Banks fighting for a share of the lucrative high-yield, or junk bond, market are bringing back a type of loan from the high-rolling era of leveraged buyouts.
Commercial and investment banks are rapidly packaging and increasing the size of bridge loan funds.
The 6-to-12-month loans provide immediate liquidity typically required in an acquisition. The bank that makes the bridge loan has an inside track to win the high-priced junk bonds, offering that replaces it.
"The bridge loan is something you've got to have to compete for these larger transactions, particularly when you're looking to lead the high- yield component," said Jay Allen, a senior managing director for leveraged finance at BankAmerica Corp. in New York.
While bankers clearly feel the competitive need to provide bridge loans, they have a nettlesome past, particularly for investment banks.
About five years ago, a number of investment banks, defending their turf against junk bond king Michael Milken, provided bridge loans that several companies did not immediately pay back.
"What you worry about is that bridge loans are investments that companies couldn't sell publicly and are presumably of a low credit quality," said M. William Benedetto, the founder of New York investment bank Benedetto, Gartland & Co.
But bankers said public offerings of junk bonds provide attractive fees, and that serving as the lead manager provides an investment bank's traders with a continuous revenue stream.
Chase Manhattan Corp., already the largest provider of leveraged syndicated loans, can now boast the largest bridge loan fund. It announced this week that it had more than doubled the size of its Roebling Fund to $1.6 billion, from $675 million.
"This bridge fund reflects both our need to service our big clients and their big aspirations, coupled with prudent risk management on our own part," said James B. Lee Jr., head of global investment banking at Chase.
Investment banks are also getting into the act. Market sources said Salomon Brothers is assembling a bridge loan fund of about $750 million with Canadian Imperial Bank of Commerce, which is expected to close in early November.
BankAmerica Corp. and Lehman Brothers run a joint $600 million fund, called Strategic Resource Partners; Donaldson Lufkin & Jenrette runs a $1.28 billion fund; Morgan Stanley has a $600 million fund; and Goldman Sachs & Co. and Citicorp operate a joint $620 million fund.
Despite their checkered past, bankers said that such loan funds allow them to provide the service without assuming too much risk.
"If you want to manage your risk, you have two options: you can write all these checks on your own account, or you can take risk management measures and pre-syndicate the loans," Mr. Lee said.
Mr. Benedetto said banks may face pressure to do just that. "Look at the debacle of the 1980s," he said. "If I were a Chase shareholder, I would want them to share the risk with someone else."