Some Loan Traders Skeptical Of Morgan Stanley's Fee Cuts

Depending on who's talking, a new loan trading policy by Morgan Stanley Dean Witter & Co. that eliminates fees and slashes minimum trade amounts will either bring about a revolution in the syndicated loan market or amount to little more than posturing by an also-ran in the business.

The policy, announced late last week, eliminates the legal and back-office fees, called assignment fees - usually $2,000 to $4,000 a trade - for trades executed by Morgan Stanley, and reduces the minimum trade to $1 million, from $5 million. Allison Taylor, president of the Loan Syndications and Trading Association, the industry's chief trade group, called the policy an encouraging first step that will promote liquidity in the market.

"It's a phenomenal move," Ms. Taylor said. "I'd like to see other banks follow their lead. I'm sure it's going to be well received, because it meets some of the goals of the investor community."

The secondary loan market has been slow to grow, particularly when compared with the markets for stocks, bonds, and even securities for credit cards, mortgages, and real estate. Loan trading was estimated at $69.1 billion in 1999 - just 6% of all loans syndicated during the same period, according to Loan Pricing Corp.

A major hurdle is the cost of making a trade. Loan trading requires more back office work - notification, legal work and borrower approval - than trading of stocks, bonds, and other securities. That has put the secondary loan market in a quandary: Eliminating fees could spur market growth but may also hit a revenue center.

"For banks which are acutely focused on their operating efficiency ratio, giving up a source of revenue will be a sore point," said Kevin Meenan, a managing director with Societe Generale in New York.

Until now, banks have only lowered minimums and slashed fees to promote trading of specific loans. BankAmerica Corp. slashed assignment fees for an $850 million Omnipoint Corp. loan in early 1998 to $500 a trade and required only a $1 million trade minimum.

Chase Manhattan Corp. is pushing more borrowers to allow lower minimums and dropped trading minimums to $1 million in recent loans to Nextel Communications Inc. and Kansas City Southern Industries Inc. Chase has won minimum trade reductions for nearly one in four syndicated loans it leads.

But no institution has ever dropped fees or high minimums as a policy. Should banks follow Morgan Stanley's lead, Ms. Taylor estimates trading volume could jump 20%.

Some bankers are skeptical. One trading chief at a top-five lender called the announcement "not a material move." The trader pointed out that though Morgan Stanley may be a heavyweight in many of its businesses, it didn't crack the top 25 ranking of lenders, and it syndicated less than $3 billion last year. Morgan Stanley does not often serve as administrative agent, nor does it have internal back-office loan trading services.

"You're talking about a minnow making a statement," said a trading desk chief at a top-five lender.

R. Bram Smith, a managing director at Morgan Stanley, acknowledged Morgan Stanley's lack of size in the business but said lower minimums and fees are "where the market should go and has to go. The banks are missing a great opportunity. I know we're going against the tide."

Ultimately, most bankers agreed that Morgan Stanley was succeeding in drawing attention to a critical issue facing the growth of the secondary loan market.

"Minimum assignments are a key issue," one banker said. And some banks "are pushing the levels lower. But no one doing substantial business can flatly throw down a policy. The borrowers have to agree and most don't. … But hey, you've got to start somewhere."

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