| His Chase business card reads James Bainbridge Lee, Jr. On Wall Street, he’s simply known as Jimmy. In his trademark blue shirt, white collar and cuffs and silver-dollar braces, he looks more like the investment bankers he is trying to beat than a traditional money lender. More Gekko than McGillicuddy. A Chemical man through and through, Lee has yet fully to come to terms with his old bank’s merger with Chase, despite the Chase logo being on everything from the garish red entrance lobby of the Park Avenue headquarters building to the wrappers of the sugar that comes with the morning coffee. At 43, Lee looks too young to be head of global investment banking at the largest bank in the US. His boyish smile, his crimped, gelled hair and his tan go with an affability that means more people warm to him than are put off by his oversized ego. But if he says “I” too often where others would say “we”, he can be forgiven. After all, his clients tend to say Jimmy when they mean Chase. His corner office is full of plastic-encased tombstones, mementoes of 21 years of lending. Between them stand framed photographs – Lee receiving awards, his wife and children, Lee with Ronald Reagan. Alone on a shelf in a cabinet is The Downing Street Years, Margaret Thatcher’s autobiography. A country-club bag lies on the floor. The desk and a large circular meeting table are covered in paperwork. Those who know Lee describe him as an arch-preppy, a product of the upper-class New England educational system. “He never hides the Bainbridge part of his name,” says one. After boarding school in Connecticut he studied economics at the top-flight Williams College. Immediately after graduating he joined Chemical, spending three years running its merchant bank in Australia before returning home to start its loan-syndication department in 1984. That move was the making of Lee. Since then the market has moved away from bilateral loans towards syndications, and two merger booms have fuelled demand for large sums put together at short notice. As a result, Lee’s department became the driving force of Chemical and, in its merged form, Chase. In his rapid ascent through the hierarchy Lee has undoubtedly touched some raw nerves, but he’s never been one to let tradition or more worldly seniors stop his sharp-elbowed advance. However many enemies he has made on the way up, he is now the man who can get you more money, more quickly and with more certainty than any other banker in the US. Ask his clients. ITT, for example, both in its old conglomerate form and in its new guise as four independent entities, has used what is now Chase for over $30 billion of financing. In December 1994 the group was planning to acquire the Caesars World casino chain, a deal it went ahead to complete for $1.7 billion. Ann Reese, now chief financial officer of ITT Corp, needed to tell ITT chairman Rand Araskog whether the firm would be able to assemble the financing swiftly enough to make a bid. “I needed to make one call to know if I could get it done,” says Reese. “Jimmy is the person I called.” Richard Bressler, chief financial officer of Time Warner, adds credence to Lee’s claim that he has never let anyone down. “Chase, particularly Jimmy Lee, has demonstrated the ability to deliver on complex financings,” says Bressler. “When I pick up the phone and call him, he’s always been there to deliver.” An example was an $8.3 billion acquisition financing and revolving credit facility last summer, which ran parallel with the financing of the sale of a 51% interest in Time Warner’s Six Flags Theme Parks to an investor group led by Boston Ventures for close to $1 billion. Lee picked up a colossal $32 million in fees for Chase for putting together these deals. The loyalty of such big-ticket clients is one of the reasons why the new Chase took a 26% market share in the US syndicated-loan market last year. The bank argues that in fact the figure should be higher, since Loan Pricing Corporation, which compiles the statistics, includes administrative, syndication and documentation agents in its figures, not just the bank claiming the top-left spot on the tombstones (the administrative agent that runs the show). Citibank, at number two, had only a 12% market share. A breakdown by deal size gives an even better idea of Chase’s – and Lee’s – influential position in the market. In 1995 Chase had a 31% share of deals over $1 billion, a 48% share of deals over $5 billion and a 55% share of deals over $7 billion. Figures for the first quarter of 1996, using data provided by Chase which give full credit to the administrative agent, indicate that Chase had 48% of all syndicated loans, 57% of loans over $1 billion and ran all three of the deals over $7 billion. The bank syndicated $60 billion worth of deals during the quarter, half as much again as the rest of the top five – Citibank, JP Morgan, First Chicago and Bankers Trust – combined. So much buying power is concentrated in Lee’s hands that he is