For top syndicated lenders, September's financial crisis was deja vu-up to a point.
"It looked and felt like 1990," said James B. Lee, Chase Manhattan Corp. vice chairman, referring to the market's recent volatility. But unlike the dip at the beginning of the decade, September's troubles did not hinder the bank loan business for long, Mr. Lee and other lenders said.
The problems of the early 1990s "took two years to fix," Mr. Lee said. "Maybe now we're going to have to get used to having all of our massive corrections and recoveries in a short period."
Addressing about 50 bankers at a syndicated lending conference this week in New York, Mr. Lee and other speakers discussed the impact the economic crisis late this summer had had on the syndicated loan market.
For example, in the third quarter, the top 20 par loan trading desks suffered losses, said Kevin Meenan, managing director of loan sales and trading in Societe Generale's New York office. It was the first quarter of losses ever in the fledgling loan trading business.
"That caught senior management by surprise," Mr. Meenan said. "People had been trading the same way they had for 10 years, and for the first time they had losses of about 25% of last year's trading profits."
Many bankers, including Mr. Lee, expressed concern at events in September that suddenly shut down most of the capital markets and drove up pricing for syndicated loans. But they were more surprised at how quickly the bank loan market reacted and recovered.
William L. Hartmann, a managing director for loan syndications at Citigroup, said a key change occurred in how deals were syndicated.
Before the market turmoil, a loan would be priced and then a bank meeting would launch a sales effort. Now deals are shopped. Investors tell lenders what pricing and structure they would like. Borrowers then approve the terms, and the loans are syndicated, Mr. Hartmann said.
"You form a club, a consensus of where the deal should be priced and structured," he said. "For those of you who ask what the deal looks like, the answer is: 'What do you want it to look like?"
Lenders were able to change the syndications process, which now resembles the sales process found in bond markets, because of "market flex" language included in borrowers' agreements with lenders. Market flex lets lenders adjust a loan's price based on market conditions.
"It will be interesting to see if market flex survives next year," said Societe Generale's Mr. Meenan.
One reason market flex may be short-lived: Many borrowers agreed to it because they needed to get a deal done, at any price. In other cases, Citigroup's Mr. Hartmann said, "a lot of market flex language was in the loan document, and there wasn't much discussion with the borrower."
Peter Gleysteen, group head of global syndicated finance at Chase, suggested that the loan market's response to the financial crisis helped it remain open during the slowdown.
Mr. Gleysteen estimated that in January the loan market represented about 60% of the financing underwritten in the capital markets. By July, he said, this share had dropped to 40%, as the high-yield bond market boomed.
When the global financial crisis shut down the high-yield market in September, market share for bank loans was "closer to 100%," Mr. Gleysteen said.
The conference, held Monday and Tuesday, was sponsored by the Strategic Research Institute and American Banker.