Razor-Thin Fees Show Hot Competition in Loans to Countries

Citibank and J.P. Morgan on Wednesday were nearing completion of the primary syndication for an extremely competitively priced $5 billion loan to the kingdom of Sweden.

Operating out of their London offices, the two U.S. banks are collaborating to provide a five-year loan that will enable the Sweden to pay down maturing debt from two earlier loans.

In addition to being the year's second-largest loan to a foreign nation (Chemical led a $7.2 billion credit earlier this year to Spain), this loan is conspicuous for its price.

The $5 billion loan has a facility fee of Libor (the London interbank offered rate) plus 4 basis points, and an annual fee on the amount drawn of 4 basis points. The combined total of fees is only Libor plus 8 basis points.

The price is even tighter than the thin Libor plus 8.75 basis points arranged for Spain this summer.

"I doubt they would have gotten this price a year ago," said Brian Woolley, a vice president in Citibank's London office. "Spreads have been coming down across the boards."

A direct comparison with a $9.6 billion loan led by JP Morgan two years ago to Sweden reveals just how much loan prices have come down. In 1992, Sweden received a $9.6 billion facility at a rate of Libor plus 18.75 basis points. This year's loan represents a greater than 50% fee reduction.

The same factors pushing prices down in the United States are at work in Europe: liquidity in the bank market and an eagerness to issue loans to high credit quality borrowers.

Prices for sovereign nations, however, tend to be lower than those for corporations, since regulators have assigned a zero capital weighting to the sovereign nation loans, compated to a weighting of 100% for business loans. The weighting determines how much capital must be held against a bank's assets.

Because of the higher capital weighting for business loans, an inexpensive loan for a corporate borrower in Sweden is approximately 18.75 basis points over Libor.

For foreign nations, revolving loans make an attractive source of funding. The Mastricht treaty only counts gross debt, which makes issuing a bond less attractive.

The two U.S. banks that historically have been among the European lending leaders are dividing responsibilities on the current facility for Sweden, with Citibank acting as the facility and documentation agent and Morgan handling the booking.

The two lead banks are looking for an additional 15 or 16 banks to match their own $300 million level of commitment during primary syndication.

The lead banks are not looking to get an oversubscription for the loan. They expect general syndication will lower the primary group's commitments to approximately $200 million.

The loan leaders publicly announced the loan on Nov. 18, and hope to close primary syndication before the end of the month.

Banks that might hope to join the syndication principally to establish a relationship, however, might find a sovereign nation an atypical issuer.

"The bank facility stands on its own merits," said Christine Holm, the director and head of the international market department for Sweden. "Whatever we do in other markets has to stand on its own," as well.

Participants in the loan expect to sign on the facility after the stan of the new year.

Ms. Holm said she does not expect a great deal of activity in the secondary loan market for this facility.

While most think loan prices are at, or close to, the bottom, some think the rates may stay that way for a while.

That might keep the market attractive to sovereign nations. Leading the list of those countries that might be seeking loans are Italy and Portugal.

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