often described as a new Michael Milken, the former employee of Drexel Burnham Lambert who in the early 1980s controlled the US junk-bond market. Pushing up profits Those who draw a comparison with Milken are quick to add that Lee’s integrity has never been questioned – Milken’s reign finally ended when he pleaded guilty to six counts of securities fraud in November 1990. But it’s not only on the score of business ethics that the similarities shade off into major differences. Milken was the predominant source of high-yield finance to companies in the 1980s; Lee is banker to much of corporate America, not just to raiders. The market over which he holds sway is far larger than Milken’s was. Junk-bond issuance peaked in 1988 at $68 billion. Last year corporate borrowing drove the syndicated-loan market to a record volume of $818 billion. And in the days when Milken could be said to have owned the market, at the beginning of the decade, high-yield volumes were tiny. In 1981 junk issuance totalled $1.47 billion, $1.08 billion of which was issued by Drexel. Lee’s volume in the loan market last year, even taking the pre-merger Chemical-only figures, was $258 billion. The sheer size is important. “There’s no doubt that Jimmy’s dominant share of the syndication market really creates, in effect, an advantage for people who work with him,” says Steve Schwarzman, chief executive of leveraged buyout firm the Blackstone Group. Being involved in more deals than any other bank gives the Chase team a particularly acute and timely grasp of market conditions. While other firms are reading about a deal the following day, Lee’s origination department has probably already seen it. “With intensity and focus, you can mark to market your entire approach,” says Lee, “so you’re able to fine-tune everything that you’re doing on a daily basis.” Chase has an impressive distribution capability – “We talk to the institutions three or four times a day, we have a very good understanding of their requirements,” says head of syndicated distribution Greg Nelson – but it’s hardly the position of persuasion Milken achieved. Other banks and prime-rate funds will buy syndicated deals from other people – whether they are wise to do so is another matter. “Can someone else do a $4 billion deal? Sure,” says one principal. “Are you better off having Jimmy do it than just about anyone else? Yes.” Does his market position give Lee too much power? “I wouldn’t have used the P-word,” says Lee. “It’s true that if you look at our share of bank deals of $5 billion or more, we’ve lead-managed about two-thirds of them. It’s not so much that we have influence, but that our name is associated with confidence. If there’s an issue about whether a big, tough deal gets done, we get the call, whether or not we have an existing relationship.” Lee’s team has not always held the top spot in the league tables. In 1989, Manufacturers Hanover Trust, Citicorp and Bankers Trust all ranked higher than Lee’s syndicated-loan group at Chemical. Only in 1992 did Chemical begin to pull ahead, ending the year with a 15% share. By the following year it had 20%, rising to 21% in 1994 and 1995. The merger with Chase, which closed on March 31, takes this to 26%. But did Chemical make Lee, or Lee Chemical? The answer is probably a bit of both, with Lee’s part in Chemical/Chase’s success getting more important in recent years. The early gains in Chemical’s market share were not so much won by Lee as lost by others. Citibank ceded its leadership position after a number of loans it made to high-profile companies, especially in the retailing sector, went sour. To add insult to injury, many of the debtor-in-possession refinancings for these companies which followed were done by Chemical. And at Bankers Trust the then chairman, Charles Sanford, refocused on specialist products, such as derivatives, leveraged finance and Latin American debt, leaving room for others at the top of the syndicated loan league tables. When Chemical took over a beleaguered Manufacturers Hanover in 1991, Lee gained new relationships to feed Chemical’s strong distribution network, adding another few percentage points of market share in the process. The merger with Chase adds yet more clients. On the surface, then, it would seem that Lee’s supremacy is largely the result of his running the loan operations of a combination of three banks which already held strong market positions. There’s more to it than that. Some bankers note that Lee made a name for himself at Chemical before that institution built up such a powerful platform. “What makes him formidable is that he doesn’t like to lose,” says one. “His instincts at the end of the deal are very good. Jimmy tracks perfectly the last two days of the deal, when you’re in trouble, when the client doesn’t want something, when you need more money.” Without prompting, comparisons are again drawn with Milken. Even when Milken’s influence was at its height, many other firms had more