Syndicated lending volume in the third quarter retreated from the blistering pace in the second quarter - a drop some experts attributed to gains in the stock and bond markets.
After a record-breaking second quarter, total lending volume dropped 17% to $189 billion, Loan Pricing Corp. reported. The total also represented a moderate drop from the $203 billion level in the year-earlier period.
Experts said the current strength in the stock market encourages leveraged-buyout firms, which have historically tapped the bank market for acquisitions, to sell into the equity markets through initial public offerings instead of becoming buyers of properties.
"It's a very attractive time in every capital market," said CS First Boston's syndication chief Bruce Ling. "Borrowers have never had more options that included such a receptive variety of markets."
Jamie Lewis, head of syndications at Bank of Boston Corp., said the robust bond market was reducing the potential size of credit facilities by taking away some of the B,C, and D tranche business.
"Companies are more expensive on the acquisition side," said Mr. Lewis.
The decline in total lending volume masks a pick-up in leveraged lending, a riskier but more profitable business for banks.
The total leveraged-deal flow nearly doubled to $33.2 billion, including the high-profile $7.5 billion deal for Westinghouse Electric Corp., led by Chemical Banking Corp. and J.P. Morgan & Co..
The Westinghouse deal was the largest leveraged financing of the quarter.
Chemical Banking led or co-led the top four deals, which included: a $10.5 billion deal for New Center Asset Trust, a specialty purpose finance vehicle for the General Motors Acceptance Corp.; a $10 billion deal for General Motors Acceptance, and a $7 billion refinancing for American Home Products.
Not surprisingly, Chemical led the agent-only league tables with $61.3 billion in deals, for a 26% market share. That's up from a 22% market share in the previous quarter.
J.P. Morgan took second place in the league tables with $28.33 billion in deals and a 12% market share. Citicorp ranked third, with $21 billion in deals and a 9% market share.
Chase Manhattan and BankAmerica took fourth and fifth in the charts, with a deal flow of $19.55 billion and $12.32 billion, respectively, which accounted for market shares of 8% and 5%.
As for the next quarter, loan syndicators are wary that Japanese banks may pull back. With the recent spate of debt downgrades, Japanese banks have an estimated 8 to 15 basis points higher cost of funds.
"The market for funded investment-grade loans might become a little less attractive for the Japanese banks," said Mr. Lewis. The Japanese banks have become more actively involved and interested in loans for companies that have BBB and BB debt ratings, reflecting a trend among banks in general.
"The increased cost of funds won't hurt in the noninvestment grade credits," said Mr. Lewis. But he added that the increase in funding costs will make a difference in the A-rated companies, where margins on funded transactions remain tight.
"We have not yet seen widespread evidence of an exodus by the Japanese banks at all," said Mark Smith, the head of loan syndications at First Chicago Corp. "But people are watching it."
Thus far, it appears that the fourth quarter has started out with a bang, with some high-profile deals expected to close in the quarter, including two $12 billion deals.
Citicorp is leading a refinancing deal for Philip Morris Co., and is co- leading, along with Credit Suisse, a $12 billion loan for Walt Disney's acquisition of Capital Cities/ABC.
"We anticipate a strong fourth quarter," said Mr. Smith. "There are a lot of acquisition-related activities going on, and we continue to see a good volume of commercial paper back-up facilities."
A loan syndicator at another bank, however, said the volume appeared slower. The Disney and Philip Morris deals will be the high- profile exceptions to the rule, he said.
Walter Bloomenthal, senior managing director of loan syndication at BankAmerica Corp., said he did not see a backlog of deals going into the fourth quarter. There's more demand for deals than there are deals out there right now, he said.
As a result, pricing continues to be under pressure, said Mr. Bloomenthal.
Industry experts said pricing on investment-grade deals doesn't really have that much farther to slip, but they are seeing some decreases in the noninvestment grade deals.
"It used to be the standard leveraged pricing was 250 basis points over" the London interbank offered rate, said Mr. Lewis. "Now, a lot of deals are getting done at 175 to 200 basis points" over Libor.
