Despite strong demand and high liquidity, the syndicated bank loan market may be losing some luster after five years of steady growth, according to senior lenders.
Speaking in New York on Monday at the syndicated loan symposium sponsored by American Banker and Strategic Research Institute, lenders warned that pricing for most loans is on the rise.
"The recent volatility in all capital markets initiated by Asia has created an environment where the bull run in terms of syndicated lending is slowing and may be coming to an end," said a keynote speaker, James B. Lee, vice-chairman and global head of investment banking at Chase Manhattan Corp.
However, lenders did agree that market is thriving in terms of volume and should continue to do so through next year.
For the first time, domestic issuance of syndicated loans is expected to top $1 trillion this year. Through October, $831 billion of loans had been syndicated, according to Securities Data Co.
But pricing for investment-grade credits has bottomed out in the second half, making loans to large corporate borrowers only slightly profitable and in many cases loss leaders.
Adequate reward for risk is also an issue.
"We do have concerns about the direction of risk in the market today," said David Gibbons, deputy comptroller for risk evaluation at the Office of the Comptroller of the Currency, who made the regulatory keynote address.
An OCC study soon to be released reveals that "relatively few banks have the systems in place to do adequate risk-reward analysis," said Mr. Gibbons. He urged lenders to improve their credit risk measurement practices and maintain fundamental underwriting standards.
Bankers at the conference also noted other trends in the market, such as the increasing role of nonbank participants.
According to Portfolio Management Data LLP, institutional investors bought 37% of the loans in the leveraged loan market so far this year, versus only 25% last year, said Kevin F. Burke, managing director and head of syndications distribution at BT Alex. Brown.
"The institutional segment represents the fastest-growing participant class in the leveraged loan market. Their involvement in 1997 has helped spur the creation of new hybrid structures such as second lien, 'covenant- lite,' and split-collateral deals," said Mr. Burke.
There are now 59 institutional investors in the leveraged loan market, up from 46 last year and 14 in 1993, according to Portfolio Management Data.
"It is clear that the bank market has moved through a turning point, with significant changes ahead well beyond the seasonal loan demand and pricing pressures of this quarter," said the conference chairman, Peter Gleysteen, managing director and group head of global syndicated finance at Chase.