capital than Drexel. Before the announcement of Chemical’s merger with Manufacturers Hanover in July 1991, the market capitalization of Chemical, Manufacturers Hanover and Chase combined was $6 billion. Today it is over $30 billion. Stock-market analysts praise the way the bank has cherry-picked staff and used leadership positions in different areas of consumer and wholesale banking to maximize its use of capital. If the figures are presented for the combined entity, last year Chase had after-tax earnings of $2.97 billion and a return on equity of 19%. Lee has been one of the biggest drivers of profit. Chase vice-chairman Bill Harrison notes that 10 years ago he had innumerable competitors, because his bank simply lent money. Syndication has narrowed the field – banks need to have distribution strength in order to take part. Lee has nurtured both sides of his business. “We’ve never started anything we didn’t finish,” he says. He believes that’s why firms come to him. To keep the promise of a comprehensive service, Lee has built a syndication desk that runs more like a bond-trading room than anything usually seen in a commercial bank. He fights to take the top-left spot of administrative agent on deals so that he can control the structuring of the credit. Lee thinks of any loans being syndicated by his team as having an “approved by Chase” label on them. If he passes on duds to investors, they’ll stop taking his calls. “One of the keys to understanding Chemical,” says a banking analyst, “is that of the loans originated on the Chemical side – forget the Manny Hanny side – they have had almost no dogs. Almost none. That enables them to be bold, because they think they know what they are doing.” For all the billions Lee has committed in recent years, sources cite only two deals that have performed poorly – a $1 billion loan to entertainment company DreamWorks SKG and a $425 million syndication managed for clothing manufacturer London Fog Corporation. Chemical was reported to have been left with $400 million of the DreamWorks loan when investors failed to buy into the start-up founded by Steven Spielberg, Jeffrey Katzenberg and David Geffen. Sources at Chase say the $400 million figure is “way too high”. London Fog had to be restructured within a year because the company underperformed. For the most part Lee is credited with, as one client puts it, “impeccable judgement”. Some firms value that judgement so much that they will pay for it even when he is not raising money for them. When Chrysler became the subject of a hostile takeover by Kirk Kerkorian’s Tracinda in April 1995, the Detroit car maker assembled a redoubtable defence team, including Morgan Stanley, CS First Boston and Salomon Brothers. But it also secretly retained Chemical to advise on whether Tracinda would be able to put financing in place for its $20.4 billion offer. “Jimmy Lee is the best bank syndication director out there,” says Chrysler treasurer Tom Capo. “We retained Jimmy’s group as a strategic adviser to us regarding all syndication matters.” Lee advised that Kerkorian would not be able to find the money. He was right. Lee claims the loan decision is a question of character – will the borrower sit down to thrash out a deal if something goes wrong? Says Blackstone’s Schwarzman: “He moves the deal around to make it work, with people he likes. And he doesn’t like everybody.” One person Lee does like is Michael Jordan, chief executive of Westinghouse Electric. When Jordan took over the ailing company in 1993 he set about changing its product mix, selling real-estate developer Westinghouse Communities for $556 million and making plans for the divestiture of furniture-maker Knoll Group, Westinghouse’s defence electronics division and some smaller properties. It was hoped that Westinghouse could be turned around partly by building a bigger presence in the high-margin, high-growth broadcasting sector. The centrepiece of the strategy was to be the purchase of CBS, one of the three US national broadcasting networks. “The Street didn’t think the deal could get done,” says Lee. “The average equity analyst couldn’t work out how Westinghouse could borrow $7.5 billion in its present state to buy this theoretically overpriced network.” Lee thought it was an excellent deal for Westinghouse. “I personally am a big fan of what Jordan and [Westinghouse chief financial officer Fred] Reynolds are doing there,” he says. Big numbers, fast That endorsement led to $7.5 billion being guaranteed to Reynolds. Lee was called before the CBS advisers three times to promise that the money would be forthcoming. To keep his word, he marshalled a team of 30 bankers, who came up with a structure of two seven-year tranches of $2.5 billion each and a 30-month asset-sale bridge loan of $2.5 billion. Worried that Westinghouse might have to back away from the deal, CBS had negotiated penalties which would take effect if the financing did not fall into place on time. As it turned out, the