Magazine article American Banker

Investment Banks' Brash Style Changes Leveraged Loan Game

Magazine article American Banker

Investment Banks' Brash Style Changes Leveraged Loan Game

Article excerpt


When Atlantic Richfield Co. agreed last June to sell part of its stake in Arco Chemical Co., Lyondell Chemical Inc. had to move fast.

Arco's share price was uncharacteristically low, leaving little time for Lyondell to solicit bids for a financing package. But within a month Lyondell had $7 billion in cash-and Arco Chemical.

What may have sealed the deal was the quick response of Lyondell's merger and acquisition advisers, J.P. Morgan & Co. and Donaldson, Lufkin & Jenrette Inc. As Lyondell negotiated, the firms worked behind the scenes to draw up plans for a syndicated loan package funded in large part by institutional investors.

By the time syndication closed, it was the largest leveraged loan of the 1990s.

"If you show up with the money, it takes a lot of the issues off the table," says Harold Philipps, managing director and co-head of DLJ's senior debt group. "It provides an ease of execution."

The deal was seen as a coup for Morgan, which historically had been an investment-grade lender. But it was an even larger victory for DLJ, a Wall Street firm that had not made its first loan until 1996.

As the Lyondell case illustrates, investment banks are increasingly using their existing relationships with companies and investors to wrest away profitable loan business from commercial banks.

Basically, investment banks syndicate loans the way they underwrite and sell bonds. By doing so, bankers say these firms have won a distinct advantage in 1998, as record M&A activity and market tumult played to their quick-reacting strength.

Meanwhile, many established commercial banking lenders were caught flat- footed.

"The way investment bankers approach the high-yield market is influencing how loans are structured and brought to market," said Mary-Etta Schneider, an executive vice president and head of leveraged finance at BankBoston Corp. The loan market "is feeling a lot more like the high-yield market."

In many ways, Lyondell was just a model for the 135 leveraged loans led by investment banks in 1998. Those firms combined to increase their leveraged lending volume by 173% from the previous year. Their combined market share now stands at 17%, up from 2% in 1995.

Among investment banks, three have led the charge: Credit Suisse First Boston, Donaldson Lufkin & Jenrette, and Lehman Brothers. Together they combined to manage $33.1 billion last year, 64% of the $51 billion syndicated by investment banks.

Though those banks have risen at a different pace, each has taken the same basic route up the leveraged lending league tables. They have hired away top talent from commercial lenders and have integrated lending with other business lines.

The relative newcomer to the group is DLJ, which launched its lending business in 1996. Mr. Philipps, hired from the Bank of Nova Scotia, and co- head Eric Swanson, who runs DLJ's syndication team in Los Angeles, have syndicated more than $10 billion in less than three years.

Lehman Brothers started its loan group in 1991, tapping Bill Gates, a loan executive with Manufacturers Hanover, to lead it and Chris Ryan, a distressed-credit researcher and M&A adviser with Salomon Brothers Inc., to lead distribution.

Credit Suisse First Boston was part of the "Class of 1994," a year when major investment banks formed syndicated lending divisions. Though classmates Merrill Lynch & Co. and Goldman Sachs & Co. remain in the business, Credit Suisse First Boston alone managed 34 deals in 1998-equal to the number led by Merrill and Goldman combined.

"This, so far, has been a five-year project, not a one-year phenomenon," said Bruce Ling, managing director and head of loan syndications at Credit Suisse First Boston. …

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