Loans have been suffering, alongside other credit markets, with volumes of new deals down by as much as a third on last year. Loans are no longer profitable enough for banks to want to make them for their own sake. At the same time, clients need bank support more than ever before as the capital markets close to many and relying on commercial paper roll-overs becomes dangerous.
That offers a great opportunity to leading syndicated loan banks that have put their faith in using their balance sheets to secure M&A and capital markets business - as long as their portfolio managers can then mitigate the credit exposure concentrations.
These banks hope that careful due diligence and disciplined portfolio management will keep any losses within manageable limits while letting them steal market share in other areas from pure investment bank rivals.
But the relationship between the loan officer who originates deals and the portfolio manager who has to accept them onto their balance sheet is not always a serene one.
Many banks, particularly in the US, have suffered big losses from their loan books, and are trying to reduce their exposures to specific sectors and credits. Some banks that merged at the credit cycle's height are facing potentially dangerous concentrations in fallen-angel credits such as Deutsche Telekom, concentrations that they must try to offset at what is hardly the most auspicious time. Their task is made still trickier since secondary loan and credit derivative markets are still comparatively illiquid and brittle.
Some banks seem to be settling for stopping their exposures growing any further rather than selling loans on at a big loss. One loan syndicator ruefully admits that his firm is simply trying to limit the damage: "Unless you have a real problem with the credit per se, there's no price at which to sell names such as DT that won't lose you lots of money." Holding on and hoping for the best may not seem the safest strategy, considering the rapid fall this year of several once highly rated corporate credits into bankruptcy, but the bank is still not willing to take immediate hits by selling down.
As credit deterioration and increasing rating agency efforts to spot problems before they actually happen endangers access to the commercial paper market, corporates are turning to banks for extra back-up lines. General Electric suffered an unexpected broadside from Pimco bond fund manager Bill Gross in March over the size of its CP programme relative to the back-up bank credit lines covering it, and had to scramble to reassure investors that its credit was still sound.
Many corporates are desperately trying to shore up their balance sheets and their liquidity resources at exactly the time banks would rather reduce their exposures.
Despite a scary credit environment driven by problem areas such as telecoms and autos, though, the loan market has quietly continued, with deals getting done at a price. Indeed for more creditworthy issuers this price has often been better than they might have expected.
Fergus Elder, co-head of loan capital markets at JPMorgan, says: "Volumes of new loans are down about 30% on last year but there is still tremendous demand - so the effect on secondary trading has been limited.
"The primary market is still name- and rating-sensitive, and obviously news sometimes still leaks out and unnerves credit committees but things seem to have bifurcated around the A- level. Above that, things are fairly easy - if anything, the simple, no-brainer credits have cheapened. With lower-rated borrowers, where there may be a real credit story to get across, things are a bit harder and pricing more expensive. But the real failings are not related to the credit markets generally but to specific credits."
Life is tougher for the sub-investment grade company that can no longer hope for cheap loans. But for higher-quality issuers the market is still very much open, as falling supply boosts demand. Tim Ritchie, head of global loans at Barclays Capital, says: "It's an interesting market out there. You have this dichotomy of investors with strong liquidity, at the same time as there are lingering concerns over credit risk. That's the equation we need to solve for borrowers." In response, banks are carrying on lending but limiting concentrations in names and sectors, and ensuring new loans come with covenants to tie them as closely as possible to the borrower's business plan.
Plenty of liquidity for the right credits
Atiq-Ur Rehman, head of the international syndication business at Citigroup, agrees that the credit cycle has not killed new lending: "There are fewer deals this year, due to M&A slowdown and credit and exposure issues in the telecoms sector," he says. "Last year, new volumes of loans were down about 30%, and this year I expect they'll be down another 25% to 30%. There is a marked divergence in credit spreads given and lending appetite between A or better names and BBB or worse names."
Ritchie at Barclays Capital agrees that banks have plenty of money to put to work with safe borrowers. "When the business environment is this uncertain, you have to ask more questions before allowing access to the balance sheet," he says. He adds: "You can structure around these kinds of issues so that the requirements of potential syndicate banks are satisfied. There are several hundred bank investors looking to lend in Europe - there's plenty of liquidity out there. However, the leading players now want to know what the true relationship prospects are before lending. For the right client at the right price, deals are getting done. We haven't seen lots of failed transactions this year - in fact, most deals have got done quite well."
None of this means, though, that banks are not being more careful when providing access to their balance sheets - events of the past year have proved that even the safest-seeming loan can quickly become a black hole.
Many banks now have specialist risk managers to look after the loan book, and have separated ownership of loans from their origination, so that portfolio managers act like internal investors with authority over which assets they accept. If an originator wants to book a loan that is below the firm's internal target returns, he or she has to find another part of the bank willing to subsidize the loan's cost.