loan was oversubscribed by day four and the call for cash was stopped on the seventh day. “We cut it off at $14.5 billion, but there were still people coming in,” says Reynolds. “It could have gone to over $16 billion.” The complexity of financings like the Westinghouse deal is what earns Lee and his department such high fees. In this case the $7.5 billion facility reaped them $25 million. Did they earn it? “Sure, they did a terrific job,” says Reynolds. But having such a strong market presence has other advantages. Having collected the fee for taking a risk with Westinghouse, Lee landed for Chemical an advisory role in the divestiture of ESG, Westinghouse’s defence electronics subsidiary, an assignment shared with former deputy treasury secretary Roger Altman and JP Morgan. Lee’s job was to assess the credibility of potential acquirers’ bids. By January the advisers had found a buyer, Northrop Grumman, and the soon-to-be merged Chase and Chemical loan teams provided $4.8 billion to Northrop to complete the purchase. Having already done due diligence on Westinghouse, Lee was able to approve a loan for the deal within 24 hours, in effect reducing the bank’s exposure to Westinghouse in favour of Northrop – and picking up another fee. The new Chase has a pedigree of being able to deliver big numbers, fast – Lee arranged the biggest deal ever, $25 billion for General Motors in 1993, and provided American Home Products with the $10 billion it needed to acquire American Cyanamid a year later – but it has not had things all its own way. There are big deals that Lee does not see. In the last quarter of 1995, Citibank knocked Chemical off the number-one spot thanks to a $12 billion loan to Walt Disney to fund the entertainment giant’s acquisition of Capital Cities/ABC. Both Citibank and JP Morgan, which often trade second and third spots in the league tables, are described by their clients as doing an outstanding job in the loan market. But both have blue-chip client lists with solid credit ratings which generate little or no fee income on the standard loan product. Chase aims to get business in what it calls situational financings, when the company concerned has a tough story to tell. A recent example, announced on March 28, was Chase’s decision to provide $3.7 billion to discount retailer Kmart, a facility described by chairman Floyd Hall as “a milestone in Kmart’s turnaround strategy”. By contrast, in Disney’s deal with Citibank there was never going to be any doubt about the company’s ability to raise the money, even given the large sums involved. Despite Chase’s rankings stumble late last year, there are signs that it could strengthen its position even further. Citibank, its nearest rival, is rebuilding itself around its worldwide consumer banking and emerging market wholesale banking businesses. Having once topped the loan league tables, Citibank no longer seems to consider it a number one priority to fight Chase for syndicated loan volume. Lee, though, is intent on making global investment banking at Chase an even more powerful force than it already is. Talk to Lee for more than five minutes and the phrase “one-stop shopping” will inevitably come up. The concept is not exclusive to Chase, but some in the market consider that Lee is trying to brand it as such. The package involves going beyond putting the bank finance in place for a deal – in addition Chase offers clients M&A advisory services and high-yield bond underwriting. By the end of this year, one-stop shopping will also offer equity issuance. Playing in other parts of the capital structure does not mean Chase is on the brink of dominating any of them, but the information feedback to the loans desk could help strengthen Lee’s grasp. Says ITT’s Reese: “Because they offer a number of services, they are in a dialogue with a client more and more, and they are going to get more of the deal flow because they’re not just pitching blind.” More important still for Lee, a strong M&A presence will elevate his contacts from the level of chief financial officer level to that of chairman and chief executive level. Says Mark Davis, who was recently hired from Salomon Brothers to add credibility to Chase’s merger operations: “There’s no business like the M&A business for getting to know your client. Once you have the CEO’s ear, you can compete for all that firm’s business.” Lee would also rather socialize with chief executives than with treasurers. Critics accuse him of being star-struck. Displayed in his office is a letter from Spielberg, Geffen and Katzenberg thanking him for his part in raising $1 billion for DreamWorks, the deal he could not then fully syndicate. Lee serves on the DreamWorks board. Also on display are pictures of Lee at dealmaker Herb Allen’s Sun Valley entertainment conference, and a note from Allen thanking Lee for attending. Some argue that Lee’s quest to be a dealmaker rests on a desire further to escape the drab image of commercial bank lending. Loans