The six-year bull run for syndicated lending is over.
U.S. syndicated loan volume totaled $1.012 trillion in 1998, down 8% from a record $1.102 trillion in 1997, according to Securities Data Co. Caused in part by the high price of refinancing, the decline in volume was the first since the credit crunch of 1991.
Still, the year will go down as one of the market's most profitable, as lenders syndicated a record number of leveraged loans. Leveraged volume grew 45% to $316 billion in 1998.
These loans command the highest fees from borrowers and are feeding the appetite of the fastest-growing sector of the loan investor market- insurance companies, mutual funds, and private funds.
"We had a couple of wobbles in the market, but it was a buoyant year over all," said Robert Patterson, head of syndicated lending for Chicago- based Bank One Corp.
One of those wobbles occurred in the fourth quarter, when syndicated lending volume fell 29% from a year earlier to $225 billion. But lenders are optimistic the action will pick up in 1999.
Leveraged loans emerged as an increasingly important part of the merger- and-acquisition scene in 1998. If M&A activity remains brisk in 1999, so will lending, bankers said.
Syndicated loans "became the market of choice for the cash M&A deal or when other capital markets are volatile," said Peter Gleysteen, group head of global syndicated finance at Chase Manhattan Corp.
More than 7,700 M&A deals worth $1.2 trillion occurred in 1998, almost twice the record set in 1997, according to Houlihan Lokey Howard & Zukin, Los Angeles. That deal flow was a vital component of the loan market's vibrancy in 1998, Bank One's Mr. Patterson said.
"You tell me what M&A will be like, and I'll tell you what lending will be like" in 1999, he said.
For many bankers, the growth of leveraged lending in 1998 signaled Wall Street's increasing influence in the market.
Investment banks and institutional investors changed the way loans were priced and syndicated last year to make them more competitive with bonds. The trend accelerated in the late-summer when turmoil hit the world's capital markets.
The changes made 1998 "the most significant year in the loan market" this decade, Mr. Gleysteen said.
Chase remained at the center of the market, though its leading market share declined to 26.8%, from 29.8%. Chase structured and priced 530 loan packages worth a combined $271 billion, beating all comers in both the leveraged and investment-grade sectors.
But the new BankAmerica Corp., formed in the fall by the merger of BankAmerica and NationsBank Corp., emerged as a strong No. 2 behind Chase. The Charlotte, N.C., banking company finished the year with a 17.1% share, arranging 682 deals worth $173 billion.
On an agent-only basis, BankAmerica displaced Chase as the No. 1 participant on deals. BankAmerica had agent status on 1,008 loans worth $443 billion in 1998, compared with Chase's 636 loans worth $441 billion.
"I'm really excited about 1999," said Thomas W. Bunn, head of syndicated lending for BankAmerica. "We've got a significant domestic merger behind us. We are very well poised for 1999. We're not going to lose momentum."
Chase, however, maintained a substantial lead in leveraged lending with a 24% market share, leading 243 deals worth $76.1 billion. BankAmerica did more but smaller deals, worth a combined $49.8 billion.
But by moving to No. 2 on the overall league tables, BankAmerica dislodged J.P. Morgan & Co. and Citicorp-now Citigroup Inc.-from their spots behind Chase. Citigroup, which includes Salomon Smith Barney Inc., saw its market share erode to 8.6%, from 11% in 1997.
J.P. Morgan fared better. It increased its market share to 10.5%, from 10.1% a year earlier.
Mike Mauer, a managing director in loan syndications at J.P. Morgan, said his bank "was in the thick of things as usual." The firm's real accomplishment, he added, was its improvement in the leveraged sector.
A year ago, Morgan bankers promised a push into leveraged lending, a relatively new market for the white-shoe bank. That effort paid off, as Morgan rose to No. 6 from No. 8 among leveraged lenders, syndicating 17 loan packages worth $12.9 billion-up from $5.8 billion a year earlier. Its market share nearly doubled to 4.1% from 2.7%.
"We made tremendous headway in the business," Mr. Mauer said.
Likewise, Lehman Brothers finished a record year in leveraged lending by jumping to No. 4 from No. 10 among all lenders. Lehman led 39 loan packages worth $15.4 billion, up from 23 packages worth $5.4 billion a year earlier.
In all, investment banks, fueled by strong crossover business from their M&A advisory shops, grabbed a bigger piece of leveraged lending. Their combined market share increased to 13.1% from 8.8% a year earlier.
Lehman was followed by Donaldson Lufkin & Jenrette, Credit Suisse First Boston, and Goldman Sachs & Co. among the investment banks' strongest gainers.
Richard W. Carey, director of syndicated finance at Credit Suisse First Boston, called 1998 a "breakthrough" year for investment banks.
"Having been at it now in the bank-bond business for four years, we've started to connect," he said. M&A advisers at the firm have begun to trust the lending department.
"You have to show them ideas and prove you're good at it. Persistence pays off," he said.