The days of bargain-basement pricing on corporate loans may soon be over.
Many of the nation's largest syndicated lenders say they are raising some of the prices they charge their corporate borrowers. Specifically, they say they are increasing certain commitment fees-the up-front payments borrowers make on lines of credit.
The move represents the decline of a long-accepted practice of offering unprofitable loans to secure relationships with corporate customers. And it shows that corporate loans may become more expensive as they compete against other instruments for investors' dollars.
Lenders are looking to charge more for a commonly used type of loan known as unfunded revolvers. That is where a borrower buys a line of credit that can be drawn down at the borrower's will.
Fees are particularly important to these loans because if the loan isn't used only the fee-but no interest-is paid. And banks that buy pieces of them get only a nominal return.
"With pressure on shareholder-owned banks to have profitable investments, the small fee you might get on these loans doesn't make it worth it," said Michael Rushmore, a loan analyst at BankAmerica Corp. "More and more the banks have said, 'We're not going to participate.'"
A harbinger of a pricing shift came this month when a two-part, $800 million loan for Teligent Inc., a Vienna, Va., telecommunications company, carried commitment fees of 0.75% and 1.25%-25 to 50 basis points higher than the industry standard.
That loan was led by Chase Manhattan Corp., Toronto-Dominion Bank, and Goldman, Sachs & Co. Other major lenders say they are working on loans with similar pricing structures.
Richard B. Carey, director of corporate finance for Credit Suisse First Boston, said his firm does not have a set fee structure. But it is telling prospective borrowers that a fee hike is a strong possibility.
"A lot of institutions are now taking a conservative approach" to pricing, Mr. Carey said. "There's less of a willingness to suck it up."
In recent years, the commitment fee on unfunded revolvers has hovered at 0.37% to 0.5%. At that price, some lenders lost money but secured from their borrowers unwritten commitments for future profitable business.
But lenders say those relationships are breaking down as borrowers shop for the best prices on financings. And lead banks have been forced to carry unwanted portions of loans that they have been unable to sell to investors.
That is what moved Teligent's banks to demand higher fees. The lenders initially told Teligent an unfunded revolver would be too difficult to sell to other banks and offered to make a lump-sum loan instead.
But Teligent wanted to draw the loan down over four years and didn't want to pay the interest on a lump-sum loan. Aware that investors were increasingly cool to unfunded revolvers, the lenders came up with the higher fee deal.
"The loan is a clear example of the continuing convergence of the loan and the bond market because it provides the structure the issuer needs and yield that appeals to investors in step with the changing market," said Chase global loan chief Peter Gleysteen.
Teligent accepted the pricing because the company could not find a credit line anywhere else. Teligent officials say they are satisfied with the loan because they may end up saving millions in interest costs.
At a bank meeting for the loan last Wednesday, syndicated lenders appeared enthusiastic. Chase is administrative agent and lead arranger; Goldman Sachs, syndication agent; and Toronto-Dominion, documentation agent.
A source close to the negotiations said that since the breakthrough deal was done, Chase has received undue credit in the industry press.
"The idea that Chase came in with this revolutionary financing-it really didn't happen like that," the source said. "Chase came in the third spot. They're a co-lead. Ideas were kicked around for several months, and at the end of the day the best idea won out."
Meanwhile, Chase has several loans in the works in which the new pricing will be used, though marketable loans will still be priced at traditional levels.
However, there will be competition. Not only is Credit Suisse First Boston considering the move, but so also are at least four other top 10 lenders.
BankAmerica has worked new pricing into a handful of revolving credits for months, though the deals fell through for reasons other than aggressive fees, said Keith Barnish, head of syndicated lending.
At First Chicago NBD Corp., pricing is determined on a case-by-case basis. A large factor in that determination is the market demand for loans, and that could mean higher commitment fees, said spokesman Tom Kelly.
Another top 10 lender is ready to raise prices using two criteria: the size of the unfunded revolver as part of the whole loan and how long the loan will go unfunded. That would be a substantial number of loans according to the lender, who called the old pricing levels "totally irrational"
Kevin F. Sullivan, head of syndicated lending at Bankers Trust Corp., said a number of smaller loans have carried higher commitment fees. Bankers Trust, he said, is using higher fees when necessary.
Mr. Barnish said, "It's going to be something we definitely see more of. It's something the industry needs if it wants to attract more participants. An investor doesn't look at this as a bank loan, it looks at this as a single investment."
