Hit hard by investment banks in the highly profitable leveraged loan market, commercial banks are fighting back.
Loan syndicators at big banks are asking corporate clients to get their investment bankers to participate in the large but very low-margin loans used to back up commercial paper programs.
The message to the nonbanks, in the words of one syndicator: "If you're going to be in the loan business, be in the loan business and play in the investment-grade market."
If investment banks refuse to play by the unwritten rules of the syndications business, commercial banks threaten to use their combined muscle to drive them out of the game.
"The Street has got to wake up and smell the coffee," said a senior syndicator a money-center bank. "The investment banks are trying to cherry- pick the more profitable end of the loan business. They do not have the capital to participate as a full-service loan product organization.
"You can't have it both ways, and more and more banks are pushing the Street to use their capital and play in the loan business."
Investment banks that have entered the loan syndications business over the past nine years-such as Goldman, Sachs & Co. and Merrill Lynch-are now making their presence felt in the market for loans used primarily to fund leveraged buyouts and acquisitions.
To date this year, investment banks as a group won about 16% of the lead agent positions on loans priced at more than 125 basis points over the London interbank offered rate, according to Portfolio Management Data LLC. This almost doubled their 8.7% share of last year.
Syndicators at investment banks say they are beginning to feel some of the retaliatory pressure from their clients.
Corporations have asked their investment banks to participate in commercial paper backstop credits during discussions on some half-dozen financings in recent months, according to one syndicator at a securities firm.
But because investment banks typically fund themselves through commercial paper too and have neither the access to Federal Reserve funds nor the large capital base of major commercial banks, lenders at securities firms say they simply cannot make those backstop loans.
"The issue is not cherry picking, it's not profitability," said John F. Yang, managing director and head of the loan syndicate group at Merrill Lynch. "It's about making commitments to your client that you can keep.
"Securities firms are pursuing the loan business where they can add the most value," he said. "The fact that they don't participate in commercial paper backstop programs is more a reflection that we don't represent an alternative source of funding. If corporate America can't roll over itscommercial paper, it is quite possible that securities firms can't either."
Commercial bankers said the purpose of the loans is not an issue.
"A loan is a loan to me," said Joseph MacHale, managing director and head of global credit at J.P. Morgan & Co. "If it's not drawn you don't mind, and if it is drawn, why does it matter if it's to backstop commercial paper or to fund an acquisition? Last time I checked, dollar bills were green no matter what you used them for."
Investment bankers also say they already do their fair share of low- margin business to support client relationships, such as corporate bond underwriting and providing advisory services without charge.
But commercial bankers argue that the true test of client commitment is the allocation of capital, and that if investment banks are unwilling or unable to participate in all aspects of the loan market, they should be forced out of it.
"A lot of the bigger banks are tired of seeing the Street shirk their responsibility and not use their capital, not use their balance sheets," said the senior syndicator, who spoke on condition of anonymity.
Commercial bankers say corporations have so far been receptive to their message. "They understand the drill," said another syndicator.
Although some money-center banks are still developing investment banking businesses or have only recently acquired securities firms, bankers are now threatening to shove Wall Street aside entirely if investment banks refuse to yield on the issue of commercial paper backstop credits.
And the syndicators at investment banks are vowing to stand firm.
"Providing financial and legal commitments that there is a material chance you can't keep is fundamentally bad business," said Mr. Yang.