competition hots up Lee is smart enough not to confront Goldman Sachs and Morgan Stanley head-on in M&A advisory, or Merrill Lynch and Donaldson Lufkin & Jenrette (DLJ) in high-yield bonds. Others have tried and failed. Instead Lee talks of changing the rules of the game. “We have a specific agenda to make sure we look like nothing that has gone before us,” he says. That means offering clients the flexibility to change between bank debt and junk bonds in 20 minutes over the telephone (as happened with Time Warner’s Six Flags deal); giving commitments to finance a transaction within 24 hours; and offering lower fees overall, because the bank is being paid fees on all elements of the capital structure. The two transactions the bank likes to showcase are the buyout of UCAR Global Enterprises from Union Carbide by the Blackstone Group, announced in October 1994, and Clayton Dubilier & Rice’s October 1995 acquisition of packaging company Riverwood International from Manville Corporation, which held an 81.3% stake. In the case of UCAR, which Union Carbide was in the process of spinning off when Blackstone decided to pounce, there could be no question of delay in finding the financing. Within weeks, Chemical had put up $700 million in senior bank debt, a $375 million subordinated bridge loan and $10 million of equity. To cement the transaction, Chemical’s Walt Shipley had to call Union Carbide’s Bob Kennedy to give a chairman-to-chairman assurance that the $1 billion was there. The Riverwood deal took the concept a step further, in that Lee actually took the idea of the buyout to Clayton Dubilier & Rice. The advertisement which appeared in the Wall Street Journal on April 16 this year to mark the closing of the deal had five separate tombstones announcing Chase’s roles as equity investor, financial adviser, dealer manager for the tender of existing debt, lead manager on $650 million of high-yield securities and provider of $1.69 billion in bank debt. An earlier draft of the advert played up Chase’s role even more, to the point that other parties asked that it be redrafted. Although the deal is a milestone in Lee’s quest to create a new kind of banking hybrid, sources note that CS First Boston and Merrill Lynch played a strong supporting role on the high-yield offering. If Chase is to succeed in branding one-stop shopping as its own, it will have to fight off competition from investment banks driving at the same goal from the other side of the Glass-Steagall barriers. In some respects, Chase is behind the game. Merrill Lynch, which hired five of Lee’s syndication team 18 months ago to start up a leveraged-loan operation, has already led a deal which included a $950 million senior credit facility and a $200 million convertible issue for manufacturing concern Elsag Bailey. Says Charles Wickham, one of the ex-Chemical bankers, now a director in the loan-syndicate group at Merrill: “Most people can only say one-stop shopping on the debt side. We can say it across the entire capital structure, from the senior all the way through to the equity side.” Morgan Stanley, Goldman Sachs and DLJ have all moved to offer bank loans to their clients, although the commercial banks are quick to ask how big a loan these players could make. DLJ, for example, is raising a $900 million bank fund from which to offer loans to clients. The terms of the fund, however, restrict the size of any one loan to $300 million. Says Bill Finnegan, head of high-yield bonds at Chase: “When a deal like Riverwood comes in, there aren’t many people you can go to for your $1.6 billion.” There’s a footnote – to raise the $900 million fund, DLJ put up equity and borrowed the balance from a bank syndicate. The syndicate was led by Chase. Some institutions, such as Goldman Sachs, have shown themselves capable of doing larger deals. Last year the firm was one of four lead banks which put together a $4 billion credit facility for UK electricity generator PowerGen’s proposed acquisition of UK electricity distributor Midlands Electricity. The deal was disallowed in May by the UK government. To beat the commercial banks at their own game, however, the Wall Street firms will have to show that they can hold loans, not just syndicate them, and have the strength to weather a recession. Says Harold Siegel, a director in the loan-syndicate group at Merrill: “One thing some underwriting banks have used against us is they say that we don’t hold on to portions of the transactions we underwrite. We always hold a significant piece of everything we agent. Merrill has the capital to do that.” Wall Street firms, however, have never endured a period when they have taken loan losses. The next recession will be their first as lenders. “Commercial banks have bigger balance sheets,” says Art Penn, managing director at Bankers Trust in New York. “The worst-case scenario for them is that a bad loan just goes on the balance sheet like any other.” Institutions which have taken the same