Bank of Boston is positioning itself to profit from the rising number of multitiered syndicated loans that have come to market in the past year.
In addition to arranging multitier loans, which are divided into short- and longer-term tranches - or portions - Bank of Boston has Committed its own money to the longer-term tranches in sever deals.
Thus, it has become one of a few banks to join the prime rate funds and institutional investors who traditionally sit on the other side of the loan syndication table.
"We like the additional yield we can realize by having an asset on our balance sheet that may be a few years longer than the bank piece," said John Giannuzzi, managing director rector of corporate finance.
Multitiered loans have become increasingly prevalent this year as lenders try to meet demand from corporations that want to avoid having all their debt mature at once. "The multiple-tranche approach creates multiple products within one note," said Mr. Giannuzzi.
Another banker pointed out that the structure helps to bring more credit to the marketplace, saying, "Additional lenders increase Market Capacity."
In particular, bankers have n the return of some insurance companies, such as Mass Mutual and Travelers, to this growing market.
The tranches are given letter designations, from A-term to D-term, in increasing length of maturity.
D-term tranches carry an average maturity of seven to nine years, several years longer than the A tranche. The price for the D tranche can be more than 100 basis points higher than for the A tranche.
The longer-term portions of credit facilities have historically been smaller than the investment grade portions.
This year, however, the size of the longer tranches has been increasing as lenders and borrowers warm to a floating-rate investment that throws off a higher yield in direct correlation to interest rate rises.
As evidence of this, bankers point to recent loans to Waters Corp., Amerifoods, and Pierce Leahy Archives - deals in which the size of the nonbank, longer-term loan portions has been even greater than that of the bank portions.
Bankers say that the instability in the high-yield bond market has driven many repeat and first-time investors to this market.
Prime rate funds, which assemble Portfolios of these longer-term tranches, have fared better with each successive Fed interest rate increase.
Bankers point out that longer-term bank loans have looked attractive to borrowers as well, because their alternative is to issue junk bonds at a higher cost.
"It's Pretty common financial management to ladder or tier debt," said Kevin Meenan, principal at Meenan, McDevitt & Co. "However," he added, "it's a relatively recent phenomenon with the banks and the loan funds to provide the tranching for the debt."
Mr. Giannuzzi said Bank of Boston likes tranching because it gives the bank's client base an alternative set of investors at a lower all-in cost.
Bankers say that the exposure from investing in longer-term debt is the same as for the investors in the traditional bank portions of loans.
"That's the beauty of the structure," said Mr. Giannuzzi. "In
Most cases, the A, B, and C tranches all have the same seniority from a credit point of view.,,
Additionally, corporations have typically prepaid their longer-term debt before maturity.
Seven-year bank loans (usually the B tranches) are paid down in an average of 24 to 30 months. Although C and D tranches haven't been around long enough to establish a prepayment history, bankers expect them to be paid down in 30 to 40 months.
"The banks have started to realize that doing a D-tranche deal and extending it two years in final maturity doesn't necessarily mean the bank debt will remain outstanding much longer than three years," said Mr. Meenan. "If you can get paid an extra @O basis points for extending a year, ultimately that's a prudent risk to take.,,
Mr. Giannuzzi echoed that sentiment. You are taking the same credit risk but are getting paid considerably more."
Companies pay down their loans quickly by refinancing debt within the capital market. In addition, companies involved in a merger or acquisition tend to pay down their debt.
"While bank loans have seven-and eight-year maturities on the face, the reality is that those bank loans get off the books within two years," said Mr. Meenan.
If a debtor company starts to fail, banks will know well before eight years, when defaults are triggered.
Though the market for lower tranches is growing and will continue to do so, Mr. Giannuzzi does not think it remains enormously untapped. "There is a limited pool of investors that has an appetite for this particular product," he said.
A higher interest rate environment may encourage bankers, however, to continue to add themselves to that pool.
Mr. Giannuzzi said that, by investing in the lower tranches of its own deals, Bank of Boston is like a chef seen eating his own food.
"We're underwriting these transactions with a full awareness of the credit risk," he said. "The fact that we are investing or holding other tranches should give investors confidence."
Although competition for syndicated loans has increased price pressure this year, bankers seem to welcome the prospect of additional players on the lower end of their deals.
Several bankers anticipate that more money and players will increase the number of deals.
The only thing that might cool this expanding market, bankers say, would be a stalling economy with falling interest rates.