Banks that Froze Lending Find Deals Are Scarce

A painful reality is dawning on banks that stressed credit rationing and stiff loan pricing in the first quarter: They aren't booking enough new loans.

Clamping down on loans was an acceptable strategy when banks were scrambling to stanch red ink flowing from loans gone sour. Now that the worst of the crisis seems over and better economic news is on the horizon, banks that plan to thrive must get back to the business of banking.

Finding borrowers in the depths of recession is not easy, however.

To compete for scarce business, banks are reducing fees and spreads that reached lofty levels earlier this year.

The price competition seems fiercest among banks vying to be selected as agent, or lead bank, for backup credit lines to the highest-quality borrowers.

Pricing Is Aggressive

"We're really going back to the days of cutthroat pricing on these deals," said a loan syndication official at a major bank outside of New York.

"I definitely see people reaching for business," said a senior official at a New York money-center bank.

While the price competition appears mainly to be benefiting the highest-quality borrowers, the next tier of investment grade borrowers, and even some that are not quite investment grade, are starting to see signs that the loan market is loosening up.

When Citgo Petroleum Corp. approached banks recently about refinancing various credit lines, for example, the unrated company braced for steep pricing in a tough loan market.

Company Not Hit Hard

"We were prepared for the worst, [but] it wasn't as bad as we thought it might be," said Mary Haddican, assistant treasurer at Citgo, which is still reviewing bids from banks.

Bankers differ about the extent of price cutting and how far it will go. But many agreed that spreads and fees were coming down at least in some instances.

In one recent transaction, a bank agreed to lead a $400 million commercial paper backup line for an agent fee of just 2 basis points. Three months ago, the agent bank probably would have gotten 5 basis points for the same deal, said a banker familiar with the credit.

The fee-cutting is said to be most prevalent among U.S. banks, who justify the practice on the grounds that it could lead to other business from the same customer.

"It's hard for U.S. banks to break themselves of relationship banking," observed the head of loan syndications at money-center bank, who, like other bankers, did not want to be identified.

All Categories Affected

According to some bankers, competitive price cutting is beginning to occur virtually across the board, including leveraged financing.

"In this market, only the highest-quality leveraged deals can get financing," said a banker who specializes in this area. With so few of such deals around, bankers are chasing those that do exist, he added.

The spreads on some structured loans are as low as 75 basis points over the London interbank offered rate, this banker noted. Upfront fees, too, have come down by 100 basis points or more since the beginning of this year.

"There is almost an insatiable demand for quality paper," and not much of it around, the banker said, in explaining why lending rates and fees are coming down.

Spreads Down

By all accounts, though, the price cutting has not extended to loans used to finance highly leveraged transactions.

In other areas, spreads on short-term borrowings (three months or less) have also tightened since the end of the first quarter for borrowers rated triple-B or better.

According to one banker, spreads have come down as much as 25 basis points as lenders compete for declining loan demand on the part of the most creditworthy borrowers.

Right now, many of these borrowers have lots of liquidity on their balance sheets. And once the economy recovers, increased sales will generate enough cash to forestall any immediate jump in loan demand on the part of many of many companies.

At this stage in the business cycle, banks typically get drawn into making cheap loans, observes Christopher Snyder, president of Loan Pricing Corp.

His advice to banks: "Keep your powder dry -- it's a real trap."

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