For the last four years syndicated lenders at Lehman Brothers watched from the bottom as their investment banking competitors rose to the middle of the lending league tables.
But during the first half of 1998 the vantage point for Lehman's bankers changed.
The firm ranked 10th in syndicated lending volume, up from 27th for the full year 1997. Since yearend Lehman's loan department has been landing lead positions in billion-dollar deals-and attracting the attention of established commercial bank lenders.
Lehman "got a few deals we were after," said Bob Patterson, head of syndicated lending for First Chicago NBD Corp., the sixth-largest lender. "They're picking up momentum."
Still, Lehman bankers maintain that becoming the top-ranked lender is not their focus.
"We're not looking to do every deal," said Chris Ryan, Lehman's director of loan trading. "But we would like 100% market share with our clients."
That goal appears to be the key to the firm's recent success. As the market started to favor the kind of leveraged lending that Lehman does best, sales forces across Lehman's product lines began introducing their fledgling loan department to their clients.
"It was a matter of getting the banker comfortable with the loan product," said Bill Gates, Lehman's director of originations. "Now our bankers are out there fighting to get business for us."
Through the first half of the year, Lehman structured and priced 23 deals worth $15.4 billion, for a market share of 3%. It participated in 26 deals, worth $26.2 billion-57.8% more business than it did all of last year, according to Securities Data Co.
To be sure, Lehman's business remains small when compared with market leader Chase Manhattan Corp., which syndicated 237 packages, worth $118 billion-seven times Lehman's business-during the first half.
But Lehman's success this year is in stark contrast to the performance of its investment bank peers, known in the market as "the class of 1994." They include Merrill Lynch & Co., Salomon Smith Barney Inc., and Goldman Sachs & Co.-a list of lending upstarts mired in the second and bottom tiers of the business.
After lagging behind those competitors, Lehman is now doing more loans than those firms combined. And through luck and savvy, it has avoided the kind of botched financings that have recently brought negative publicity to other investment banks.
For instance, Morgan Stanley, Dean Witter & Co. had to postpone a $1.7 billion loan for Sunbeam Corp. in June. And Salomon Smith Barney Inc. failed to syndicate a $2.25 billion loan for, and was fired by, Meditrust Inc. in May. Other lenders have been plagued by slow-selling loans.
In contrast, Lehman put through three breakthrough deals in the first half. The first was a $5.5 billion loan package for Starwood Lodging and Resorts Inc.'s high-profiled buyout of ITT Corp.
That deal was followed by a $725 million loan package to Premier Parks Inc. for its acquisition of Six Flags Entertainment Corp. Then came a co- lead position for a $10.9 billion loan to Texas Utilities Co. for its buyout of Energy Group PLC.
The buyer's market received all of those packages well. And they were all for clients that tapped Lehman to underwrite bonds or provide M&A advice.
"The push for our firm has been the one-stop deal," Mr. Ryan said.
Lehman's success is most obvious in the leveraged market, were lower- rated borrowers pay higher rates for loans. Through June 30, Lehman underwrote 20 leveraged loans worth $8.09 billion, beating out such established lenders as BankAmerica Corp., J.P. Morgan & Co., and BankBoston Corp.
Moreover, Lehman is far outpacing its investment banking peers in the leveraged market. Merrill Lynch & Co. underwrote nine loans worth $2 billion; Goldman Sachs & Co., seven loans worth $1.6 billion; and Salomon Smith Barney, five loans worth $970 million.
First Chicago's Mr. Patterson said Lehman's success in the sector is "a natural outcome when Lehman has key products in high-yield securities and M&A advisory work."
Other investment banks excel in those areas as well. But Lehman is also benefiting from Mr. Ryan's reputation for running one of the industry's top trading desks, renowned for selling off its best customers' paper-or buying it when necessary, bankers say.
"They've been very successful trading sponsors' paper," a banker said. "They're market makers."
For that reason, bankers say Lehman's corporate clients are far more likely to ask Lehman, rather than one of its investment bank competitors, to lead a syndicated loan. The clients have seen the trading desk buy and sell paper with ease relative to other firms, a banker said. That is a huge selling point for companies that cringe at the potential embarrassment of a loan being stuck in the market.
"They see Lehman already doing the job," a market participant said. Goldman and Merrill have not focused as squarely on the secondary market, but have concentrated on the slowly developing global leveraged loan business, market sources said.
Morgan Stanley, Goldman, and Merrill bankers did not return phone calls seeking comment.
Mr. Gates describes Lehman as a passive player in a market where predatory pricing and mudslinging have increased sharply with competition. Though he and Mr. Ryan complain Lehman is rarely invited in on other banks' deals, they say they prefer not to retaliate.
"We try to preserve the client-bank relationship," Mr. Gates said. "If it looks like the client's traditional bank can give them a better deal, we don't hesitate to tell them."
Like most investment bankers, Mr. Ryan and Mr. Gates bristle at the suggestion that investment bankers do not commit to the loans they syndicate. But they declined to disclose what kind of commitments they have made on their loans.
"Our practices are consistent with other lending players," Mr. Ryan said, "including banks."
Nevertheless, market players say that to gain a larger share of the lending market, Lehman would have to commit a substantially larger portion of its capital to lending.
That is why Mr. Gates and Mr. Ryan are content with being No. 10. They see growth coming from the one-stop shopping that Lehman has asked its businesses to push. That includes more lending products that are innovative or require work with other Lehman departments such as bridge loans and hybrids.
"We don't want to think of ourselves as loan specialists," Mr. Gates said. "We want to offer something more than the traditional product."