Salomon Smith Barney Inc. was involved in one of the year's biggest corporate lending blunders this month-the failed syndication of a $2.25 billion loan for Meditrust Corp.
Meditrust, a health-care real estate investment trust, fired Salomon as lead arranger of the high-profile loan. The move was not only an embarrassment for Salomon but also fueled speculation that its lending unit would not survive the pending merger of its parent, Travelers Group, with Citicorp.
"It was nuclear for them," one source said.
But Salomon and Citibank sources say the merger partners have decided not only to keep the Salomon lending unit intact but to strengthen its presence. By adding Salomon's lenders to its mix, Citigroup would boost the bottom line of its syndicated lending operation, observers said.
While Salomon's syndicating lending business is newer and smaller than Citibank's, it executes very profitable leveraged or highly leveraged loans. On its own, Citibank has a global reach but deals almost exclusively in thin-margin investment-grade paper.
"Citi does a lot of business," a source said. "But in terms of making money they're doing a lot of" nothing.
At Citigroup, the Salomon bankers are expected to be given access to Citibank's substantial global loan sales and trading desks. With Citibank's resources at its fingertips, the Salomon team would be able to better gauge the lending market and avoid the missteps-such as inappropriate pricing- that plagued the Meditrust loan, observers said.
"The loan market is a private market," said Michael Rushmore, a loan analyst for BankAmerica Corp. in Chicago. "In terms of what's happening today you have to be talking to investors and you do that through deal flow."
Salomon hasn't had that advantage. The firm ranked 46th among syndicated lenders last year, with 17 deals, worth $5.6 billion; Citibank ranked No. 3, with 276 loans, worth $218.7 billion-16 times Salomon's deal flow, according to Securities Data Co.
Citigroup officials are strongly considering rolling some or all of Citibank's lending operations under the fixed-income umbrella on the Salomon side. A second, less-popular option, is rolling those units into Salomon's investment banking side.
A Citigroup source said Salomon's lending group would also be helped by the fact that many of its top managers are former Citibank lenders who carry sway with their former employer.
"These are guys who were at Citi when it completely dominated the markets," the source said.
Those Salomon executives reportedly have come to the conclusion that fusing their origination system with Citibank's trading and sales operations might remedy the market-gauging problems Salomon had with Meditrust.
"A trading desk is considered a revenue generator," BankAmerica's Mr. Rushmore said. "But it's also a key provider of market information-a research tool."
That is especially important in the leveraged loan business that Salomon specializes in for two reasons: Investors are less likely to have existing relationships with corporate clients, and it's a market where pricing tends to be more volatile, Mr. Rushmore said.
Though Salomon has had a couple of embarrassing syndications in Meditrust and 1997's Mercury Finance Co. loan, the investment bank has syndicated several successful loans. The unit, which gained girth from Salomon's merger with Smith Barney Inc., is currently working on eight loans.
Salomon jumped into loan syndication in 1996 as part of a rush of new competitors in the mid-1990s. The new competition was fueled by a lending boom. Syndicated lending soared from $665 billion in 1994 to $1.6 trillion last year.
To give its shop experience, Salomon went on a hiring binge not unlike other upstarts such as Merrill Lynch & Co., Goldman, Sachs & Co., Lehman Brothers, and Donaldson, Lufkin & Jenrette Inc.
Salomon focused on building a strong leveraged-lending shop focused on sales and distribution. In 1997 Chad Leat, an expert at leveraged buyouts during his 12-year career at Chase Manhattan Corp., was hired to be managing director of Salomon's high-yield capital markets group.
Smith Barney aimed at origination of leveraged loans. It hired Glenn Marchak from Natwest Markets and James Zelter from Goldman Sachs.
The group is led by Richard H. Ivers, a former managing director at Credit Suisse First Boston, who heads high-yield debt finance at Salomon.