Offering Money Where The Big Banks Won?t

LONDON — Turkiye Garanti Bankasi is on no one’s list of global financial heavyweights. But the Turkish bank is going where the mightiest banks on Wall Street fear to tread.

Garanti is one of three Turkish banks that helped finance the $3.3 billion takeover of Turkey’s largest supermarket chain in February. Big Wall Street banks, protective of their own weakened finances, balked at doing the deal.

From the Baltic to the Mediterranean, small local banks like Garanti are stepping in to finance corporate buyouts as big banks grapple with the running credit crisis. While the American mortgage crisis has metastasized around the globe — risky mortgage investments have turned up everywhere from Australia to Norway — many small European lenders have emerged relatively unscathed so far.

Wall Street’s troubles have given these relatively tiny lenders an opening to do deals.

“The international banks that were prepared to finance the deal were not offering competitive terms,” said Nikos Stathopoulos, a senior partner at BC Partners, the London-based private equity firm that bought the Migros supermarket chain. “Wall Street had no appetite or willingness to finance such a deal.”

These are tough times for the once-mighty buyout industry, which depends on leverage, or borrowed money, to pay for acquisitions. Big Wall Street banks that happily financed deals are no longer willing to foot the bill.

Big banks are sitting on roughly $200 billion of buyout loans that they have been unable to sell. These institutions face mounting losses as this debt loses value, perhaps as much as $9 billion during the first half of this year, according to Deutsche Bank.

So deal makers are looking to local banks to help pick up the slack. Danske Bank, a Danish lender, and DnB Nor Bank, Norway’s biggest bank, helped finance the recent takeover of Coor Service Management, a Swedish building services company, by Cinven, a London-based private equity firm. The price was about $832 million.

And when 3i Group, the big European private equity firm, set out to buy the Oslo-based Active Pharmaceuticals for $400 million in February, several Scandanavian banks, including Danske, helped pull the financing together.

“The small banks are charging good spreads now and getting a good return on their retail holdings,” said Julian Hirst, a London-based managing partner at Tri-Artisan Partners, a merchant bank and takeover advisory firm. "They are getting into a market they weren’t able to compete in before."

Granted, banks like Danske are too small to finance giant takeovers. They are more likely to focus on deals worth less than $1 billion. Many of these banks are likely to team up with other lenders to spread their risk from the deals, Mr. Hirst said.

But such banks’ strong links with local businesses make them natural allies of buyout firms hunting for acquisitions, said Bernie Schuler, a 3i partner.

"We picked local Nordic banks because they have an interest in the local market," he said. "If there is a trouble with the business or the deal, local banks can be more supportive."

Among the big-name buyout firms turning to Turkish banks is Kohlberg Kravis Roberts & Company, which recently bought the Turkish shipping company U.N. Ro-Ro Isletmeleri for $1.3 billion with the help of Garanti, which is co-owned by General Electric, and Turkiye Is Bankasi, Turkey’s largest lender.

For the local banks, such deals give them experience in financing takeovers and, if all goes well, will increase their profits. But these banks tend to hold buyout loans, rather than sell them, so they are also exposing themselves to risks. And many of them have lowered their expectations for the returns that buyouts generate.

Still, these banks suddenly find themselves at Wall Street’s table.

“The current difficult market conditions has opened a window into a market they could until recently not really compete in," said Pedro Fonseca, an analyst at Nomura in London. The banks, for their part, are trumpeting their willingness to do deals. The Istanbul-based Is Bankasi issued a statement recently that said it "would like to reiterate that it will continue to be interested in such financing projects."

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