Two economic winds have blown the syndicated loan market to record volumes since the mid-1990s: mergers and acquisitions activity and a boom in refinancings.

Now, with the first half of 1998 in the books, the refinancing gale appears to have lost its force.

Only $112 billion of syndicated loans were refinanced in the first half of 1998, compared with $204 billion a year earlier, according to Loan Pricing Corp.

Loan Pricing also found that refinancings represent only 25% of all syndicated loans this year compared with last year's record 40% share.

The data confirm what many bankers have been saying for months-higher financing costs, especially for investment-grade loans, are keeping borrowers on the sidelines.

There are "fundamental changes happening," said Meredith Coffey, a lending analyst at Loan Pricing. Among them: fewer investors willing to take on the razor-thin spreads that dominated the market during the last 24 months and increased credit scrutiny by banks.

The latter resulted in lenders turning to "deals that did not provide sufficient returns" and companies failing to lower their cost of borrowing through refinancing, according to Michael Rushmore, an analyst at BankAmerica Corp. in Chicago.

Mr. Rushmore said the bulk of new refinancings is occurring with 364-day credit facilities that must be refinanced or paid off.

Longer-term loans, usually of three to five years, became less attractive to refinance when "the downward pricing trend stalled and then reversed," he said.

Facilities of 364-days represented 47% of the refinancing volume in 1998, up from 23% a year earlier, Mr. Rushmore said.

To bankers and analysts, the decline suggests the loan market may be headed for slower overall growth, especially in the investment-grade sector. But fewer refinancings do not necessarily mean lenders are not making healthy profits-though the overall value of deals dropped 8% in the second quarter.

Bob Patterson, head of syndicated lending for First Chicago NBD Corp., said that the rise of M&A and leveraged loan activity has kept margins fat for lenders so that "the business mix is still very good."

In fact, declining refinancings also underscored how strong the leveraged market has become.

Refinancings of leveraged loans dropped to 12.6% of all leveraged syndicated lending in the first half compared with 30% of all deals last year.

But overall leveraged lending soared to more than $80 billion this year, compared with $50 billion through the first half of 1997, according to Securities Data Co.

"I think everybody in the market realized that there were several things driving the growth of leveraged loans - real economic events and refinancings," said Steven Bavaria, an analyst at Standard & Poor's. "You still have a real amount of economic activity with mergers and acquisitions."

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