When Atlantic Richfield Co. agreed last June to sell part of its stake in Arco Chemical Co., Lyondell Chemical Inc. had to move fast.

Arco's share price was uncharacteristically low, leaving little time for Lyondell to solicit bids for a financing package. But within a month Lyondell had $7 billion in cash-and Arco Chemical.

What may have sealed the deal was the quick response of Lyondell's merger and acquisition advisers, J.P. Morgan & Co. and Donaldson, Lufkin & Jenrette Inc. As Lyondell negotiated, the firms worked behind the scenes to draw up plans for a syndicated loan package funded in large part by institutional investors.

By the time syndication closed, it was the largest leveraged loan of the 1990s.

"If you show up with the money, it takes a lot of the issues off the table," says Harold Philipps, managing director and co-head of DLJ's senior debt group. "It provides an ease of execution."

The deal was seen as a coup for Morgan, which historically had been an investment-grade lender. But it was an even larger victory for DLJ, a Wall Street firm that had not made its first loan until 1996.

As the Lyondell case illustrates, investment banks are increasingly using their existing relationships with companies and investors to wrest away profitable loan business from commercial banks.

Basically, investment banks syndicate loans the way they underwrite and sell bonds. By doing so, bankers say these firms have won a distinct advantage in 1998, as record M&A activity and market tumult played to their quick-reacting strength.

Meanwhile, many established commercial banking lenders were caught flat- footed.

"The way investment bankers approach the high-yield market is influencing how loans are structured and brought to market," said Mary-Etta Schneider, an executive vice president and head of leveraged finance at BankBoston Corp. The loan market "is feeling a lot more like the high-yield market."

In many ways, Lyondell was just a model for the 135 leveraged loans led by investment banks in 1998. Those firms combined to increase their leveraged lending volume by 173% from the previous year. Their combined market share now stands at 17%, up from 2% in 1995.

Among investment banks, three have led the charge: Credit Suisse First Boston, Donaldson Lufkin & Jenrette, and Lehman Brothers. Together they combined to manage $33.1 billion last year, 64% of the $51 billion syndicated by investment banks.

Though those banks have risen at a different pace, each has taken the same basic route up the leveraged lending league tables. They have hired away top talent from commercial lenders and have integrated lending with other business lines.

The relative newcomer to the group is DLJ, which launched its lending business in 1996. Mr. Philipps, hired from the Bank of Nova Scotia, and co- head Eric Swanson, who runs DLJ's syndication team in Los Angeles, have syndicated more than $10 billion in less than three years.

Lehman Brothers started its loan group in 1991, tapping Bill Gates, a loan executive with Manufacturers Hanover, to lead it and Chris Ryan, a distressed-credit researcher and M&A adviser with Salomon Brothers Inc., to lead distribution.

Credit Suisse First Boston was part of the "Class of 1994," a year when major investment banks formed syndicated lending divisions. Though classmates Merrill Lynch & Co. and Goldman Sachs & Co. remain in the business, Credit Suisse First Boston alone managed 34 deals in 1998-equal to the number led by Merrill and Goldman combined.

"This, so far, has been a five-year project, not a one-year phenomenon," said Bruce Ling, managing director and head of loan syndications at Credit Suisse First Boston. "It's a success trend line we feel is predictable."

Investment bankers say a key reason they have been able to build so fast is their existing relationships with investors. For years, commercial banks syndicated loans mostly among themselves. But as leveraged loans grew to a $300 billion market, investment banks brought in "crossover" buyers from other debt markets.

"On thing we've been able to say to investors is, there's no reason you should think of bank debt as a different security," Mr. Philipps said. With Lyondell, "we used a bond pricing mentality that brought a lot of things together," resulting in $1 billion of institutional investments.

Investment bankers say they have also improved the customer service available to loan investors. Where commercial banks have historically ended the syndication process once a loan closes, investment banks-taking a cue from their stock and bond shops-built research departments and trading desks to serve investors long after a loan is syndicated.

"It's an institutional-investor driven market," Mr. Philipps said. "It's the driving force. And we're better positioned to distribute. The investor is focused on liquidity and research. The commercial banks have never been attuned to institutional buyers."

The result has been the loyalty of such money managers as Scott Page at Eaton Vance in Boston and Howard Tiffen at Pilgrim America Inc. in Phoenix.

"I get a call from someone at DLJ every couple of weeks," said one fund manager who asked not to be named. "I can't get Chase on the phone."

Still, when asked to name the biggest reason for their success, the heads of each syndicated lending shop at the top three investment bank lenders said it was their relationship with the borrower.

Said Lehman's Mr. Ryan, "In our most successful deals we felt we knew the client as well as anybody in the market."

Lehman's $725 million loan to Premier Parks in April was perhaps the best example. Lehman not only syndicated Premier Parks' loan, it led two equity stock offerings, a high-yield bond issue and served as an M&A adviser.

"I'd say we have as tight an integration of loan and securities business as anyone," Mr. Ryan said.

That effort stands in contrast to major commercial banks, most of which have pieces of investment banking businesses, but not the whole pie. For instance, only J.P. Morgan had an M&A advisory business ranked in the top 10 last year, according to Securities Data Co.

Now it is the commercial banks that are playing catch-up by either buying or building investment banking capabilities. Other changes are internal. At BankBoston, Ms. Schneider has trained bond and loan underwriters to underwrite both.

And almost all lenders instituted "market flex" in 1998-a bond market trick that basically allows the market to price loans. Historically, banks had set loan prices before the syndication process.

"We're going to see that happening more," Ms. Schneider said of the move toward the investment banking style. "It's necessary to stay ahead."

The great year enjoyed by investment banks in 1998 may have put an end to the main criticism leveled by commercial banks: that investment banks did not commit enough capital to the loan market to build relationships.

In the words of Mr. Ling, 1998 proved "we don't need to."

"I don't think participating for us is about making a $20 million commitment to someone else's loan," he said. "We have a small team here and we focus on target relationships.

"We're high-impact, with a good balance sheet that we put to work," he added.

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