Venturing into a business that led to significant losses for other investment banks several years ago, Morgan Stanley has formed a $600 million subordinated debt bridge loan fund.
Run by managing director Hartley R. Rogers, the fund has received the financial backing of several institutional investors, including First Union Corp., Charlotte, N.C., and Societe Generale, the French banking company.
Morgan Stanley joins a growing list of commercial and investment banks that have started bridge loan funds.
Bridge loans are usually six-month to 12-month financings that provide corporations with quick access to capital and are usually replaced by junk bonds or private placements before they mature.
Banks earn hefty 1.5% to 2% fees for the bridge loans, but more importantly usually underwrite the high-yield junk bonds that refinance them.
The returns are not without risk, as investment banks discovered several years ago when they were stuck with large bridge loans that they couldn't refinance in the junk bond market.
But, bankers said, this time the junk bond market is safer and their approach more cautious.
"It's a good time to get into bridge lending," said Walt Bloomenthal, a senior managing director at BankAmerica Corp..
Indeed, commercial banks are looking to develop bridge services as they offer traditional investment banking products.
Just this past October, BankAmerica and Lehman Brothers announced a partnership to provide bridge loans.
In 1994, Chase Securities created the Roebling Fund, a bridge fund named after the designer of the Brooklyn Bridge.
Both commercial and investment banks are pushing to deliver a broad range of products from a one-stop shopping platform.
"When added to our existing strengths in the high-yield debt, M&A advisory, and bridge equity areas, the bridge loan capability will allow us to provide our clients with a broad spectrum of products to meet their financing needs," said Robert G. Scott, head of Morgan Stanley's Investment Banking Division.
Several industry observers expected all of the major investment banks to develop bridge funds in the near future.
"It would be surprising to me in two years if every major investment banking firm doesn't have a bridge fund," said M. William Benedetto, the founder of Benedetto, Gartland & Co. in New York.
And while investment and commercial banks feel compelled to develop the ability to offer bridge loans, the stakes are not nearly as high as they were when bridge loans were first offered in the late 1980s.
"Morgan Stanley won't go out of business if it doesn't do bridge loans," Mr. Benedetto said.
About five years ago, investment banks felt they might lose a significant portion of their business to Michael Milken and Drexel Burnham Lambert if they didn't offer bridge loans.
Drexel had sent its clients a letter indicating its confidence in raising the funds in the junk bond market.
Fearing they would lose the business because they couldn't assure a client of immediate capital, banks provided the money in the short term themselves with bridge loans.
Several investment banks wound up stuck with risky loans that they couldn't sell, leaving them exposed to large losses.
This time around, however, Drexel isn't giving bankers nightmares, and bankers are spreading out the risk.
"Investment banks are not putting all of their own capital at risk," Mr. Benedetto said. "They are using other's capital."
Bankers said offering bridge funds is an integral part of their business.
"I think if you want to deliver the entire right side of the balance sheet, if that's what your objective is, a bridge loan is an important part of that," said BankAmerica's Mr. Bloomenthal.
Mr. Benedetto said bankers are pursuing the bridge loan business much more rationally.
"The funds are now staffed by independent people making objective judgments," he said. "They get rewarded based on how well the fund does. They're not as worried about losing investment banking."
