Of all the battles faced by treasurers and CFOs, obtaining credit is one of the most basic. And it's a battle in which the ground has shifted a great deal in recent years as the banking industry underwent steady consolidation, eliminating many credit providers. As one bank gobbles up another, corporate credit groups lose members. When two banks that are both in a company's lending group merge, the combined entity is unlikely to offer the company a commitment equal to what the banks had provided previously, says Steven Bavaria, head of Standard & Poor's Corp.'s loan rating business. "It's always less, sometimes quite a bit less."
In the coming months, the number of big banks is expected to shrink even more, given the merger plans already announced between Bank of America and FleetBoston Financial, and J.P. Morgan Chase and Bank One, as well as additional mergers suspected to be on the drawing boards.
So should the new momentum behind this consolidation trend strike fear into the hearts of companies seeking credit? Not necessarily, many experts claim: As the number of banks has been declining, hungry new capital has begun to surge into credit markets from non-bank players–institutional investors, including insurance companies, hedge funds, collateralized debt obligation (CDO) funds and prime rate funds. Either through the sale of loans by banks or at a loan's origination by joining a loan syndicate, these lenders are channeling new liquidity into once stagnant credit markets. Even though the big banks are often leading the syndications, the new interest has meant a lot more cash looking for corporate coffers to call home. "As they've come to the table, there's ultimately more and more of a demand than ever," S&P's Bavaria says. "The liquidity in general has definitely increased."
Recommended For You
Statistics from Standard & Poor's Leveraged Commentary & Data show that 132 institutional investors participated in non-investment-grade loan syndications last year, up from 86 in 2002. That number has risen steadily from 40 in 1997. Steve Miller, managing director of Leveraged Commentary & Data, says that about 60% of the 2003 investors were structured finance vehicles like CDO funds; 15% were mutual funds, and the remainder were insurance companies, hedge funds and others. Loan Pricing Corp., a Reuters subsidiary that provides news and analytics to the loan market, says those institutions accounted for nearly $120 billion in loan issuance in 2003, up from $56.9 billion in 1999.
The growing influence of non-bank lenders has begun to trickle down to the market for loans to midsize companies as well. "Banks did pull back in the last couple of years because of economic uncertainty and rising loan losses, but at the same time, non-bank institutions and specialty finance lenders have come in and offered lending to middle-market companies," says Ioana Barza, senior market analyst at Loan Pricing. "They all want to put their cash to work."
That's good news for small and midsize firms, since they tend to be more reliant on bank lines of credit than larger corporate borrowers, who enjoy a greater access to capital markets. Middle-market borrowers also continue to rely heavily on regional banks as a prime source of lending, and while analysts say that market continues to be healthy, it is also the market most likely to be transformed by further consolidation.
Through syndication deals, again usually led by the large banks, non-bank institutional lenders now account for 38% of all lending to middle market companies for loans between $100 million and $500 million, up from 16% in early 2002, according to data collected by Loan Pricing.
Globalization is also translating into new sources of capital for large companies or middle-market companies with sizable overseas operations or sales, coming primarily from banks in Europe and Asia.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
