Banks are rolling out the red carpet to welcome midsize companies to a club that until recently was restricted to the biggest corporations: the capital markets.
First Union Corp. enlarged its capital markets group by 20% to 1,800 in 1996 and will add another 11% this year to work with more midsize companies. SunTrust Banks Inc. also increased its group by 46%, to 142 bankers in 1996. And Wachovia Corp. is projecting 50% growth in 1997 revenue from deals for middle-market companies.
Several others, including NationsBank Corp. and Bank of Boston Corp., are also dedicating significant resources to providing such products as revenue bonds, private placements, and common stock to the middle markets - a broad category that takes in companies whose annual sales range from $10 million to $2 billion.
"It's probably going to be the largest growth segment in the investment banking and capital markets areas over the next three to five years," said John Giannuzzi, a managing director and head of Bank of Boston's capital markets division. "It's going to drive the future of this marketplace."
Bankers say they already have strong ties to middle-market companies, which have traditionally relied upon them for loans to fuel their growth. But they acknowledge that it is a challenge to hang on to these customers as their businesses and needs grow.
"Our customers are leading us that way," said Michael F. Ryan, managing director of Wachovia's commercial banking division.
Banks' euphoria about the sector, however, is tempered by numerous challenges: strong competition, investor reluctance, and relatively high per-deal costs, to name a few.
Still, more than 96% of the record-breaking 10,000 mergers and acquisitions through the first 50 weeks of 1996 were in the middle market, according to Securities Data Co.
These acquisitions require financing, and bankers said that the traditional loan product is now one of many options for middle-market companies. "When we look to future opportunities, we think that there will be more for us in the middle market than in the Fortune 500," said Charles Shufeldt, president of SunTrust Capital Markets.
Indeed, a recent study suggested that executives at middle-market companies are becoming increasingly aware of the ability to tap the capital markets.
One percent of companies with $10 million to $100 million of annual sales will probably enter the capital markets for the first time in 1997, according to a study by Payment Systems Inc., Tampa, Fla.
While the percentage isn't large, that amounts to approximately 1,680 new participants in the capital markets.
The move largely reflects acquisition and facility-expansion plans among these companies, said Maria Erickson, director of corporate research at Payment Systems. "It's still at the tip of the iceberg."
Many regional and superregional banks are jostling for position. They have found that middle-market customers are ready for more sophisticated financing.
"We see a growing acceptance of these products," among midsize companies, said Wachovia's Mr. Ryan. "We've been talking about it, they've been listening, and now they're buying."
Growing efficiencies in the capital markets have also made smaller deals more feasible. A $20 million deal is commonplace now, but would have been unheard of in the 1970s.
The increasingly sophisticated middle-market executives, however, are also more rate-conscious than those who stick to more traditional funding. "Middle-market firms that are using capital markets carry a lot less traditional debt," said Ms. Erikson. They contact four or five institutions to find the best rate, while others contact only two on average, she said.
Banks are making a wide range of capital markets products available to midsize firms. Revenue bonds are the most common instrument, with 42% of those companies using them, according to the survey.
High-yield bonds, private placements, loan syndications, asset-backed securities, and commercial real estate are growing in popularity with the middle market, according to several bankers.
Foreign exchange and interest rate protection products are also gaining favor, said Edward J. Brown, president of NationsBank corporate finance, who called this market a "cornerstone" of the bank's business.
Some of the largest banks are staying above the fray. Citicorp, for example, "doesn't really focus on the middle market," said a spokeswoman.
Even bankers who see the middle market as the new frontier said there were significant challenges in accessing the capital market.
"It's easier to sell an investor AT&T or IBM than a small $100 million company in Worcester, Mass.," said BankBoston's Mr. Giannuzzi.
The small size of many transactions can inhibit institutional investors. "A deal below $100 million gets tough because it becomes extremely illiquid," said Jerry Paul, a fixed income portfolio manager at Invesco.
And smaller deals can be prohibitively expensive for an issuer because they cost as much as larger ones.
Investment banks are eyeing the middle market as well, making this relatively new market crowded.
The banks are gearing up for stiff competition. "If they don't do it for the companies attracted to that type of product, they're at risk of losing them anyway" said Ms. Erickson.