities for banks.
  • The minimum amount that you have to put on the table to become a private bank's client is called minimum reserve requirements.

Two bodies are in charge of monetary policy in the Eurozone – the European Central Bank (ECB) and national central Banks (NCB) in each member state.

Open market operations

To understand open market operations, it is best to ask yourself two questions:

  • What does the ECB intend to achieve?
  • How can the ECB achieve its goals?

What does the ECB intend to achieve?

First, the ECB may want to provide liquidity to the economy, either in a regular and standardized way or on an ad hoc basis.

Regular open market operations can take the form of main refinancing operations or longer-term refinancing operations. Main refinancing operations are made through weekly tenders and mature weekly. Longer-term refinancing operations are reverse transactions with monthly frequency and a three months maturity. NCBs execute both main- and longer-term refinancing operations.

In the ad hoc scenario, we talk about fine tuning operations. With such transactions, the ECB manages the liquidity situation in the market and steers interest rates.

Second, the ECB might want to adjust the structural position of the Eurosystem vis-à-vis the financial sector. We talk about structural operations here.

How can the ECB achieve its goals?

They dispose of five major instruments:

  • Reverse transactions designate repurchase agreements and collateralized loans. The ECB does reverse transactions for all of the above goals.
  • Outright transactions designate purchases or sales of eligible assets in financial markets. They are used for structural operations, without standardized frequency, and on a bilateral basis. An outright purchase provides liquidity, whereas an outright sale absorbs liquidity.
  • For structural operations, the ECB can also issue debt certificates with a maturity of less than 12 months. The certificates are freely transferable and carry interest by issuing them at a discount and paying back only the nominal upon maturity.
  • The ECB uses foreign exchange swaps for fine-tuning operations. These swaps involve only widely traded currencies and are done in accordance with standard market practice. They can provide or absorb liquidity, incur any frequency or maturity, and are executed trough tenders or bilateral procedures.
  • Finally, the ECB can collect fixed-term deposits. It uses this instrument for fine-tuning operations and to absorb liquidity in the market. Deposits are made for a fixed term and at fixed interest rates. The ECB provides no collateral.

Standing facilities for banks

Let's ask ourselves the same questions again:

What does the ECB intend to achieve?

With standing facilities, the ECB can

  • provide and absorb overnight liquidity,
  • put monetary policy into practice, and
  • bound overnight market interest rates.

How can the ECB achieve its goals?

The ECB can act through marginal lending facilities or deposit facilities.

Marginal lending facilities provide overnight liquidity to banks at predetermined interest rates. This is done upon delivery of adequate securities (collateral). In legal terms, the facilities can take the form of a repurchase agreement or a collateralized loan.

Deposit facilities allow banks to make overnight deposits with NCBs. The remuneration is the same for the entire Eurozone and fixed in advance. NCBs provide no collateral for deposits.

Current ECB Headquarters in Frankfurt am Main

Minimum reserve requirements for credit institutions

Minimum reserve requirements for banks contribute to the stabilization of money market interest rates. Interest on reserves with the ECB is the same as interest for main refinancing operations.

You might object that I sometimes oversimplify the complex ECB transactions. If you think so, I suggest you click on the link below and enjoy the European Central Bank's guideline.


Monday, February 3, 2014

Kenneth Rogoff holds the 14th L.K. Jha memorial lecture – “There is no protection against human nature.”

“Policy Debates in the Aftermath of the Financial Crisis” was the title of 14th L.K. Jha (a former governor of the Reserve Bank of India) memorial lecture, hosted by the the Reserve Bank of India.

Kenneth Rogoff gave this talk on December 17, 2013. He summarizes the current economic situation and gives some insights into today's hot economic topics. Here is a summary in Q&A form:

Can economists predict the future?

I agree, my question is stupid. The answer is obviously no. I was just looking for a question to place this nice quote:

“Whenever you see economists saying that they are absolutely sure about something, you can be absolutely sure that they don't know.”

Is the world suffering a lack of innovation?

We hear this very often. “The Internet hasn't contributed much in economic terms.”, “Since the industrial revolution, nothing revolutionary happened”, etc.

Kenneth Rogoff doesn't adhere to this suggestion.

“I am very skeptical that innovation has actually slowed [and should be responsible for today's low growth environment].”

“The idea that we run out of ideas is improbable.”

Should central banks worry about inflation?

Reading the financial press, you sometimes get the impression that we fear inflation more than death.

Kenneth Rogoff doesn't share this opinion. He says that we tend to overstate the impact of inflation on economic development. It might even have a negative impact, since inflation targeting can limit the flexibility of monetary policy.

“Our price indexes don't necessarily do a great job of measuring, over long periods, what really changed.”

“Inflation targeting [by central banks] became a little too much of a religion in advanced economies and a little bit too inflexible.”

Has the financial system become safer since the financial crisis?

Kenneth Rogoff says, financial reforms since the crisis have not been fundamental. With regards to the current state of the world economy, he warns about continuously high debt levels in the private and public sector and a still uncertain situation in Europe.

“They [financial regulators after 2008/09 the financial crisis] were not trying to redesign the system. They were not trying to revolutionize things.”

“It's [the European sovereign debt crisis] not over until it's over. It's still work in progress.”

A possible solution to achieve a more robust financial system would be a greater use of indexing of financial securities.

“We would have a much more robust financial system if we would have more indexing [of financial securities to inflation and other indexes].”

Can we predict monetary policy?

The question is, again, somewhat trivial and Kenneth gives the obvious answer – No, we can't. The reason is that central bankers are subject to extensive lobbying.

“It's hard to predict monetary policy. It helps some people and it hurts some people. So there's a lot of lobbying.”

How should countries stimulate their economies when growth is low?

First, central banks can't do everything, politicians must act. Second, they should focus on infrastructure investment because this is auspicious in the long term.

“Monetary policy [in Europe] has been very helpful to provide a bridge. But that bridge has to go somewhere.”

“If you are growing slowly and interest rates are really low, that's a good time to build your infrastructure.”

Does quantitative easing work?

The short answer is – We don't know yet.

“This [quantitative easing] is a very experimental policy.”

“It [quantitative easing] works great on my blackboard. But it is not exactly clear what happens [in reality], as we don't have enough experience.”

I liked the lecture. Kenneth Rogoff's talk is very clear and straightforward. You can review the event here.