The $1 trillion-a-year syndicated lending market may finally be getting something from Wall Street that it has sorely lacked.


A report by PaineWebber bank analyst Ruchi Madan is causing a stir by touting syndicated lending as the most profitable and biggest corporate finance vehicle on Wall Street.

The 44-page report, "The Biggest Secret of Wall Street," says syndicated lending is the answer to the question: What is the largest, highest-fee- generating, and most profitable corporate financing business for Wall Street?

"We believe the growing importance of the syndicated loan market has been underappreciated by investors," Ms. Madan wrote. The market "is not well understood."

But that lack of understanding may be a mistake, according to Ms. Madan, who pointed out that syndicated lending is a growing business that shows which banks are making handsome fees and are best poised to enter investment banking.

Among the reasons Ms. Madan gave for syndicated lending's importance:

Syndications represent $5.5 billion to $6 billion in fees to the banking industry and those revenues are growing by 15% a year.

Leveraged lending, the most profitable kind of syndicated lending representing 80% to 90% of most banks' lending revenue, grew by 41% in 1998 from the prior year.

The bank loan market has become a "viable asset class" attracting a growing base of institutional investors who are credited with buying 40% of all leveraged loans.

Michael Rushmore, a loan analyst for Bank of America Corp. with 15 years of experience, said that it is only in the last few years that syndicated lending has garnered respect from Wall Street.

When he first started in the early 1980s, Mr. Rushmore said the market was characterized by "a buy and hold strategy and dominated by traditional commercial banks. Now it's a market that behaves like a capital market, matching investors and issuers."

That a Wall Street analyst seems to be taking notice of the loan market represents a shift in how investment bankers view commercial bank lenders.

Michael Lewis' 1990 book, "Liar's Poker," described an investment banker's view of a commercial banker as lending "a few hundred million dollars. ... But wasn't any more a troublemaker than Dagwood Bumstead. He had a wife, a station wagon, 2.2 children, and a dog that brought him slippers when he returned home from work at six."

By contrast the investment banker "was a breed apart, a member of a master race of deal makers. He possessed vast, almost unimaginable talent."

How times have changed. Now, commercial bankers who have made their names in the loan syndication business draw raves from investment bankers. Probably the most notable of these is James B. Lee, Chase Manhattan Corp.'s vice chairman and head of global investment banking.

"Jimmy is one of the best salesmen I've ever met," said one investment banker. "He could sell you an ice cube in January and at the end of his pitch you'd really think that ice cube was something special."

Corporate chief financial officers have realized that in many cases, syndicated loans are cheaper and more flexible than the bonds peddled by investment bankers. That helped the syndicated loan market grow from $200 billion in volume in 1990 to more than $1 trillion last year.

In response, in the early 1990s investment banks started trading desks for loans. As the loans became more profitable, the investment banks started their own origination teams. Some commercial bankers who made their names in syndicated lending now head major fixed-income divisions at those investment banks.

One of those is Chad Leat, co-head of high-yield capital markets for Citigroup Inc.'s Salomon Smith Barney investment banking unit.

"The change that we have seen in the last several years has been the increasing importance of syndicated lending product to overall corporate finance relationships," he said.

Mr. Leat, who began his syndications career in the 1980s, said another reason the market has won respect is the growing interest of institutional investors in loan products. Those investors rarely had contact with commercial bankers. When leveraged loans became a main part of the market, it forced the investment bankers to pay attention too.

Mr. Rushmore said, "Syndicated lending has become a true investment banking product in the same way that high-yield bonds, corporate bonds, or other capital markets products are."

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