While fees and spreads on loans to investment-grade companies appeared to reach a floor in the first quarter, some bankers say pricing is only now heading for the basement.
Fees and spreads on loans to companies at the lower end of the investment-grade class are continuing to shrink. Average drawn spreads for multiyear loans to BBB-rated companies fell to 29 basis points in the second quarter, down 28% from 40.25 just three quarters ago. And observers are worried they will continue to drop.
"There's still room down there in the lower investment grade," said Babak Varzandeh, an analyst at Loan Pricing Corp.
The culprit, bankers say, is unprecedented competition for investment- grade deals among top syndicators. Banks are willing to take razor-thin spreads and tiny fees in order to win an investment-grade mandate.
Because pricing is only one factor banks weigh when deciding whether to participate in a deal, low-priced loans are still being successfully syndicated, bankers said. Lenders will often participate in an investment- grade credit just to stay in the good graces of an importantrporate customer.
"If you're a bank that wants to do business with Company X, and you don't support them in their corporate facility, you won't be invited to look at other business opportunities," said one syndicated lender. "It's that simple."
This week, all eyes are likely to be on a $2.2 billion loan for Fred Meyers, a BB-plus-rated grocery store chain, that Chase Manhattan Corp. and Bankers Trust New York Corp. are expected to launch.
The loan, which sports pricing beginning with a drawn spread of Libor plus 30 basis points, will serve as an indicator of how low pricing on investment-grade credits can go.
If Chase and Bankers Trust cannot sell the thinly priced credit, which they fully underwrote, the deal will establish a pricing floor, bankers said.
"Pricing will be stabilized when the investor market commits ever- smaller dollar amounts to the most aggressively priced transactions," said Michael H. Rushmore, head of loan syndications and trading research at BancAmerica Securities Inc. When that happens, a balance will be "struck between the number of banks that are required to fill up a large investment-grade financing, and the number of banks that exceeds the comfort level for the issuer."
For top-notch investment-grade companies, a floor has already been set, Mr. Varzandeh said.
According to Loan Pricing Corp., the average undrawn fee - one paid to lenders for funds they commit that remain unused - on loans to top-rated AA borrowers has held steady at 5.8 basis points over the last four quarters.