Credit-stressed corporate borrowers have been told for weeks that the bank loan market is open for business and that there is no credit crunch.
But with prices for some leveraged loans having soared as much as 75% since the summer, many borrowers are finding that the credit lenders have been dangling is a costly proposition.
A new report by BankAmerica Corp.'s NationsBanc Montgomery Securities shows that 10 loans worth $12.5 billion have been repriced during the last 45 days to get deals done. Almost all of the loans carried price increases that cost borrowers millions.
"In August the power structure shifted to investors," said Michael Rushmore, co-author of the report. "With this shift, pricing spiked up sharply, affecting deals that were launched prior to, or during, the market disruption."
The price increases for leveraged corporate loans have come as a fine- print shock to many borrowers who have no place to turn as the junk bond market remains dormant.
On Sept. 4, Federal Mogul Corp., an auto parts maker in Southfield, Mich., thought it had a deal for an 18-month, $1.95 billion loan led by Chase Manhattan Corp. to be priced at the London interbank offered rate plus 200 basis points.
But after a poll of investors, Chase changed the terms on Sept. 10 to ensure the deal would be sold. The new terms will cost Federal Mogul more than $6 million.
Thomas Ryan, chief financial officer for Federal Mogul, did not return phone calls seeking comment on the loan package.
Bankers say the key to the price increase was a flexible-pricing agreement Chase had inserted into the loan agreement. Unlike the lending practices of a year ago, flexible pricing allows lenders to tinker with the interest rate paid by the borrower in order to syndicate the loan to investors.
Peter Gleysteen, head of global syndicated finance for Chase, said the bank is using flexible pricing agreements, called market flex, in more than 90% of the deals it participates in as a lead syndicator.
Chase isn't alone. Credit Suisse First Boston changed the structure and pricing of a loan package not once, but four times for Environmental Systems Products Holdings between Aug. 20 and Oct. 14.
What was originally a five-part, $445 million loan priced at Libor plus 225 to 300 basis points ended up a three-part, $435 million loan with pricing at Libor plus 325 to 400 basis points-increases of about one-third of the original cost.
Banks have been able to use flexible pricing agreements because borrowers are far more interested in getting their deals syndicated than they are in paying higher costs, Mr. Gleysteen said.
Investor banks have become more conscious of returns driving the market to become more like bond markets. As a result, issuers need to have loans well received among investors to maintain access to the loan market, Mr. Gleysteen said.
Chase started pushing flexible-pricing agreements in the summer of 1997, and Mr. Gleysteen described it as an indispensable tool in the current highly volatile loan market.
"In a different market it could and should work the other way," he said. "This pricing will work to the borrower's advantage."