Syndicated lending in the second quarter fell 8% below the 1997 level, to $291 billion, according to Securities Data Co.
The drop, the first since Securities Data began tracking the market in 1995, came in a remarkably dynamic period, marked by both botched loans and hugely successful deals. The cost of borrowing went up while mergers and buyout activity spurred a boom in leveraged lending.
"It was probably the most interesting period in the bank market since the early 1990s," said Peter Gleysteen, head of syndicated lending at Chase Manhattan Corp.
Because lending tends to fluctuate seasonally, market watchers pay more attention to year-to-year comparisons than to quarter-to-quarter shifts. True to form, the second-quarter total exceeded the first by $76 billion.
Lending through June 30 fell 4% behind the first-half 1997 figure, to $507 billion.
The data foreshadowed the impact of bank mergers, particularly the pending combination of NationsBank Corp. and BankAmerica Corp. While Chase Manhattan held the No. 1 position, participating in 164 loan packages worth $107 billion, the new BankAmerica on a pro forma basis would drop Chase by a significant margin into the No. 2 position.
NationsBank plus BankAmerica participated in 273 packages worth $142 billion. Though the combined bank would have lagged behind Chase through the first half of the year, second-quarter activity suggests Chase no longer has a hammerlock on the top spot.
NationsBank and BankAmerica, which ranked second and third on their own, expect to close their merger Oct. 1.
Mr. Gleysteen acknowledged that Chase's volume was down, citing "sharply reduced" investment-grade loan volume. But he said fees were up.
In regard to Chase's standing, Mr. Gleysteen said, "the agent-only league tables are meaningless" because they measure who participates in deals, not who leads them. He pointed out that Chase remains a strong No. 1 in terms of leading deals.
Rounding out the top five for the quarter were perennial leaders J.P. Morgan & Co., with 55 packages worth $59.8 billion, and Citicorp, with 71 packages worth $59.7 billion.
Meanwhile, the volume of high-yield loans-those made for leveraged takeovers or companies with poor credit-soared 50% from the second quarter a year ago, to $82.9 billion.
"That market was booming," said Jasmin Chanana, an analyst with Securities Data. "It didn't matter if you were in fixed income or loans. I think it's pretty much a result of the M&A."
A surging leveraged-loan market is good news for investment banks, which have been trying to break into corporate lending for five years. Merrill Lynch & Co., Goldman Sachs & Co., and Credit Suisse First Boston are specializing in the highly profitable leveraged loan market.
Their strategy appears to be paying off. For the first half, Lehman Brothers, not previously in the top 25, came in 11th, participating in 29 deals worth $26.3 billion.
"We're thrilled and we're working hard," said a Lehman banker.
The sheer volume of the leveraged loan market was great news for institutional investors, who continue to strengthen their hand as buyers in the market. Scott Page, co-manager of the $2 billion Eaton Vance Prime Rate fund, said the quarter was marked by good prices and ample supply.
"More deals are clearly being made for institutional investors," he said. "That's great from our standpoint."
As the leveraged market expanded, the investment-grade loan market faltered. Two high-profile loans were pulled after investors balked: a $2.25 billion financing for Meditrust Corp., led by Salomon Smith Barney; and a $1.7 billion loan for Sunbeam Corp., led by Morgan Stanley Dean Witter & Co.
Borrowers found that the costs of financing in the second quarter rose for the first time in two years. Chase broke a long-standing market policy in May by boosting the commitment fees for an $800 million investment-grade loan to Teligent Inc., a telcommunications company.
Other lenders, including Credit Suisse, Bankers Trust Corp., and BankAmerica, said they would follow suit.
There were successful deals, too. In April, Chase, Lehman, and Merrill led a $10.9 billion sydication for Texas Utilities Co.'s buyout of Energy Group PLC of the United Kingdom. That syndication, the largest since a $13 billion loan led by J.P. Morgan for Westinghouse in February 1997, included 21 banks as co-underwriters.
Many bankers anticipate a weak second half of the year. U.S. syndicated lending is on pace to finish at about $1.1 trillion, about the same as in 1997. This would be the first year in at least five in which a new record was not set.
But Mr. Gleysteen said there are sure signs of a healthy market: "There's still ample capacity in the market, albeit not the surplus conditions of a year ago."