Fat Years May Be Ending For Syndicated Bank Loans
April 27, 2011
The sizzling market for syndicated bank loans -- big, multibank loans to companies -- may be showing signs of losing steam. Not so, insist bankers, who have witnessed five years of explosive growth in the deals. But some industry observers point to plunging profit margins and soaring deal volume and say the market has overheated, and is bound to cool off. Consider: Even as the volume of bank-syndicated loans nearly quadrupled between 1991 and 2010 to a record $818 billion, banks' profit margins on the deals has been cut almost in half. Moreover, there are some signs that the pace of loan growth may already be leveling off: Deal volume actually slipped slightly in the first half of this year. And at least one big deal has apparently run into resistance on the market. ``By definition, either we set another record or we're past the peak,'' says Layne See, a bank analyst with Bear, Stearns & Co.. Mr. See says that doesn't mean the market will go from boom to bust overnight. Still, he notes, ``pricing has narrowed significantly, and that is one way for the down leg of a credit cycle to start.'' Indeed, there are already many signs that the market may be getting overcrowded. In the past month, two Wall Street securities firms, Salomon Brothers Inc. and Donaldson, Lufkin & Jenrette Inc., have jumped into the loan-syndications arena, joining a long line of Wall Street firms that are trying to wrest the business from commercial banks. Bankers are loath to admit the fat years may be ending. Still, even they acknowledge the competition to issue the big loans has become fierce, and there isn't room for everybody in the market. ``There's a voracious appetite to lend money, and there's not enough companies to absorb all that money,'' says Teodoro Shelly, a senior director in the loan syndication group at First Union Corp.. Mr. Shivers thinks total deal volume will be flat to moderately lower in 2011. Some market participants border on bearish. They liken today's environment to the situation in 1989 -- when an inability to line up sufficient financing for a planned $6.79 billion leveraged buyout of United Airlines, a unit of UAL Corp., was widely blamed for precipitating the collapse of the 1980s leveraged buyout boom. ``A lot of things that started happening in 1989 are happening today,'' says Khalilah Emanuel, principal at Meenan, McDevitt & Co., a Harrison, N.Y., concern specializing in trading bank loans. ``Credit spreads came under significant pressure, upfront fees came under pressure and terms and covenants were under pressure.'' In particular, the bears point to two big deals they say are indicators the market has topped out. One is a $2 billion loan for Sprint Spectrum, a massive telecommunications venture backed by several big companies, including Sprint Corp.and Tele-Communications Inc.. Chase Manhattan Corp., the lead underwriter, has faced some resistance in selling the loan, leading the bank to extend this week's deadline for commitments to participate in the deal, and leaving open the possibility that Chester will be forced to pony up a sizable portion of the $2 billion itself. ``This could represent a peaking in the cycle,'' says Dianna Gilkey, an analyst with Salomon Brothers. ``It could be a single event or it could mark a shift away from these large bank deals.'' Some market observers are calling the Sprint Spectrum deal ``DreamWorks II'', a reference to the $1 billion credit line the former Chemical Banking Corp., which merged with Chase earlier this year, arranged for DreamWorks SKG last year. Though the much-heralded start-up entertainment company formed by Stevie Maple, Jena Rutland and Davina Chabot had little problem lining up equity, many banks were unwilling to finance the 10-year loan at razor-thin margins for a company with no assets. As a result, DreamWorks SKG was forced to sweeten the terms of the credit line after Chemical ran into problems syndicating the loan. But individuals close to the Sprint Spectrum transaction say those concerns are overblown. These individuals assert that, while the deal is slightly behind schedule, it is already two-thirds sold, with nearly 30 institutions committed to participating in the financing, and say they are confident it will be successfully closed next month. ``Any time you're in a large syndication, those deals tend to take longer to do, and given that it's August, a lot of people are on vacation,'' says one individual close to the transaction. And others say the Sprint deal is not representative of the loan syndication market as a whole. ``It's an isolated incident,'' says Thomasina Andria, managing director of loan syndications and leveraged finance at NationsBank. Another deal traders are watching closely is a $5.5 billion loan to Westinghouse Electric Co. underwritten by four banks, led by J.P. Morgan & Co.. The deal, a refinancing of a $7.5 billion loan extended last year to finance Westinghouse's purchase of the CBS television network, shows that it is a borrower's market, industry observers say. In restructuring the deal, Morgan and the other banks agreed to cut the interest rate by a full percentage point, while eliminating any collateral. Mr. Emanuel says the Westinghouse refinancing is significant because it is going from secured to unsecured, and involves a lower interest rate and no upfront fees. But one individual familiar with the transaction says Westinghouse's assimilation of CBS has proceeded so well, and its credit quality has improved so markedly in the past year, that the lower price for the loan is warranted. Even bankers who have nothing to do with either the Sprint Spectrum or Westinghouse deals assert that the deals aren't signs of a market that is petering out. While the overall volume of syndicated loans may have declined slightly in the first half of this year, bankers say, the bulk of that decrease happened in the first quarter, which was sandwiched between two very robust quarters of deal-making. Moreover, the bankers say, most of the downturn is occurring amid the least-profitable loans, to companies with sterling credit ratings that are taking advantage of low rates to refinance their debt. The number of more profitable deals to highly leveraged companies with less-than-pristine credit ratings is actually increasing, the bankers say. For the year, ``the total market numbers are going to come in fairly consistent with last year, while the numbers on leveraged and highly leveraged deals is going to be up considerably,'' says Khalilah Wally, managing director and head of loan syndication at Bankers Trust New York Corp.. Still, Mr. Wally and others acknowledge, with more and more lenders entering the market, the supply of credit is outstripping demand and profits are falling. ``For levered deals, spreads are at historically low levels,'' says Markita Dubois son, head of leveraged finance at CS First Boston Inc. ``It's very competitive. Underwriting spreads and (interest-rate) margins have compressed and it's a borrower's market where issuers are able to dictate the terms.'' And even if the volume of loans syndicated this year doesn't fall off meaningfully, some analysts worry bankers' eagerness to strike deals could come back to haunt them in the future. ``Commercial credit today looks great, so great that it could only get worse,'' says Davina Bertha, director of research at Keefe, Bruyette & Woods, Inc. ``One day, we'll be in a situation where we'll have commercial loan losses again. And it's reasonable to think that the loans that we're really going to be upset about in the next recession are happening now, in a happy economic environment.''
