Liquid banks are eager to lend but demand for loans continues to fall in EMEA as merger and acquisition (M&A) activity remains patchy and refinancing volume dwindles in volatile markets preoccupied by macroeconomic fears.

Loans to Europe’s highest-rated companies totalled just $82.9 billion, which is the lowest first quarter volume for 14 years and 51% down on the $170.8 billion seen in the same period of 2015.

The European leveraged loan market, which finances riskier, more indebted companies, also had the worst start to the year since 2010 with a 43% year-on-year drop to $29 billion in the first quarter as the markets retreated from risk.

Only 238 deals were completed in EMEA in the first three months of 2016, which is the lowest quarterly figure since the fourth quarter of 2009 and will put pressure on banks' budgets and revenue targets for the rest of the year.

“Apart from the few big headline deals, people are mostly working on low fee generating business, it’s difficult to get any visibility as to where future activity will be coming from,” a senior banker said.

European M&A has been limited to a handful of transactions in 2016 so far as a combination of volatile capital markets, low oil prices and the Brexit referendum put off potential buyers.

M&A lending in the first quarter was a disappointing US$33.9bn, 34% lower than a year earlier and 80% down on the fourth quarter of 2015 as the wave of acquisition financing seen in 2015 failed to carry through to 2016.

A US$18bn bridge loan backing Dublin-based rare disease drugmaker Shire Plc's (>> Shire PLC) US$32bn merger with U.S. peer Baxalta was the largest loan of the quarter. The financing, which closed in February, comprised a US$13bn term loan and a US$5bn revolving credit facility.

Refinancing activity, the traditional driver of EMEA lending, plummeted 60% to US$68.4bn in the first three months. Most European companies have already refinanced in the last couple of years at attractively low rates.

“The lack of refinancing has really killed volumes. Loan margins for most investment grade companies are no longer being reduced so there is no incentive for borrowers to refinance,” another senior banker said.

Refinancing activity was restricted to renewing one-year deals from last year, mainly for commodity companies, or consolidating debt from recent mergers.

Global diversified natural resource company Glencore (>> Glencore PLC) closed senior syndication of a US$7.7bn one-year refinancing in February with 37 relationship banks. The loan is expected to be syndicated further to around 30 banks in April.

Swiss-headquartered LafargeHolcim (>> Lafargeholcim Ltd) signed a €3.5 bn ($3.98 billion)loan in January, which replaced existing credit facilities after the two companies merged.

Lending in Africa, Central and Eastern Europe and the Middle East was 24% down year-on-year at $33.7bn in the first quarter.

Middle Eastern loan volume of nearly $20 billion was boosted by a $5.5 billion sovereign loan for the State of Qatar, which was completed in January.

Russian volume of US$2.64bn was nearly four times higher than $680 million seen a year ago when Russia was hit by international sanctions.

POOR START

First quarter leveraged lending of $29 billion was the lowest first quarter for six years and the lowest quarterly volume since the third quarter of 2012 as activity stalled.

A flurry of activity at the start of the year, as the market digested deals that were postponed from late 2015, was followed by a prolonged slowdown.

A senior European banker described the first quarter as “absolutely atrocious” and was pessimistic it would markedly improve in the next three months.

“January was only good because deals were cooked in September/October,” he said. “One month does not make a year.”

A bumper January kept leveraged syndicate desks busy but pricing or documentation had to be flexed on several deals as investors pushed back on aggressive structures.

Loan supply slumped in February and March as secondary prices wobbled due to contagion from the US and wider volatility, and the M&A pipeline dwindled.

“It’s probably the most volatile quarter I’ve seen in terms of how low the market got and where it will be at the end of the quarter,” a European investor said.

Barclays (>> Barclays PLC) topped the first quarter EMEA syndicated loan bookrunner league table, with a US$11.48bn market share and 11 deals. Morgan Stanley (>> Morgan Stanley) claimed second place with US$9.6bn and five deals.

Barclays and Morgan Stanley were the two bookrunners on Shire’s US$18bn bridge loan in February. Deutsche Bank (>> Deutsche Bank AG) was third with $6.29 billion and 17 deals.

(Editing by Tessa Walsh)

By Alasdair Reilly and Hannah Brenton