Once the exclusive province of a small club of banks, high-technology companies are now attracting a wide range of lenders.
The increased pool of lenders for information technology companies such as semiconductor manufacturers and software designers has made the sector's loan market more liquid.
But the growing competition has also driven down pricing on the typically unrated or noninvestment grade credits, reducing or eliminating the premium formerly paid for lending to the industry.
"There really isn't the technology premium that people thought there was," said Robert A. Piepenburg, a vice president and head of loan market research and analysis at BancBoston Securities Inc. "It just isn't true anymore."
The increase in lending reflects the double-digit growth rates of many sectors of the information technology industry over the past few years. That industry growth is driven largely by the transformation of developed countries to information-based economies. It is also fueled by the expansion of technology into developing nations, increased corporate spending on technology, and the growth of the Internet.
Indeed, 33 banks were agents for 97 loans to information technology companies between Jan. 1, 1995 and this Aug. 31, for $43 billion, according to BancBoston Securities. On rated loans, technology credits are often priced cheaper than the general bank market because bank lenders consider factors "beyond the scope of the rating agencies," Mr. Piepenburg said last week at the Robert Morris Associates annual conference in San Antonio. These include a company's brand-name value, foreign ownership, or support for new companies.
But the overwhelming majority of technology loans were to unrated or noninvestment grade companies, most of which are middle-market companies with annual sales of less than $1 billion.
The credits typically fund capital expenditures, research and development, or inventory buildup, said Mr. Piepenburg.
Information technology companies "go through cash a lot quicker than they generate it when they're growing," he said.
Indeed, technology borrowers are often pre-profit or even pre-revenue companies with very short histories and negative net worth, said Doug Mangum, a senior vice president with Silicon Valley Bank in Austin, Tex.
Covenants tied to a borrower's liquidity should feature prominently in loans to technology companies, said Mr. Mangum. For example, a minimum quick ratio (cash, marketable securities, and accounts receivable, divided by current liabilities) should be a key covenant.