Rising bond prices and new fears of increased interest rates are driving borrowers to the leveraged syndicated loan market for fresh jumbo financings, bankers say.
If corporate borrowers' shift toward loans is sustained, banks could be doing a brisk business the next three months. Already, more than $132 billion in leveraged loans have been originated this year, about the same pace as last year's record first half, according to Portfolio Management Data LLC.
"Volume has increased dramatically," said Steven Miller, a principal at Portfolio Management, "but I think it's been met by investor appetite."
Bankers say the strong run could be perpetuated by the recent volatility in Latin American bond markets and bearish comments made last week by Federal Reserve Chairman Alan Greenspan.
A hike in interest rates or an increase in global bond prices would send more borrowers to the loan market. But as bankers found out in the second half of 1998, the bond and loan markets both need to be healthy for continued growth.
"We've made some good transactions because of bond market volatility. That's not sustainable," said Robert Woods, head of syndicated lending for the Americas for Societe Generale in New York. "We need a bond market to survive."
For example, as 1998's global bond crisis lingered from the third quarter to the fourth, leveraged lending volume began to falter. Less than $60 billion was syndicated in the last quarter of the year, a 13% decrease from the previous year.
Said Mr. Woods, "We've got to get a more predictable bond market."
Not everyone in the loan market is sharing in the robust market. Some smaller leveraged loans-in amounts of less than $500 million-have not met with the same measure of demand, especially among institutional investors. Those investors look for names that can easily be bought and sold in the secondary market.
"The magic word is liquidity," said Anthony Clemente, who manages $2 billion in bank loan funds for Merrill Lynch & Co. "We don't want price volatility."
As a result, lenders are finding it more difficult to syndicate smaller deals, which generally contain fewer investors and therefore do not offer much of a market for trading.
Mr. Clemente said managers not only like to be able to dump credits in times of crisis, but they like to be able to tinker with portfolios by buying and selling to boost returns.
Among the smaller deals in the market are a $220 million loan package for Intersil led by Credit Suisse First Boston and a $145 million loan package for Orius Corp. led by Bank of America Corp.
Michael Rushmore, head of syndicated loan research for Bank of America Corp. in Chicago, said that the liquidity issue is forcing many lenders to take a hard look at the way they structure deals. That usually means shorter maturities and higher pricing.
"There are a few investors who will look at the smaller deals with proper pricing," he said. "They are usually buy-and-hold investors who view small loans almost like private equity."
