Bank Loans Lure Institutional Investors

Goldman Sachs, Credit Suisse, and Citicorp syndicated a $1.225 billion loan this fall for Allied Waste that included a $500 million piece earmarked for institutional investors, the largest to date.

That loan, which was eventually increased to $1.275 billion, is the latest evidence of the increasing appetite for bank loans among institutional investors: insurance companies, prime-rate funds, sophisticated private investors, even other banks.

"Institutional investors have clearly achieved the mass to broaden their influence in the syndications market," said Stephen Ceurvorst, the head of syndications at Mellon Bank, Pittsburgh.

In the first nine months of this year, institutional investors purchased a record $9.74 billion in bank loans - more than 14 times the level in 1992, and 9.3% of total leveraged lending volume, according to data from Loan Pricing Corp., New York.

And institutional investors' interest in bank loans shows no signs of abating. This year, Oak Hill Partners and Keystone Inc. formed a $1.75 billion fund to invest in bank loans, high-yield bonds and distressed securities.

"There's an increased amount of capital that's being assembled to invest" in bank loans, said Glenn R. August, a portfolio manager at Oak Hill. "The question is whether there will be quality supply to invest in."

So far, Mr. August said, there's been enough product to meet the demand, but the immediate horizon appears to be challenging.

"You have a lot of money chasing a limited supply of goods at the moment," said Mark R. Smith, a senior vice president and senior managing director at First Chicago NBD Corp. "That bodes for a strong appetite for attractive deals in 1997 and a continued pressure on fees and spreads."

To satisfy that appetite, bankers said, institutional investors are likely to purchase pieces of loans for middle-market companies.

"We're looking for institutional investors to play a more meaningful role in smaller financings," said Mr. Ceurvorst. "As they look for a home for billions in funds, I don't know where else they will find one without going downmarket a little bit."

In putting together leveraged loans, bankers said they are increasingly considering dedicating a portion for institutional investors.

"One of the very first thoughts or avenues we'd explore is whether or not a situation is ripe for an institutional piece," said Mr. Smith.

Corporate borrowers turn to this structure because of its flexibility, bankers said.

Institutional portions of loans typically have longer maturities, less amortization, and higher fees.

"The portion of bank debt in a transaction is being increased relative to the bonds and equity, and that's a very attractive scenario for issuers," said Bruce Ling, the head of loan syndications at Credit Suisse First Boston.

These investments "have characteristics of high-yield bonds, have no call protection, and can be readily refinanced when rates are more attractive," Mr. Ling said.

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