Capitalizing on corporations' growing desire to consolidate credit lines, three giant banks are leading an $8.8 billion loan for American Express Co.
J.P. Morgan & Co., Chase Manhattan Corp., and Union Bank of Switzerland are assembling the blockbuster loan, which would replace individual lines of credit with more than 65 banks. The syndicated loan would also provide $900 million of fresh funds.
American Express is the latest on a growing list of companies to take advantage of falling prices for syndicated credit in order to gain the efficiency of a single credit line managed by a small group of lead banks.
In individual credits, a borrower typically secures lower pricing because of its strong bargaining position. However, with the price of large loans coming down in recent years, the incentive to maintain individual credit lines declines, said Bruce Ling, head of loan syndications at Credit Suisse.
American Express is following the precedent of a number of large companies, including ITT Corp., which consolidated several smaller credit lines into a $7 billion loan led by Chemical Banking Corp. in 1994.
Some bankers suggested that swapping separately negotiated, or "bilateral," loans for a single syndicated credit has important consequences for banking relationships.
In doing a syndicated deal, the borrower must explicitly choose which lenders will carry the ball on the funding front - a decision that can change the nature of a borrower's relationship with its banks, said a loan syndicator. "That is one of the challenges in going from a bilateral to a syndicated credit."
To be sure, other bankers played down the consequences for relationships of shifting to a syndicated credit line.
"Everyone who is in the bilateral always rolls into these new facilities," said another syndicator. The size of the commitments typically reflects the importance of the relationship with the borrower, as would be the case with any other syndicated loan, this banker said.
The new loan to American Express will be available to a number of company affiliates, including American Express Credit Corp. (called CredCo.) and American Express Centurion Bank, which manages the Optima Card.
Within preset limits, any of the related companies can draw on the loan.
The lead banks, which each underwrote $600 million of the deal, are offering managing agent titles for $350 million commitments, co-agent titles for $250 million, lead manager for $150 million, and manager for $100 million.
Bankers said they anticipated no difficulty in syndicating the loan, though some of the facility might support American Express' competitive credit card operations.
"Traditionally, there hasn't been any concern lending to a competitor," said a loan syndicator.
"Banks frequently provide backup lines to other bank holding companies," said another lender. "It's the normal thing to do in the banking business."
The loan is broken up into a $2.2 billion, 364-day facility and a $6.6 billion, multiyear facility. This portion is divided evenly into four, five, and six-year maturities.
The average life on the longer maturities is five years, according to market sources.
The one-year piece has a five-basis-point facility fee and is priced at the London interbank offered rate plus 15 basis points.
On the multiyear pieces, the facility fee is seven basis points, with a price, at the company's current debt ratings, of Libor plus 13 basis points. This price can vary with the debt ratings.
If more than half of either the shorter- or the longer-duration pieces is used, the cost increases by five basis points. There are no up-front fees.