The same forces that have driven down returns on large corporate credits are now moving into the middle market.
Increased liquidity and a growing number of competitors are pushing down pricing for some middle-market credits, defined broadly as loans to companies with annual sales of less than $500 million.
Though spreads in the middle market have generally held steady, up-front and agency fees paid to lenders and bank loan investors have decreased drastically.
The average premium on these loans over broadly syndicated deals, for example, was down to 10 basis points in the first quarter for companies with senior debt ratings of BBB. That same premium was more than 140 basis points in the third quarter of 1995.
"Because more people came into this market and there was more money chasing it, it really just drove the pricing down," said Mary Etta Schneider, managing director and head of loan syndications at BankBoston Securities Inc.
Ms. Schneider made her remarks Tuesday in a presentation to American Banker and Strategic Research Initiatives' Syndicated Loan and High-Yield Debt Symposium.
Seeking to flee the low-priced investment grade market, more lenders have moved into middle-market lending, said Ms. Schneider.
Among the new entrants are foreign banks, especially Japanese banks, seeking to buy portions of smaller credits.
Institutional investors, such as insurance companies and prime rate funds, also are lowering their deal thresholds.
Funds that previously required an institutional tranch of a loan to be at least $100 million before they would consider investing, "would now take a share of B pieces that are only $50 million total," she said.
Opportunities for middle-market lending are plentiful across a wide range of industry sectors, including ambulance services, propane gas, radio, solid waste handling, telemarketing, wireless communications, and death care services such as funeral home chains.
Industries in earlier stages of consolidation include home security, temporary staffing, wireless communications towers, building services, real estate investment trusts, municipal water companies, and court reporting services.
Ms. Schneider said BankBoston is focusing on home security, among other industries. The sector has about 12,000 participants, with the top 100 companies accounting for 25% of the market.
With $11.9 billion in annual revenues last year and an average growth of 15% per annum, opportunities for bank financing are increasing, she said.
The bank is also turning its attention to temporary staffing, which experienced revenue growth of more than 103% from 1991 to 1995, Ms. Schneider said.
