WASHINGTON Perhaps persistence pays.
After hearing regulators repeatedly hiss at high-cost loans, lenders led by Chase Manhattan Corp. have pulled back from risky borrowers and put an end to leveraged lendings sensational growth.
Leveraged loans, defined as credits priced 125 basis points or more over the London interbank offered rate, totaled $285.4 billion through Sept. 30, down 0.6% from the same period last year, according to Thomson Financial Securities Data.
While the decline is small, the trend is clear and it picked up momentum in the second and third quarters. Between April 1 and Sept. 30, leveraged lending totaled $188 billion, down 8.7% from the same period in 1999.
David D. Gibbons, deputy comptroller for credit risk, applauded the trend but said regulators are still concerned. The level of activity has come down quite a bit, he said in an interview. I am encouraged by a couple of quarters of this trend.
On the other hand, I know how much of this stuff is still out there. Id like to see it go a little further.
The decline this year is a dramatic shift from the huge growth in leveraged lending since 1995. From an $81.8 billion base that year, leveraged loans grew 75% in 1996, 55% in 1997, and 49% in 1998 before slowing to a more modest 22% last year.
Mr. Gibbons noted that federal regulators began issuing credit warnings in 1995 and stepped up the effort in 1997 and 1998. The Office of the Comptroller of the Currency specifically targeted leveraged lending in a May 1999 advisory to national banks and their examiners. The four federal banking agencies are working on new guidelines to govern leveraged finance, and the 2000 Shared National Credit Review, a summary of syndicated lending trends that is due out next week, is expected to highlight the uptick in defaults among highly leveraged borrowers.
Mr. Gibbons cited rising defaults and increased scrutiny by examiners for the falloff in leveraged loans. We have re-trained our exam force to make sure they see the higher risk in these loans, he said. Bankers, he added, are losing money on these credits, which forces them to increase loan reserves and reduces earnings.
Leveraged loans are a subset of corporate lending, and the loans are often syndicated, or sold to other lenders or institutional investors. The definition of a leveraged loan varies, and is often based on factors beyond interest rates, such as a borrowers ratio of debt to cash flow. But Mr. Gibbons said all the calculations translate to the same thing: a loan with a higher rate to reflect a higher risk posed by a borrower.
The top 25 firms made $257 billion of leveraged loans through Sept. 30, or 5% less than during the same period last year. Their share of the leveraged loan market was shaved by four percentage points to 90.1% while the number of deals shrank 17.5% to 1,060, according to Thomson Financial Securities Data, a sister company to American Banker.
(Securities Data ranks lenders by amount loaned and gives full credit to the lead manager. If banks co-manage a loan, the credit is split among them. For example, a $500 million loan managed jointly by two lenders would be listed as $250 million for each firm.)
Together, Chase and Bank of America Corp. dominate the leveraged loan market, holding a combined 42.4%. But that is down from nearly 52% last year, and the decline is due mainly to moves by Chase. Dropping to second in the rankings, Chase made 20% of the leveraged loans originated through Sept. 30, down from 29.7% a year earlier. The New York giant made $57.2 billion of leveraged loans 33% less than in the first nine months of 1999. Its deal total declined 27.3%, to 181.
Those changes pushed Banc of America Securities into the No. 1 spot from No. 2 last year. But Banc of America Securities also cut back on its volume, down 9.2% to 337 deals. Its market share and amount lent nudged up to 22.4% and $64 billion, respectively. Both Bank of America and Chase declined to comment.
FleetBoston Financial Corp. held on to the No. 3 position, but its market share fell to 5.4%, its number of deals slid to 109, and the amount lent was off slightly to $15.3 billion. Deutsche Bank AG hung in at No. 4, watching its market share inch up to 5.1%, its number of deals climb by nine to 60, and its loan total increase slightly to $14.5 billion.
Rounding out the top five is Credit Suisse First Boston, which vaulted from 11th place last year on a steady number of deals (25) but which nearly doubled the amount lent, to $13.1 billion. The three other companies that made big moves during the first nine months are Morgan Stanley Dean Witter, which moved seven places to 11th, Wachovia Corp., which jumped nine places to 21st, and SunTrust Banks, which shot up 13 places to 22nd.
Morgan Stanleys deals were flat at eight, but its amount lent soared to $5.6 billion from $2.1 billion.
Wachovia did one fewer deal through Sept. 30, or nine, but its volume nearly doubled, to $2 billion.
SunTrust, while still a small player with less than 1% of the market, did 10 deals compared to six a year earlier, and made $1.8 billion of leveraged loans, triple its volume in the first nine months of 1999.
Eugene S. Putnam, SunTrusts director of investor relations, said the bank made a decision to take a lead role in more of these credits. That increase clearly represents a strategy that we have put in place to significantly upgrade our relationships with our clients into a lead agency role, he said. We have done that without taking on additional credit risk. We continue to sell off large pieces of these credits.
Mr. Putnam would not say how much of SunTrusts $1.8 billion has been sold.
Other companies significantly cut back their volume of leveraged lending including Bank One Corp., Donaldson, Lufkin & Jenrette, Lehman Brothers, and Bank of New York.
Bank One fell one notch to rank 10th, but saw its loan volume skid 15.5% to $6.7 billion. The Chicago banking company did 53 deals, or 17 fewer than last year.
DLJ skidded eight places to 15th, while amount loaned plunged 49.1% to $4.1 billion, and its market share was cut by half to 1.4%. DLJ, under agreement to be acquired by UBS, did 18 deals, down from 24 in 1999.
Lehman dropped four spots to 17th place. Its total leveraged lending fell nearly 40% to $3.1 billion while its deal flow dipped 23% to 17.
Finally, Bank of New York moved up four spots to 19th place, but its leveraged lending dropped 35.4% to $2.7 billion. It did half as many deals, 10, and it share of the market fell to 0.9% from 1.5%.