Bank of America Corp. is becoming an aggressive competitor in the loan syndication market and is giving the traditional pace-setter, Chase Manhattan Corp., a run for its money. BofA pulled off a coup in the third quarter when it narrowly edged out Chase as the leading manager of U.S. syndicated loans. BofA's total was $90.166 billion, a mere $34 million more than Chase's $90.132 billion.Bank of America and Chase clearly dominate the loan syndication market. The two controlled more than 55% of the market in the year ended Sept. 30. Salomon Smith Barney, Citigroup's investment banking unit, came in a distant third, with $9.8 billion in loan syndications under its belt, followed by Bank One, with $5.3 billion.
Sharon Tucker, a Bank of America spokeswoman, said the company has targeted syndicated lending as a growth area within its investment banking activities. Despite a 15% drop in third-quarter 2000 net income, Bank of America's investment banking unit's income rose 4% to $376 million. Syndicated lending and advisory services accounted for $219 million of investment banking revenue, or 60% of the third quarter investment banking income.

BofA has been narrowing the gap in the syndicated lending rankings since the start of the year. In the first and second quarters, it was beaten out by Chase. Chase managed $78.96 billion of loans in the first quarter, compared with $49.7 billion for Bank of America. In the second quarter, Chase syndicated $123.7 billion in loans, versus $79.4 billion for BofA. But in the third quarter, Chase's syndications dropped sharply to $90.132 billion, while Bank of America's rose to $90.166 billion.

But over the past twelve months, Chase remained the leading manager of syndicated loans in terms of dollar amount. Chase managed $378.7 billion in deals during the period, for a 33.1% market share. Banc of America led a total of $263.6 billion of syndicated deals, for a 23% share.

The numbers were provided by Thomson Financial Securities Data, which gave full credit to book managers and equal credit to joint managers.

The reason for the sharp decline in Chase's third-quarter syndications was unclear, but regulators have been warning smaller banks about purchasing syndicated loans without fully understanding the risks involved. And some participants might be reluctant to take on more syndicated loans because of the growing number that are being classified as substandard.

In a joint release in October, the three federal bank regulatory agencies revealed that "adversely classified" syndicated bank loans increased for the second consecutive year. Under the Shared National Credit Program (SNC), federal regulators annually review large syndicated loans (any loan or loan commitment shared by three or more institutions and totaling $20 million or more).

In 2000, the SNC program covered 9,848 credits to 5,844 borrowers totaling nearly $2 trillion in drawn and undrawn loan commitments. Of the total, $63 billion, 3.3% was classified adversely because of default or other significant credit concerns. That was a steep rise from the 1999 level of 2.0%, which was far higher than the 1.3% of 1998.

Volume in the syndicated loan market has undergone significant shifts during 2000. In the first quarter 2000, the industry total for managed proceeds was $237.14 billion. In the second quarter that figure rose 50.7% to $357.37 billion, and by the close of the third quarter the figure had dropped 10.3% to $320.56 billion.

The largest syndicated loan in the third quarter was a $10 billion credit to Georgia-Pacific Corp., a lumber and paper products manufacturer and distributor. The loan was priced at LIBOR plus 125 basis points, which would classify the deal as a "leveraged loan" by bank regulators. The three managers were BofA, Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co.

While Chase and BofA led the pack in terms of volume, J.P. Morgan & Co. was No. 1 in terms of the size of the average deal. Its syndications averaged $78 million in size, trailed by Chase at $65.2 million. Chase was followed by Salomon, $55.2 million; Credit Suisse First Boston, $53.7 million; and TD Securities, $47.4 million.

Although securities firms have been getting into loan syndication to round out their investment banking services, they have hardly made a dent in the business. The biggest factor in the market that is not affiliated with a large commercial bank is Morgan Stanley Dean Witter, which, with $9.2 billion in loan syndications, had only a 0.9% share of the market. Lehman Brothers had a 0.8% share, and Merrill Lynch, 0.7%.

Despite these sad figures, some analysts say the securities firms are making progress. Kathleen Blecher, an analyst with Sandler O'Neill and Partners, said securities firms have carved a prominent niche in the syndicated lending market.

The unattached securities firms seem to be reacting to the intensified competition they face from commercial banks, especially those aligned with investment banks. Although advising on the equity side of merger-and-acquisition deals produces far greater fees than advising on the loan side, having the ability to raise loans gives a firm a leg up on the competition.

And while investment banks have been making a bit of progress in loan syndications, commercial banks have been making considerable headway into investment banking, especially those that have purchased large investment banking houses.

The most obvious example is Citigroup, which acquired Salomon Smith Barney as a result of Citicorp's merger with the Travelers Group. Salomon Smith Barney ranks third in loan syndications because of its affiliation with Citibank.

And J.P. Morgan, while still not a bulge-bracket firm, has converted itself from a commercial bank into a substantial investment bank. It hopes that its pending merger with Chase, and Chase's 5,000 commercial clients, will let it break into that hallowed region. On the loan syndication side, the combined Chase and Morgan would have a 37.2% share of the market.

But in practice, things may not work out as theory predicts. Alan Monroe, a banking consultant at Greenwich Associates, doesn't believe that corporations will be more inclined to do business with investment banks simply because they're hawking additional banking services, or with commercial banks just because they offer better loan packages. "The companies aren't wholly convinced. Just because you give them a bunch of money, that doesn't mean that you are the best advisor for each individual service."

"Everyone wants to be in loan syndication," said Diane Glossman, a banking analyst at UBS Warburg. She said that while securities firms continue to become more involved in loan syndication, banks may be becoming more cautious.

Signs of that are contained in the data on leveraged loans. According to Thomson Financial Securities Data, leveraged loans through Sept. 30 were down 0.6% from the same period last year. The industry total slipped over the first nine months of 2000 from $98.7 billion in the first quarter to $93.7 billion in the third quarter.

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