Syndicated lending volume broke the $1 trillion mark for the first time ever in 1997, and bankers are predicting an even more vibrant market for 1998.
Securities Data Co. of Newark, N.J., reported Friday that in 1997 volume hit a record $1.09 trillion, up from $950.3 billion in 1996. The fourth quarter also broke records, Securities Data said, with volume hitting $316.7 billion, up from $271.8 billion a year earlier.
This year, strong loan demand, well-capitalized banks, and high levels of liquidity are expected to propel the syndications market to new heights, despite continued volatility in Asia.
Even as Japanese banks-historically large providers of liquidity to the U.S. loan syndications market-pulled up their stakes late last year, volume remained brisk.
"Overall, 1998 could well beat all records, provided financial linkage to Asia, U.S. export performance, and valuations do not undermine confidence in otherwise great fundamentals," said Peter Gleysteen, managing director and group head of global syndicated finance at Chase Manhattan Corp.
The first quarter of 1998, he added, could very well set another loan syndications record.
Perennial market leader Chase Manhattan remained at the top of the list, leading $473.7 billion of syndicated loans last year for a 43% share, according to Securities Data. J.P. Morgan & Co. ranked second, with $260 billion of loans, followed by BankAmerica Corp., Citicorp, and NationsBank Corp.
In the investment-grade market, last year ended a five-year decline in pricing that had been reducing the interest income reaped from these loans. In the second half of 1997, several thinly priced loans got such a chilly reception from investors that they left agent banks with greater than expected allocations of the credits.
"The five-year free fall in loan pricing is over," Mr. Gleysteen said. "The market started changing in the second half, and we clearly went through a turn. By the time the fourth quarter arrived, we were on other side of the turning point."
However, in the higher-yielding leveraged and highly leveraged sectors, pricing declined in 1997, due in part to an unprecedented demand for the loans from bank and institutional investors alike.
"For the bulk of the year, I think most people were happy with their allocations and were happy with what they got paid," said Kevin Sullivan, managing director and head of loan syndications at Bankers Trust, which ranked third on the 1997 leveraged lending league tables.
"Was pricing down from prior years? Sure. But were the transactions worthwhile, and did they make money? Yes," he added.
For leveraged loans-those priced at 125 basis points or more over the London interbank offered rate-Chase took the No. 1 spot for the year, with $66.5 billion of loans and a 31% market share. NationsBank was ranked second, with $40.8 billion, and Bankers Trust, third, with $38.2 billion.
The different pricing trends in the investment-grade and leveraged markets are expected to continue this year, lenders said.
"The divergence of the technical factors driving the different sectors of the market is the most important change to the loan market in 1998," said Michael H. Rushmore, managing director and head of loan syndications and trading research at BancAmerica Robertson Stephens Inc.
"The excessive and increasing demand for leveraged loans, by institutional investors and banks, continues to cause changes in pricing and structure of this segment," he said. "But decreasing demand for new issues of investment-grade loans is causing loan spread expansion, and sharply higher risk for loan underwriters."
Also in 1997, many Japanese banks, which historically had provided 10% to 20% of the loan market's liquidity, were hit hard by troubled loan portfolios at home and drastically reduced their participation in the global credit markets.
For nine of the largest Japanese banks, total agent/co-agent loan volume fell from a high of $86 billion in the second quarter to $58 billion in the fourth quarter, according to Securities Data.
Their pullback from the market late last year will most likely be felt this year, said lenders.
"We saw a general reluctance of the Japanese to play in total, even in the leveraged end of the world, toward the end of the year," Mr. Sullivan said. "But the real impact will be in '98."
Nearly one-third of the loans made last year, more than $325 billion worth, were for manufacturing companies. The retail sales industry was the next most active borrower, with $61.4 billion of loans, or about 6% of total volume.
