Moderate inflation, a surge of mergers and acquisitions, and the voracious appetites of bank and institutional investors fueled the booming bank loan and high-yield bond markets in 1997.
Syndicated lending volume already stood at $831 billion on Oct. 31, according to Securities Data Co., putting this year's market on track to surpass the $1 trillion mark for the first time. While the outlook for next year is less clear, lenders are cautiously optimistic that some favorable trends that began in recent months will continue in 1998.
"The bank market turned in the second half," said Peter Gleysteen, managing director and group head of global syndicated finance at Chase Manhattan Corp.
"Relentlessly lower pricing to borrowers on the one hand, and steadily increasing loan volume on the other," he said, "have reversed the supply and demand balance favoring issuers to what is now increasingly a lender's market."
Junk bond issuance, meanwhile, totaled more than $107 billion at the end of October, according to Securities Data, easily surpassing the $79.3 billion issued during all of last year. Issuance is expected to continue to explode in 1998, thanks to a growing economy and soaring activity in mergers and acquisitions, experts said.
"It is going to be monstrous," said Jon Winkelried, managing director and co-head of high-yield at Goldman, Sachs & Co.
The lucrative leveraged lending market is also poised to soar, thanks to an influx of investors, including floating-rate mutual funds and managers of collateralized loan obligations.
"The key swing factor will be the budgets that the commercial banks set for booking new loans in 1998," said Christopher R. Ryan, managing director for loan syndication and trading at Lehman Brothers.
Chase once again topped league tables of both broadly syndicated and leveraged lenders, leading $371.9 billion of loans in 499 deals through the end of October, according to Securities Data. Mr. Gleysteen said the prospects for next year's loan market are less clear.
"The 1998 overall outlook is uncertain, given increased capital market volatility generally and financial concerns emanating from Asia, which, if resolved quickly, would clearly benefit everyone."
The 1997 syndicated loan market saw the end of a downward pricing trend that had continued steadily for nearly four years. "Investment-grade pricing got so low that we've gone from investor apathy to investor antipathy," Mr. Gleysteen said.
The leveraged loan market remained attractive to lenders and investors alike. Both groups had new players in 1997.
Investment banks such as Lehman and Goldman Sachs, which entered the bank market in the mid-1990s, took a much bigger bite of the leveraged loan market this year, joining the ranks of the top 10 leveraged lenders for the first time.
Among the top 25 leveraged lenders, investment banks took nearly 18% of the market, compared to less than 5% in the first 10 months last year.
"The market is becoming much more comfortable with investment banks as underwriters and syndicators, and so have the borrowers," said Lehman's Mr. Ryan.
On the investor side, institutions joined the fray, prompting lenders to add tranches to their deals that combine features of loans and bonds. These "hybrids" are expected to remain a feature of the market next year, lenders said.
Just as investment banks increased their presence in the syndicated lending market, commercial banks increased their high-yield bond underwriting activities. Among the top 25 underwriters, bank-based groups garnered 25.4% of the market, compared with 19.7% last year.
Many bank-based underwriters brought their first lead-managed deals to market in 1997, including Societe Generale Securities Corp., BancAmerica Securities Inc., and BancBoston Securities Inc.
Well-established bank players, such as Chase and BT Alex. Brown, remained formidable competitors with the investment banks that dominate the market. When its leveraged lending activities are combined with its high- yield bond mandates, Chase did $50.3 billion of leveraged financings during the first 10 months of this year, according to Securities Data.
High-yield bond market participants note that commercial banks may get a boost from their strong relationships with corporate customers and financial sponsors.
"If the newcomers can focus and do a good job in acquisition finance, they do have a built-in advantage and will work their way up the league tables, said Dean Kehler, co-head of high-yield at CIBC Oppenheimer, a subsidiary of Canadian Imperial Bank of Commerce.
Still, in order to break into the top ranks, they will have to displace strong leveraged lenders and well-established Wall Street firms.
Those established lenders are "not going away," Mr. Kehler said, "and they don't want to give up their slots to anyone trying to move in."
Overall, the high-yield market is expected to roar next year, even if the economy whimpers. Interest rates and defaults may pick up, Mr. Kehler said, "but that's not because the deals are over the edge; it's because a poorer economy is going to catch some people the wrong way."
