Bank of Boston Corp. has joined the growing list of bank companies trying to solidify claims on the nation's booming corporate finance business by adding underwriting to their menus.
The company recently notified the Federal Reserve of plans to apply for investment banking powers under section 20 of the Bank Holding Company Act. It could have such powers by the middle of next year.
Were the bank to get approval, it would the 40th commercial bank to win such powers. Including Bank of Boston, all of the top 10 leveraged lenders would have section 20 subsidiaries.
Bankers who have created such subsidiaries say they hope to double their leveraged lending revenue by offering a complementary high-yield bond service.
Not to enter the field, they say, is to risk erosion of one's leveraged lending franchise.
"To be a leading syndicator of bank loans, particularly to the leveraged market, you have to be able to offer a one-stop shopping capability," said Michael J. Zupon, a managing director at the NationsBanc Capital Markets subsidiary of NationsBank Corp.
"We're finding that investment banks that can access each of the capital markets have more credibility when making recommendations," Mr. Zupon said.
Bank of Boston is seeking to join the likes of Chase Manhattan Corp., Bankers Trust New York Corp., NationsBank Corp., and First Union Corp. just as the Fed is considering an increase in the ceiling on section 20 subsidiaries' underwriting revenues to 25% of total revenues, from 10%.
"For those commercial banks who find it important to be a leading arranger of syndicated bank loans, having the section 20 capabilities will be increasingly a mandatory requirement to participate in the market," Mr. Zupon said.
The bank loan and capital markets both have both grown considerably during the past five years. Capital markets, moreover, have become an increasingly important component of the financing needs of midsize companies.
"Banks whose primary franchise is the middle market are beginning to respond by developing capital markets capabilities," said Howard D. "Sandy" Curlett, president of First Union Capital Markets.
"This is a natural extension of our existing relationships," said John K. Giannuzzi, a managing director and head of corporate finance at Bank of Boston. "The market has become efficient enough to execute transactions for midsize companies" that form the core of Bank of Boston's clientele.
Mr. Giannuzzi said his company has been offering non-section 20 investment banking services, including private placements, asset securitization, and loan syndications.
The number of deals the bank has executed increased to 142 last year, from 32 in 1992.
In 1995, corporations raised $43 billion by issuing high-yield bonds and about $101 billion through leveraged loans. With an average spread of 2.5% to 3.0% on high-yield bonds and 1% to 1.25% on bank loans, the profits in each market total about $1 billion, said bankers.
Investment banks have risen to the challenge and have also seen the potential for profit in the lending market.
Salomon Brothers Inc., Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette, and a host of others have started bank lending businesses that focus on the leveraged lending market.
Mr. Giannuzzi said creating a section 20 unit is an "enormous commitment" by his bank. But he added, "We feel very comfortable at this point that we understand the appropriate way to execute in a section 20 environment, given our culture and client base."
