Sponsors across Europe may face an even harder time obtaining finance for leveraged deals in the coming months as many of the lenders are now owned to varying degrees by their national governments.
A condition of many of these state bailouts was an insistence that the fresh capital be deployed to support domestic homeowners and smaller businesses.
The UK Government has said, for instance, that as part of its £37bn package it wants banks to maintain “over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels”.
This might make political sense. After all taxpayers and voters, who stand to benefit if this demand is implemented, are effectively the new shareholders in these banks.
However, this could severely curtail such lenders’ policies, particularly in more aggressive parts of their books, such as loans to sponsors to carry out buyouts outside their home country. This is particularly pertinent for UK banks.
Royal Bank of Scotland (RBS) tops the Thomson Reuters league table of European leveraged loans by some distance, having been bookrunner on 33 deals so far this year worth a total of US$15.4bn.
RBS has accepted that it requires state support to give it sufficient capital. It has agreed to raise £15bn via an equity issue at 65.5p a share underwritten by the Government, plus £5bn in preference shares, which will give the state a 60% stake in the bank.
There are four other UK banks in the top ten of this table: HSBC, Barclays, Lloyds TSB and HBOS. All have been offered government support if required too. Lloyds and HBOS, which are in the process of merging, have accepted this as well.
But HSBC and Barclays have tried to avoid this fate at all costs. The latter has recently raised £7.3bn at an extortionate average rate of 11.5%, principally from Middle Eastern sovereign wealth funds in Qatar and Abu Dhabi.
Justifying this, Barclays’ chief executive John Varley stressed “the benefits of being independent”.
“It is important we are careful when we are developing our shareholder base. If we felt there would be significant interference in the way Barclays is run as a group they would not be on the register,” he added.
Chairman Marcus Agius concurred. “We do think we will maintain this [independence]. The board debated this very carefully to ensure that we continue to exercise self determination.”
Lloyds is also trying its hardest to avoid state interference in its commercial decisions. Luckily the Government will only end up with a maximum 43% holding in a combined Lloyds HBOS after a £17bn capital injection.
Nevertheless Lloyds has indicated that it wants to repay the £4bn of costly preference shares to the Government within a year of accepting the bailout. It will seek third party investment from relatively benign sovereign wealth funds too.
Lloyds chief executive Eric Daniels has also said he does not believe the UK government “will have an impact on our lending policies or conduct of business”.
That will leave RBS as the principal state-owned entity, with new management approved by the Government. Already the problems this might pose have been seen regarding the repayment of a US$4.5bn loan extended to Russian aluminium oligarch Oleg Deripaska.
Liberal Democrat Treasury spokesman Vince Cable wrote a public letter to RBS chairman Sir Tom McKillop urging him not to renew the loan and instead repatriate the money and use it domestically to help UK voters through the pending recession.
Luckily Deripaska on this occasion solved this tricky predicament by obtaining finance from the Russian state development bank VEB. But RBS will have further issues regarding LBOs, never the politician’s favourite form of finance.
Eric Capp, global head of leveraged capital markets at RBS, has admitted as much to IFR Buyouts Europe. Unlike Eric Daniels, he fears: “The impact of Government support in banks will increasingly be seen with regards to capital allocation.”
However, some lower mid market sponsors believe that if the Government is serious about its intent then its insistence that banks must back UK smaller businesses may assist their activity.
After all there is a precedent for Labour governments in the UK to intervene, following previous major upsets in the financial markets, and set up hybrid institutions to encourage investment. After the Second World War, Investors in Industry was formed. This became 3i. And in 1976, Equity Capital for Industry, or ECI, was created.
Both institutions, now completely privatised, were originally quangos, with private managers investing public money. From these seeds, the venture capital and private equity industry was born in the UK. Perhaps another may be born from RBS whilst it is in public ownership?