For years bankers have been touting the flexibility and value of syndicated loans over bonds, and new statistics suggest that loans have indeed become the financing of choice in the market - but because of a changing investor landscape rather than marketing.

A study by Bank of America Corp., Loan Pricing Corp., and Portfolio Management Data LLC says borrowers are increasingly using leveraged loans instead of junk bonds. Leveraged lending surged to $320 billion in 1990, against just $80 billion for bonds. Those numbers were up from $135 billion and $58 billion in 1996, according to the report.

The key reason for the shift, according to researchers, is the changing investor profile and perceived risk in the junk bond market. At yearend more than 140 institutional investors were buying leveraged syndicated loans, versus about 20 in 1993. Bank participation rapidly declined in the same period - especially among Asian and European banks, where it dropped 78% and 22% respectively. U.S. bank participation declined 5%.

Michael Rushmore, head of syndicated loan research at Bank of America in Chicago, said the new breed of loan investors isn't beholden to traditional bank-borrower relationships. That means institutional investors are more risk-averse.

"These institutions are not selling other products to the issuers, so the relationship between the issuer and investor is less developed," Mr. Rushmore said. "The result is a more disciplined market, where the pricing and structure of a deal more closely reflect the stand-alone risk of the deal."

Just as investors have changed the way they invest in loans, banks are repositioning themselves away from lending and interest income in favor of fee income from trading, advisory, and management services. For instance, J.P. Morgan & Co., long a leading syndicated lender, has been paring loans from its balance sheet for two years.

Banks have not abandoned the loan market. Rather, they've changed their roles; where they were underwriters they are now distributors that feed institutional demand. All major syndicators now run active trading desks for all types of loans. At the end of 1999 there were 35 active trading desks in the market that traded $65 billion in loans that year. That's up from just 25 desks trading $32 billion in 1995, according to the study.

"Institutional investors approach the leveraged loan market more like a bond market, actively managing portfolios of assets without the armies of people supporting the process," Mr. Rushmore said. In the past, "investors moved very deliberately, compensating for the higher risks."

Not so in recent years. Portfolio Management Data and Bank of America report that debt-to-earnings for borrowers decreased to 3.3 times earnings in 2000, from 4.7 times in 1987.

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