Soaring volume in the loan syndications market is making it more difficult for agent-banks to serve loan investors' needs.
Michael DiRe, a managing director at PPM America Inc., told attendees of a bank loan conference on Tuesday that staffing levels at agent-banks are not keeping up with the syndicated lending market's burgeoning volume.
As a result, Mr. DiRe said, the quality and thoroughness of due diligence conducted by agent banks on borrowers is beginning to slip, causing potential problems for the banks and other institutions that buy pieces of syndicated loans.
"I have asked questions, and I haven't been able to get answers," on transactions where agent banks have not been thorough in due diligence, Mr. DiRe said.
Mr. DiRe, who invests in high-yield bank loans for PPM, a New York-based unit of Great Britain's Prudential Corp., made his remarks at a syndicated loan and high-yield debt conference sponsored by American Banker and Strategic Research Institute.
Mr. DiRe said the due diligence problem has been exacerbated by agent- banks that increasingly are promising to get money to their clients fast. That means they are trying to make more deals in less time.
"You will see some responsiveness slipping. I think due diligence has slipped," said Mr. DiRe.
Last year, the syndicated lending market grew from $181.4 billion in the first quarter to $272.9 billion by the fourth quarter.
This year, volume continues to build. In the first quarter, some 673 deals, worth $204 billion, were done, and 911 deals, representing $304 billion, were completed in the second quarter.
Bank loan staffs have not been expanding at the same level, however. According to one New York-based recruiter, bank loan departments have not regained the manpower they had in the early 1990s, before they fell victim to vigorous cost-cutting programs.
Although most banks have been hiring a few lenders each year, none has made a large addition to its staff.
Though reluctant to cite specific examples, some investors said they have received from agent-banks incomplete information on deals. Some said they have been asked to commit to loans without being shown any documentation.
One banker at the loan conference agreed that the quality of due diligence has suffered. The banker said that at his bank, lenders are given only two weeks to run due diligence on some transactions, which has the bankers juggling and hoping that everything turns out all right.
The due diligence process normally requires three to four weeks.
Regulators have also noted that due diligence is suffering as banks compete for deals based on speed. In his keynote address to the conference, G. Scott Calhoun, deputy comptroller for risk evaluation at the Office of the Comptroller of the Currency, listed banks' willingness to compromise due diligence as an example of structural risk in the lending market.
Given the circumstances, investors are trying to maintain their discipline while dealing with what they view as a slide in the discipline of banks. The main questions investors ask themselves is, "How on top of the credit is the agent?"
In some instances, a bank has a long history with a client and can offer information that could ease the toll of not having a bank book.
Investors do not expect this problem to be solved until banks take more ownership in the transactions they arrange.
"That is something that probably will not return until there is less competition" to win transactions, said Charles Froland, managing director of General Motors Investment Corp.
"It will get worse before it gets better," he said.