Syndicated loan volume hit a record level in the second quarter, as big corporate borrowers continued to refinance existing credit lines on more favorable terms.
Bankers were encouraged that demand for new acquisition loans also contributed to the surge in volume.
According to Loan Pricing Corp., a data base company in New York, syndicated loan volume soared 40% from the year-ago quarter, to $164.1 billion. Loan volume was up 54% from the first quarter, which is typically the slowest of the year.
The refinancing boom has been driving market activity in the loan market for at least the past few quarters.
Hoping to get a break from the profit-squeezing monotony of redoing old deals at lower pricing, bankers have been predicting an upswing in acquisition-related financings. They were heartened that activity did, indeed, pick up noticeably in the second quarter.
"More important, we see much more of it in the second half, when this type of activity will be at quite a high level," said James Lee, senior managing director and head of structured finance at Chemical Banking Corp.
The biggest syndicated loan in the second quarter was a $6.8 billion credit backing Viacom Inc.'s winning bid for Paramount Communications Inc. The new credit also refinanced existing debt.
Other big acquisition-related credits included a $2.8 billion credit for Northrop Corp.'s successful bid for Grumman Corp.
Better Terms Sought
Most of the market volume, though, was driven by corporations seeking lower pricing, longer maturities, and in some cases, less restrictive covenants on existing credits.
AT&T Corp., and the finance arms of Chrysler Corp. and Sears, Roebuck and Co. refinanced multibillion-dollar credit lines in the quarter.
"All of that was locking in tenor and price," said Chad Leat, head of loan syndications at Chase Manhattan Corp.
Moreover, corporations were also enlarging their existing credit lines to take advantage of favorable market conditions, even if they didn't necessarily have an immediate need for larger credits.
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"Some of that [second-quarter] volume is coming from the fact that terms and conditions are so attractive that borrowers are locking in an incremental amount above their perceived needs," said Keith Barnish, head of loan syndications at Bank-America Corp.
Sears, for example, decided to expand its new credit line after the original $4 billion deal was vastly oversubscribed in the loan market this spring.
Others, including MCI Communications Corp. and Dow Chemical Co. did the same thing.
Bankers generally agree that pricing in the loan market still has not bottomed out.
"As long as liquidity outpaces loan demand, pricing and other terms will be under tremendous pressure," said Chemical's Mr. Lee. But he also said the pressure on pricing appears to be easing somewhat.
The annual fees banks now charge investment-grade corporations have gotten so low -- well into single-digit territory in some cases -- that they can't possibly go much lower.
And those are the fees that are visible in the market. Rumors abound about banks actually waiving arranger fees in order to win mandates to lead credits.
No bank would admit to waiving such fees -- which generally are not disclosed -- but neither would any bank dispute the fact that the market is hotly competitive.
The upshot for banks is that higher market volume doesn't translate into bigger profits.
"Did the banks make more money because volume was up? My guess is that people are saying, gosh, we're working harder and not making any more money because pricing is so tough," said Thomas Bunn, managing director in charge of loan syndications at NationsBank Corp. in Charlotte, N.C.
Loans to borrowers with speculative-grade credit ratings, though, can still be quite profitable, which is why bankers are so encouraged about the increased acquisition activity in the second quarter.
While some of that activity is taking place at the less profitable investment-grade level, some of it is not.
Comcast Corp., which last week launched a $2.2 billion bid for QVC Inc., has an implied senior debt rating from Standard & Poor's Corp. of BB, which is below investment grade.
As reported, Bank of New York was tapped to lead the bank financing for the bid, which could face rival offers. Comcast's bid derailed a previously planned merger between QVC and CBS.
Leading Banks in Loan syndication for 2Q
Top 10, full credit to agents and coagents Volume Number in billions of dealsChemical $76.34 98Citicorp 61.18 87BankAmerica 57.06 47NationsBank 51.64 63Chase Manhattan 50.35 59J.P. Morgan 50.30 46First Chicago 49.20 49Credit Suisse/CFSB 39.24 30Canadian Imperial Bank of Commerce 37.72 28Royal Bank of Canada 33.43 18
Top 10, full credit to agents onlyChemical $56.50 79J.P. Morgan 37.80 40Citicorp 31.50 62Chase Manhattan 15.00 38First Chicago 11.29 28Bank of New York 10.91 22BankAmerica 10.23 20Bank of Nova Scotia 5.51 15NationsBank 4.21 27Bankers Trust 3.84 18
Source: Loan Pricing Corp.