NEW YORK -- Since its yearend 1991 merger with Manufacturers Hanover Corp., Chemical Banking Corp. has been the top syndicator of corporate loans.
Chemical's rise coincided with a revival in the syndicated loan market in 1992, following two years of sluggish activity. This years, syndicated loan volume in the United States is poised to meet or exceed last year's record volume of $336 billion.
"The bank loan market is extremely strong, robust, and liquid," says James B. Lee Jr., senior managing director at Chemical.
As head of structured finance, Mr. Lee oversees loan syndications, as well as acquisition finance, private placements, and high-yield bond underwriting. Q.: What's driving the market? LEE: As was the case in 1992, there continues to be a very large amount of refinancings. Some are tied to initial public offerings of stock. In other cases, it's just straight debt-for-debt refinancings, driven by the low level of interest rates.
A second significant segment of the market over the past few years has been the refinancing of commercial paper backstop facilities for investment-grade corporations.
During the late 1980s and early 1990s, maturities for this type of facility shortened considerably. Now, you see a larger number of corporations having to refinance more quickly. Q.: Aren't corporations trying to extend these to multiyear facilities? LEE: They are. That's really being driven by corporations perceiving that they are in a bank market which is strong enough that they would like to capture what they feel is a window of opportunity that may not be present again.
That's really encouraged by the bank market itself, which is producing substantially more favorable terms for borrowers. Q.: Are we nearing a resistance level on pricing? LEE: I believe that there will continue to be pressure to bring spreads and fees down. We have encountered a series of resistance levels in the journey from 1990-1991 levels to where pricing is today.
Certain of the remaining resistance levels will be harder to break through than other, depending in part on the credit characteristics of the borrower and the nature of the financing. Q.: Where do you see the most pressure on pricing now? LEE: We've seen the greatest price compression in that part of the credit spectrum which straddles investment grade and noninvestment grade. The strong BB-plus/weak BBB-minus range has been under very, very significant spread and fee pressure in the last six months. Q.: Why that segment? LEE: That segment was priced adjacent to the noninvestment-grade sector by banks during 1990 and 1991, and was viewed in a similar though not identical manner. In today's bank market, I would say that sector is now being placed closer to the investment grade sector, and is therefore losing a lot of the yield that had been built into it. Q.: Who are the major participants in the loan market today? LEE: The bank loan market is extremely strong, robust and liquid, and to have those characteristics, it must have a large number of participants and a significant diversity of participants.
One of the features of today's bank market is in fact that many of the banks who participated in the strong bank market of the 1980s are in fact now particpants in the syndicates of the 1990s. With certain exceptions, I would say that today's syndicate, with respect to mix, is not going to look altogether that different than other syndicates for similar credits constructed in the 1980s. Q.: Is that true for leveraged transactions. investment-grade credits, or both? LEE: It's across the board. Q.: How much play to you get from regional banks on a typical multibillion-dollar backstop? LEE: As a general matter, banks are trading fees, spreads, and -- in certain cases -- structures, for improved credit statistics, and an uptiering of relationships. So what that means is, if there is an uptiering possibility, and the credit statistics are strong, then that bank will make every effort to be in that financing. Q.: Even if the backup line is never likely to be funded? LEE: That's correct. Q.: That, wouldn't be an asset play, it would be a relationship play, right? LEE: That's correct. I think one of the most significant and fundamental aspects of today's bank market is this desire to enhance an existing relationship or gain a new relationship. Q.: What about nonbank investors -- are they playing a bigger role in the market today than in the 1980s? LEE: In today's financing market, the bank loan funds are playing an increasingly larger role than they have in the recent past. Q.: In terms of the sheer volume of commitments, or in terms of playing a substantive role in the actual structuring of deals? LEE: Their increasingly larger role is with respect to larger amounts of dollars committed to financings and this phenomenon is really a byproduct of the drive by institutions to replace maturing financing assets with higher-yielding assets.
One area of the bank market that has retained many of its yield characteristics has been the highly leveraged end of the market. So funds are very active participants in those financings.
And to the extent that bank loan funds accept longer maturities than even the longest traditional bank maturities, they can begin to produce an attractive floating rate alternative to public high-yield senior notes.
The loan funds occupy a very interesting position in the overall evolution of structured financing techniques, in that they are bridging commercial banking with more traditional investment banking distribution techniques.
I think over the next several years, we will see an even further migration of investors [in the loan market] into this area of the capital structure. Q.: Do funds have any ambitions to play a role in structuring deals? LEE: No, loan funds aren't playing any new role with respect to structuring. However, as I said, they are prepared to produce an average life in what was traditionally a bank tranche, which is highly attractive to the client. Q.: What about foreign banks? LEE: Foreign bank participation in the bank loan market is very strong, virtually across the board. This is true throughout the credit spectrum. Q.: Are they competing more to win mandates? LEE: It depends on the situation, but we frequently compete against foreign banks for mandates. Q.: There was a time when that competition wasn't so intense. Is it getting hotter? LEE: Yes, it is. More foreign banks are committing more resources to their syndicate business in the United States. Q.: Now that Chemical has established itself as the market leader, what's your strategy for staying on top? LEE: Well, it's certainly true that staying No. 1 is harder than becoming No. 1. The strategy is simply to produce the best financing results for our clients and the loan market as is possible. Q.: Chemical's strength is its distribution capability, and one visible sign of that is your top ranking in the league tables. How important is it to Chemical to remain No. 1 in league tables? LEE: First, I would not agree that it is exclusively the power of distribution that is producing these results.
It's the power of teamwork within the bank -- the client manager, the credit area, and structured finance -- working with the client, that produces the optimum execution for the client and the market.
Second, many times in the execution of a large financing, your place many interest ahead of your own. For example, in the very largest transactions, it is virtually impossible to execute them in an optimum manner for the client without ensuring that the client's other major relationship banks are treated visibly in the transaction.
So we regularly in our group recommend strategies which are framed by banking relationships that either the client has, or that we think he should have.
More times than not, these recommendations place our league table rankings at risk.