The turbo-charged loan syndication market lost speed in January, raising concern that lenders may be unable to match 1996's record volume.
After arranging a whopping $887 billion in loans in 1996, most big banks began this year with budgets prepared to handle 10% to 15% more volume. The extra allocations, coupled with the entry of new players, have made competition for loans intense.
But so far, deals have been slow to develop. While January is often a quiet month for loan syndications, this year's slowdown has proved especially worrisome.
"If volume remains flat or decreases and the leveraged sector, in particular, suffers from price compression, then earnings generated in that segment will be lower at a time when every banker's budget is higher," said Michael H. Rushmore Jr., a vice president in loan syndications and trading research at BancAmerica Securities, the investment banking arm of BankAmerica Corp.
"What we're seeing is that the overall syndication activity may be flat against last year," added Tom Bunn, the head of loan syndications at NationsBank Corp.
If that happens, banks may be hard pressed to achieve the lofty goals they have set for loan syndication operations. That could encourage some lenders to lower their standards and participate in poorly structured deals.
"Come May, June, July, or August, bankers might start doing dumb things when they figure out that they won't make budget unless they start pushing the edge of the envelope hard," said a veteran syndicated lender.
While bankers said the entire market remains challenging, they are particularly concerned about the leveraged sector, which generates the bulk of lending revenues. New entrants, including Morgan Stanley & Co., Donaldson Lufkin & Jenrette, and Salomon Brothers, are concentrating on the leveraged market, as are regional and foreign banks.
Lower pricing is an inevitable consequence of the increasingly crowded field.
"It's a double hit," said BankAmerica's Mr. Rushmore. If banks cut fees by as much as 20% in the leveraged arena, he said, they would have to generate 35% more volume to achieve a 10% increase in revenue.
The investment-grade sector already has seen pricing erode. Now bankers are predicting a slowdown in volume as lower prices make refinancings unnecessary.
"Each year, big backup syndicated credits are redone," said Lawrence Cohn, a bank analyst at PaineWebber. "Pricing is as close to zero as it can get. In the next round, banks will have to start paying borrowers."
The decrease in refinancings does not pose any threat to wholesale banking profitability, said bankers. It is the leveraged sector that they are most worried about.
"More people are trying to take a piece out of a pie that is not growing as quickly as the appetite for it," said Peter Gleysteen, a managing director at Chase Manhattan Corp.
Right now, experts said it is difficult to quantify the decrease in the last month's deal flow. Indeed, January saw Chase bring two big loans to the market, including a $2 billion deal for A.H. Belo and a $1.75 billion credit for American Standard.
Other loans launched last month included J.P. Morgan's $1.5 billion deal for the Florida Residential Joint Underwriting Association, and Bankers Trust's $750 million loan for Kohlberg, Kravis & Roberts.
These deals hit the market following the seasonal fourth-quarter rush to take advantage of various tax incentives to complete transactions before the end of the year.
Nevertheless, experts said the slower deal flow was evident in the secondary market, where the value of loans traded rose as banks sold fewer new deals.
Still, some bankers remain hopeful for the months ahead. It would only take a few blockbuster loans to put volume ahead of last year's pace, they said.
"You go through spells like this and wake up in a cold sweat, and a week later, things are absolutely (crazy)," said Mr. Bunn.
"We may find that nothing goes bad in 1997 if the economy stays strong," added another loan syndicator. "Bankers will get deals done, but in the midst of that, they may be sewing the seeds for their own demise when a lot of companies run into trouble when the economy turns down."