As U.S. companies continue to embrace mergers and acquisitions, bankers are stepping up their efforts to finance the deals.
Syndicated lenders that have historically targeted investment-grade companies-such as Bank One Corp., J.P. Morgan & Co., Bank of New York, and Toronto-Dominion Bank-are aggressively building their leveraged lending businesses. Each of these banks doubled their leveraged lending volume in 1998 and are expected to continue to build in 1999.
The jump reflects banks' growing desire to finance acquisitions, particularly those made by leveraged buyout firms. Nearly half of M&A- related loans are leveraged, which means they command some of the highest fees in the syndicated lending market.
"We recognized we have the ability to manage risk," said Robert Patterson, head of syndicated lending for Bank One, Chicago. "We had to look at where capital resides in the investor-driven (buyout) firms. Now it's a matter of being responsive to their needs."
Bank One and J.P. Morgan recently scored a coup in the sector when they led a $545 million loan to Bain Capital Inc. to finance its acquisition of Domino's Inc. Bain, a well-regarded buyout shop, had long been a customer of Bankers Trust Corp., a bank that has historically focused on the leveraged market.
Customers like Bain are becoming increasingly important to syndicated lenders. Though investment grade loan volume dropped 21% to $696 billion last year, leveraged lending jumped 46% to $316 billion, according to Securities Data Co.
"The high-power M&A trend is running strong," said Peter Gleysteen, head of global syndicated finance at Chase Manhattan Corp. "Nineteen ninety-nine will likely be another M&A-driven year."
The rise of loans as an alternative to more established sources of M&A financing-junk bonds and stocks-underscores a substantial shift in the rapidly changing syndicated loan market.
In essence, commercial banks are moving away from their traditional territory of relationship-building, investment-grade lending in favor of the high-return, investor-driven leveraged side of the market.
Commercial banks managed 37.3% more leveraged deals by dollar volume in 1998 than the previous year. They have been spurred, in part, by fierce competition from investment banks. Firms such as Lehman Brothers and Donaldson, Lufkin & Jenrette have jump-started their fledgling loan businesses by tapping their vast M&A advisory client bases.
"I see it as a positive that we could have investment banks involved," said Mike Mauer, head of syndicated lending and a managing director at J.P. Morgan. "They bring a fluid capital markets mentality."
J.P. Morgan increased its management of leveraged deals to $12.9 billion in 1998 from $5.8 billion a year ago, according to Securities Data.
Investment banks also bring competition for the high fees M&A and leveraged lending bring. And so far, there's been enough business to go around.
All M&A-related lending, which includes leveraged and investment grade loans, was up 7.4% to $189 billion in 1998. The category represented 20% of all loans last year compared with 17% in 1997, according to Securities Data.
But opinions differ about how long the M&A binge will continue. Last year, after all, was a record with $1.2 trillion in M&A deals.
Among the more optimistic is Thomas W. Bunn, head of syndicated finance for BankAmerica Corp. in Charlotte, N.C. He said conditions are right to fuel leveraged M&A-based lending this year.
"You have a strong currency in the stock market and a tremendous amount of capacity and very healthy liquidity on the institutional investor side," Mr. Bunn said.
Like his peers, Mr. Bunn seemed less interested that overall lending declined 8% in 1998. More important, he said, was the 46% jump in leveraged volume.
"If you look at where pricing settled out, there became a disincentive to refinance backup facility and credit lines because issuers couldn't get pricing reductions," he said. "What's more important to me is the rise in leveraged volume. Our leveraged business was way up."
Should conditions foster strong M&A activity, it would go a long way to remedy what was a miserable fourth quarter for syndicated lenders.
Overall lending was down 29% with declines most pronounced at major book managers such as J.P. Morgan, down 51.7%, and Citigroup's Salomon Smith Barney unit, down 50.9%, according to Securities Data.
Leveraged lending was down 4% too, due to the fallout from the summer's financial crisis.
"We know (overall loan) volume will be nowhere near the levels pre- disruption," said Morgan's Mr. Mauer.
Bank One's Mr. Patterson said that speculation about the M&A markets has replaced the traditional barometer for syndicated lending: the economy.
"I'm not sure economic growth is as big a driver as stock market activity," Mr. Patterson said. "If stock prices go down there are going to be potential buying opportunities."
Mr. Patterson said Bank One lenders are taking a "neutral" market view for 1999. The bank has several deals in its syndication pipeline and is planning to continue its expansion into leveraged loan syndication.
Mr. Patterson said Bank One returned to the leveraged loan market after avoiding the loans in the early 1990s. Bank One targeted leveraged buyout firms and was lead manager on 108 deals worth $12.6 billion in 1998, up 80% from last year's $6.9 billion.