Bloomberg News

Nestle Borrows at 4-Year Low as KitKat Maker Favored in Crisis

September 26, 2011

Sept. 26 (Bloomberg) -- Nestle SA, the world’s biggest food company, won the lowest rate on a European company loan in four years amid speculation larger companies are better able to withstand a stagnant economy.

The maker of Nescafe and KitKat chocolate bars agreed to pay 10 basis points more than the euro interbank offered rate to draw a 4 billion-euro ($5.4 billion) one-year revolving credit, according to data compiled by Bloomberg. That’s the lowest interest margin since a $2.25 billion deal for chemicals maker BASF SE in April 2007, according to data compiled by Bloomberg.

Large companies with international operations have about twice as much cash as short-term loans and are well-placed to meet debt redemptions amid Europe’s deepening crisis, according to Alberto Gallo, senior credit strategist at Royal Bank of Scotland Group Plc. The average interest margin of 53.5 basis points more than Euribor on high-grade loans may rise as lenders pass on their own increased funding costs, Bloomberg data show.

“We prefer large firms because we think they will have more bargaining power in negotiating loans with banks, and they will benefit from better liquidity,” London-based Gallo said in a note to clients.

A gauge of yield premiums on European bank bonds widened to a record last week on concern the financial system is in jeopardy as the economy slows and Greece flirts with default. The International Monetary Fund cut its forecast for global economic growth to 4 percent this year and next, compared with June forecasts of 4.3 percent in 2011 and 4.5 percent in 2012.

‘Pressure’

“Pricing is heading higher, that’s for sure,” said Ashu Khullar, London-based co-head of EMEA loan structuring and syndication at Citigroup Inc. “It’s a slow process and the impact will be less for the global investment-grade companies with large banking wallets. You may also see banks start talking about charging more for drawings in dollars because that’s where the pressure is for a lot of European banks.”

The Barclays Capital Euro Aggregate Banking Senior Index rose 17 basis points last week to 339 basis points more than government debt. That takes it above the 325 reached in December 2008 after Lehman Brothers Holdings Inc. collapsed.

Nestle’s new revolving credit, a backstop to its global commercial paper program, will replace a 2 billion-euro seven- year credit line signed in 2005 that paid an interest margin of 7.5 basis points on drawn funds, Bloomberg data show. A basis point is 0.01 percentage point.

Nestle would pay a margin of 40 basis points to use all the funds in the facility. Lenders will receive a commitment fee of 1 basis point to join the deal coordinated by Citigroup Inc., according to Bloomberg data. The Vevey, Switzerland-based company is rated AA by Standard & Poor’s and Aa1 by Moody’s Investors Service.

Three-Tier Fees

Citigroup’s Khullar said lenders may start a three-tier utilization fee structure instead of two, meaning the fee will kick in once the borrower uses the money.

Bayerische Motoren Werke AG, the world’s biggest luxury carmaker, agreed to utilization fees of 20 basis points fee to use more than one-third of a new 6 billion-euro five-year revolving credit, and 40 basis points to draw more than two- thirds. That’s 30 percent more than the fees paid by rival Daimler AG for a 7 billion-euro credit line signed last year.

BMW’s new revolving credit can be extended by a maximum of two years and renews an $8 billion financing signed in November 2005, according to a statement from coordinators of the transaction BNP Paribas SA, Citigroup Inc., Deutsche Bank AG and UniCredit SpA.

“Given the credit market situation, banks are starting to be more disciplined in pricing deals and we are starting to see banks demanding better protections and incentives to cover high funding costs on lines that are not meant to be drawn, either through utilization fees or other mechanisms,” said Alvaro Huete, head of global syndicate at Societe Generale CIB.

SocGen expects high-grade refinancing in Europe to fall by 50 percent next year as about 70 percent of these companies have renewed credit lines due by 2013, London-based Huete said.

“If you have refinancing to do, it’s prudent to get on with it now because I don’t think there is certainty that things will improve anytime soon,” said Khullar.

--with assistance from John Glover and Ben Martin in London. Editors: Cecile Gutscher, Paul Armstrong

To contact the reporter on this story: Patricia Kuo in London at pkuo2@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net


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