Lehman Brothers Inc. and Merrill Lynch & Co. won the auction for Nippon Credit Bank's $2.2 billion syndicated loan portfolio, one of the largest secondary loan deals ever.
Market sources said that the two beat out seven other bidders, including Bankers Trust New York Corp., Goldman, Sachs & Co., Morgan Stanley & Co., J.P. Morgan & Co., and Chase Manhattan Corp.
The Japanese bank's portfolio, comprising 99 corporate and project finance loans, was divided between the two investment banks. Lehman will get $1.23 billion of loans managed in New York while Merrill Lynch will take about $1 billion of credits held in Los Angeles.
"Clearly, it's one of the bigger outright portfolio sales that's ever taken place," said Kevin Meenan, a principal of Meenan, McDevitt & Co., a Harrington, N.Y.-based investment banking boutique specializing in the sale and trading of commercial loans.
Nippon Credit has been hit with losses from an estimated $6 billion of bad loans. The bank is closing its U.S. operations as part of a plan to scale back its international presence.
The winning bids came in at around 99.5% of the portfolio's par value, said a market source, with the second-place bid trailing by only 5 basis points.
Lehman and Merrill, which entered the loan syndication business in 1992 and 1994, respectively, have placed strong emphasis on secondary market activity.
"Merrill Lynch has probably been one of the most aggressive bidders in the marketplace for secondary business over the last couple of years," said Mr. Meenan. "It's not like this is a flash in the pan."
"Lehman has been increasingly emphasizing its syndicated loan activities, and this is evidence of that," said Christopher Ryan, managing director and head of Lehman's loan syndication and trading business.
More than 50 employees from Lehman operations in both the United States and Asia worked on the winning bid, he said.
Exactly how the two firms will sell down their portions of the portfolio was not disclosed, but Lehman said it would use secondary markets and asset securitizations to wind down portions of the portfolio.
"The winning bidders will figure out what execution gets them the highest price," said Mr. Meenan. He noted the growth of collateralized loan obligations, or CLOs-a form of securitization that lets lenders sell their syndicated loan holdings to a broader market of nonbank institutional investors-as an indicator of healthy demand for loans on the secondary market.
"It's too early to tell whether this is going to be the first of a trend among the Japanese banks," he said, "but it's rumored that there are 20 or 30 CLOs in process, so the number of highly leveraged transaction buyers seems to be strong."