Others Following the Lead of Continental, Chemical

Quaker Coal Co., a midsize mining company in Prestonsburg, Ky., traditionally relied on bank financing to fund its operations. Not anymore.

Tapping institutional investors for the first time, Quaker just completed a $50 million private placement of long-term debt, arranged through Continental Bank in Chicago.

Increasingly, middle-market companies such as Quaker Coal are seeking - and gaining - access to more sophisticated financial products and services once reserved for big corporations.

And commercial banks, fearful of losing these clients to Wall Street firms, are aggressively pitching their own upsacle product offerings to such middle-market companies - broadly defined as those having annual sales of $10 million to $500 million.

Spiced with Variety

The product menu includes everything form private placements, to asset-backed securitizations, mezzanine financings, public debt and equity of offerings, and derivatives.

"We have a lamp manufacturer that hedges its precious metals requirements in the futures market with us, and a trucking company that hedges diesel-fuel contracts," said Marcus Acheson 4th, executive vice president at Continental, ticking off just a couple of examples of how the bank is providing its midsize clients with more sophisticated fare these days.

Banks such as Continental and New York's Chemical Bank have been downstreaming sophisticated capital-maket products to their middle-market customers for some time.

Bank of Boston Joins In

"We've been doing this now for about five years," said Franks Lourenso, the executvie vice president who runs Chemical's middle-market banking group.

Other banks have only recently begun the effort, and mor are likely to follow.

In January, Bank of Boston Corp. revised its corporate finance strategy, which is now "completely driven" by the "downward migratin of sophisticated profts to midsize companies," said John Giannuzzi, managing director of corporate fionance at the New England banking company.

Similarly, First Union Corp., the Charlotte, N.C., Superegional with a strong middle-market franchise in the Southeast, is expanding its capital-markets operations in order to better serve its customers.

'An Explosion of Demand'

The competition between First Union and hometown rival NationsBank Corp. promises to be fierce.

The recent revision in Bank of Boston's corporate finance strategy is based on an belief that the next big wave of demand for capital-market products is going to come from midsize companies.

"What we see in the 1990s is an explosion of demand," said Mr. Giannuzzi.

In order to retain its base of middle-market customers, the bank's priority is to provide its clients with the most sophisticated products it can.

"The whole theme of our strategy is not necessarily reinventing the wheel, but trying to offer our midsize customes with the same access to sophisticated capital-market product as the Fortune 100 have used for the last 20 years," Mr. Giannuzzi said.

Major Presence Needed

"If we don't do it, someone else will," he added.

Many banks, though, lack the necessary combination of key ingredients to pull off such a strategy, which explains why more aren't pursuing it.

What's needed, firs tof all, is a major market presence with both midsize and large corportions.

The large corporate market, said Continental's Mr. Acheson, provides the scale that justifies development of sophisticated capital-market products.

"Once that economy of scale is achieved, you can sell tht capability down market," he said.

But getting product specialists to turn their attention from big corporations to smaller deals for middle-market companies can be difficult.

Select Product Group

Chemical, for one, solved this problem by forming a select group of product specialists from its global bank to focus almost exclusively on the middle market.

Mr. Lourenso said 80% of their time is spent on middle-market deals, even though the product specialists technically are part of the global bank, which serves big multinational corportions.

Bank of Boston breaks much of its national banking business down by industry segment, through which both middle-market and large corporate customers are served.

"We team up corporate finance professionals with each one of those specialty industry groups to service clients with a product set," said mr. Giannuzzi.

Manager Training a Key

Bank of Boston also has corporate finance professionals dedicated to midzie companies in its market.

Training relationship managgers to market these products is also critical.

Many banks, said Mr. Lourenso, will respond to a middle-market customer's request for a private placement, derivative, or some other sophisticated financial product.

"How actively it's marketed, that's the real question." At Chemical, he added, "it's actively marketed in the middle-market group."

At Continental, all relationship managers are recruited, hired, and trained as part of the same program, whether thye are assigned to the large corporate or middle market, said Mr. Acheson.

Indeed, the growing use of upscale capital-market products is being driven by the increased sophistication of middle-market bankers and clients alike.

Degree of Cannibalization

"The typical middle-market line officer can speak very conversantly about private placements, public debt" and so forth, said Mr. Lourenso.

At the same time, the Chemical executive added, "the average treasurer of a $20-million [annual sales] company knows more [about such products] than he did five years ago."

To some extent, of course, banks are cannibalizing their lending business when they market upscale products to their middle-market customers.

Continental has steered a number of its middle-market customers to refinance bank debt with private placements, even though the bank earns substantially less on the fees it gets from arranging the placements that it would earn on the loans over time.

"Yeah, it hurts," Mr. Acheson acknowledged. But risking the relationship by doing nothing would hurt more. Also, the ability to effectively market upscale products can also mean winning new clients.

Continental, for example, didn't have a relationship with Quaker Coal before its bankers successfully sold the company on a private placement as an alternative to its traditional bank financing.

Don Chickering, chairman and owner of Quaker, spent a decade on Wall Street earlier in his career, so he is noo stranger to sophisticated financial products. But even he was skeptical when Continental proposed a private placement.

"I said, 'Are you sure we're ready to go to the institutional market?" They said yes - and they were right," he said.

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