Wall Street Not Living On Junk Loans Alone

Conventional wisdom holds that investment banks in syndicated lending are out to win high-risk deals because of the juicy fees they promise. But a financing unveiled this week shows they're not shying away from investment-grade deals.

CS Holding's commercial banking unit, Credit Suisse, will lead the syndication of a $3 billion loan for J.C. Penney Co.'s acquisition of Eckerd Corp. - a deal on which the Zurich giant's investment banking subsidiary, CS First Boston, has been serving as adviser.

The $2.5 billion cash and stock purchase is the Plano, Tex.-based retailer's third drugstore acquisition in a year.

The loan marks the second time in less than a week that an investment house has led a financing for an investment grade company. Merrill Lynch & Co. is working with J.P. Morgan & Co. on a $11.5 billion loan backing Norfolk Southern's hostile bid for Conrail Inc.

Investment banks certainly aren't turning their backs on lending to noninvestment grade companies. But they are looking to cross-sell services in cases where they have made other inroads, such as advising on mergers.

"When the opportunity arises to get involved in a transaction by virtue of other work the bank is doing on a credit, it's an easy piece of add-on business," said one lender, who requested anonymity.

Keith Barnish, a senior managing director and the head of loan syndications at BankAmerica Corp., said that the underlying theme in the two deals is the advisory position.

"Absent the M&A position, they wouldn't go after this business," he said.

"Advisers have done all the analysis and credit work," said an investment banker. "To put an underwriting on the table for the bank piece of the capital structure requires no additional due diligence or cost, and is just a matter of figuring out the capital structure."

Bruce Ling, the head of loan syndications at CS First Boston, said that investment grade deals that are tied to acquisitions can be profitable. "Strategic investment grade deals are very attractive financings for the underwriting, arranging, and participant banks," he said.

Generally, lenders said, investment-grade transactions would remain a fairly low percentage of an investment bank's overall lending business.

Investment grade acquisitions typically don't involve bank debt, bankers said, because such companies can access the capital markets directly or can structure the deal as a stock swap.

For A-plus rated J.C. Penney, a combination of stock and debt made sense because the retailer's stock trades at a multiple of approximately 14 times earnings, whereas Eckerd's stock trades at closer to 19 times earnings.

CS First Boston underwrote $2.5 billion for the deal, which will back the acquisition and refinance approximately $760 million in Eckerd debt.

Several investment bankers pointed out that Credit Suisse's AA debt rating makes it easier for the bank to lead loans for companies like J.C. Penney and Walt Disney. Credit Suisse can support investment-grade clients without cutting into the bank's profitability.

Others said that part of the appeal of the Norfolk Southern deal for Merrill Lynch is that it will help the company quickly establish itself as a player and win a berth in the rankings of loan syndicators.

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