Chemical Bank Forced to Reprice Burlington Credit
To the delight of some of its rivals, Chemical Bank's aggressive underwriting strategy backfired this week when it was forced to reprice a $900 million credit for Burlington Northern Inc.
The episode leaves Chemical with egg on its face, and means that Burlington will have to pay more than it expected for the credit, a commercial paper backup line.
"We're disappointed to have to increase the pricing," said Robert McKinney, treasurer of the Fort Worth, Tex., railroad holding company.
Other borrowers may have reason to be disappointed, too.
Chemical has been on a hot streak lately, gaining market share by underpricing the competition. In the second quarter of 1991, Chemical was agent bank on nearly $19 billion worth of deals, far outdistancing second-place Citibank, at under $13 billion.
However, Chemical's failure to syndicate the Burlington deal on its original terms could inhibit the bank's aggressive bidding practices in the future. That, at least, is the hope of some Chemical competitors.
Others also suggested borrowers may now question Chemical's reading of the market.
For its part, though, Burlington knew from the outset that Chemical's pricing was aggressive, Mr. McKinney said. "We were clearly cognizant of that."
Plans by Rival Banks
Still, officials at more than a few rival banks said they plan to bring up the Burlington episode with borrowers when these banks bid against Chemical on deals to come.
"We're going to use Burlington Northern as a marketing tool," said one banker in a typical comment.
Chemical underbid both Citibank and Chase Manhattan Bank to win the agent role on the Burlington credit, believing it could ram an underpriced deal through the market.
However, the credit drew few takers, and Chemical had to ratchet up the pricing to about the same level at which Citibank and Chase had priced the deal in their unsuccessful bids.
The $900 million credit was divided into two tranches, both carrying a interest rate of 25 basis points over the London interbank offered rate. From the market's perspective, the main problem seemed to be the facility fee offered on the 3-year tranche, originally set at 15 basis points. In the repriced deal, that fee was raised to 25 basis points.
Market sources said the new pricing properly reflects Burlington's triple-B credit rating.
The size of the backup line was also reduced to $800 million. Banking sources predicted Thursday that the repriced deal would succeed.
Chemical's stumble represents something of a vindication for Citibank, which was the agent bank for Burlington's previous backup line.
Sources said Citibank committed $50 million to the Chemical-led facility as originally priced, for the sake of preserving its relationship with Burlington.