Syndicated lending was supposed to be a solution. Today, it may be turning into a problem.

Fierce competition is squeezing margins and putting pressure on bankers to commit to deals quickly. That has at least one regulatory agency on edge, issuing warnings to bankers and stepping up surveillance.

"We've seen a number of cases in the past few months where we've raised an eyebrow," said Scott Calhoun, deputy comptroller for risk evaluation. "Our concern is with aggressive underwriting and structuring, and pricing that is really pushing the margins."

Such fears are ironic considering syndicated lending first took off during the last credit crisis as a safer way for banks to lend large sums of money.

Though other regulators have yet to target the market, the Office of the Comptroller of the Currency has made its concerns very public. Comptroller of the Currency Eugene A. Ludwig raised the first red flag in December, when he warned that cheap pricing and easier repayment conditions are exposing banks, especially smaller institutions, to too much risk.

Syndicated loans are large credits that originators carve up and sell to other banks. Fueled by the fast pace of corporate mergers, the volume of syndicated loans has nearly quadrupled in the last five years, hitting $888 billion at the end of 1996, according to Loan Pricing Corp., a New York firm that tracks syndicated loans.

"In several industries, companies have been having problems meeting projected cash flows, so banks have had to rejigger deals, which can lead to more risk," said Babak Varzandeh, a market analyst with Loan Pricing.

For example, Chase Manhattan Corp., the leader of the market, in September relaxed the terms of a $1.55 million loan funding the purchase of Riverwood International Corp., a global paperboard and packaging company. Because of a downturn in the paper and pulp market, Riverwood was unable to meet the repayment schedule set out in the original deal.

The telecommunications and retail industries have become especially dicey, experts say.

According to Loan Pricing, the average borrower has $3.31 of debt for every dollar of earnings-a record debt-to-earnings ratio that increased more than 30% in the last half of 1996.

While a group of 10 to 15 large institutions lead most syndicated deals, scores of smaller banks participate.

Last year, 17%, or $151 billion, of syndicated loans were purchased by nonmoney-center commercial banks, according to the OCC. Foreign banks bought 57%, and the remaining 26% stayed on the books of syndicator banks or nonbank investors, such as mutual funds, insurance companies, and investment banks.

The "downstream" banks are hungry for deals because they have a lot of money to invest.

"What are the options if they don't do this?" Mr. Calhoun said. "There is simply a lot of institutional money that is looking for investment alternatives."

Fierce demand also means banks have little time to size deals up.

Banks used to have two weeks to examine the terms and pricing of a deal and research the borrower. Today, bankers have just a day or a few hours, according to Harris S. Berger, senior risk manager at Fleet Corporate Administration, a subsidiary of Fleet Financial Group.

"You don't get complete information, and you don't have a lot of time to commit to the deal," Mr. Berger said.

Downstream banks rely too much on the underwriting standards of the large institutions that lead these huge credits, he added. The OCC's Mr. Calhoun agreed, saying that sometimes these banks pay too much attention to the reputation of the lead institution while neglecting to do their own risk analysis.

"Clearly we're concerned that there is no blind faith," Mr. Calhoun said.

In some cases, the need to maintain relationships with the syndicators overrides concerns participating banks have about riskiness, one analyst said.

"The lead banks won't tell you this, but we've been hearing that some banks are being told, 'If you don't participate in a deal, you might not get invited to the next one,'" the analyst said.

Word of this tactic has reached the OCC. It's of particular concern because there are fewer banks leading these deals, Mr. Calhoun said. In 1994, the top 10 commercial bank syndicators accounted for about half of the loan volume. Last year, nearly 80% of the loans were initiated by the top 10 banks.

Some industry officials are concerned that banks may end up in the same situation that loan syndications were created to avoid. The practice of carving up large credits took off in the late 1980s and early 1990s when banks had huge loan losses. Banks became reluctant to hold too much of any given credit in their portfolios.

Competition to participate in a syndication is so strong that when given the chance banks buy as much as they can, said Dorothy M. Horvath, executive vice president of National City Bank, Columbus.

"With the demand so far in excess of supply, banks are holding more than they were before," she said. "The trend seems to be moving toward more single-borrower concentration."

Ms. Horvath-who is also chairwoman of Robert Morris Associates, a commercial lending trade group-said she is especially concerned about smaller banks that lack the resources to evaluate the risks associated with syndicated loans.

"Smaller regionals are investing in these pieces for the sole reason that they have a lot of money to invest," she said. "But these banks may not have the people or resources to do the necessary exhaustive underwriting."

To counter this, the OCC is warning banks not to enter deals if they don't have the time or resources to do a thorough credit analysis. Credit officers also should have a strategy for backing out of a participation, the OCC said.

"Essentially, we expect banks to employ the same level of due diligence as they would for any independent credit decision," Mr. Calhoun said. "It's the same pool of shareholder capital that's being put at risk."

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