steps as Chase towards one-stop shopping, such as Credit Suisse, parent of CS First Boston, and NatWest Markets, which bought M&A boutique Gleacher & Co last October, will be strong competition. Each has heavy hitters in M&A. But while the chequebooks may be big enough to back deals, non-US banks often cannot move fast enough to clinch them. Bill Harrison, head of wholesale banking at Chase, Lee’s long-time boss and mentor, points out that at $30 billion Chase has a bigger market capitalization than Merrill, Goldman and Morgan Stanley combined. On the subject of competition in one-stop shopping, Harrison is succinct: “Capital is important, and we have capital.” So if the investment banks fail to stop Lee’s capital-rich juggernaut, what will? One-stop shopping Lee’s record does not mean Chase will never suffer problem loans. But the capital the institution has is sufficient to enable it to absorb losses, and Lee makes his money by syndicating, not by holding big loans. On the demand side, the investor base is becoming more diversified as prime-rate funds and other non-bank institutions buy into syndications. Already a quarter of all syndicated loans are sold to institutions in B, C and D tranches at maturities from six to nine years. A broader investor base is less likely to turn its back on Lee’s loan product than is an homogenous group of commercial banks, all subject to the same market or regulatory forces. Could Chase and Lee part company? Although he is said to have threatened to join Citibank in 1994 unless given a more senior reporting relationship, Lee has been given so much freedom to pursue one-stop shopping on behalf of the bank that he could hardly be happier elsewhere. Says Harrison: “Jimmy likes our organization, he likes our strategic platform, and we compensate him well. That’s why he’s still here.” Nor can analogies with Milken be stretched to the way Lee works. Milken worked for himself under the aegis of Drexel; Lee is firmly a part of Chase. Where Milken was secretive, Lee is open, so much so that a Chase public relations man has to scramble around Lee’s office covering non-public documents when journalists arrive. Lee has none of the introverted quirks of Milken either. He has a house in the New York banker belt near Greenwich, a wife and three children, and avoids working at weekends so that he can take his kids to play in their junior ice-hockey and football leagues. The threat to Lee is not from within Chase. Having engineered his position over time, he has no natural successor there. Nor do his competitors have the measure of him. His future depends on whether there really is an expansive market for the concept he has identified as his own – one-stop shopping. Listening to Lee describe the future, with Chase as the leading department store bank purveying a gamut of corporate finance services, it is easy to become enthused with the idea. What tends to be forgotten in all the hype is that banks are the ones promoting the service – there’s less indication that companies or leveraged-buyout sponsors are demanding it. The man who has made his name listening to clients is betting the bank on a vision not all of them want, or need. One-stop shopping is not always the best answer. Says Kevin Conway, a senior executive with Clayton Dubilier: “While there were many positives for us in Chase’s role in Riverwood, in many instances it may be more attractive to us to involve different groups for bank financing and high yield. There are benefits to having two institutions review the capital structure, the company and the credit, and give a favourable response.” The other disadvantage for leveraged buy-out firms is that one-stop shopping violates the old Kohlberg Kravis Roberts rule of rewarding mandates to firms which bring ideas. The fees KKR handed out in the 1980s were legendary, but ensured that if bankers saw an opportunity their first call was to KKR. In the Riverwood transaction, the fact that almost all the mandates were given to Chase meant that Clayton Dubilier & Rice returned few favours for ideas brought to them which fell by the wayside. Similarly, corporates value the different ideas that firms with different cultures bring them. “We use a variety of different investment bankers,” says Bressler at Time Warner. “That tells you that my philosophy is that there is always an advantage to getting different bankers involved. I don’t think we will ever go to one firm for all of our services.” Whether or not Chase becomes the new type of bank he expects, Lee’s pursuit of power could be his undoing. As he strives for more market share, not all of those clients who say Jimmy when they mean Chase are going to be able to have him running their deals. For all the talent in the team, the clients want Lee himself. Says Schwarzman: “Jimmy is all over the deals. He’s a very good manager, but on deal day, it isn’t delegated. The real risk to [Chase] is that its market share is too big, and Jimmy himself can no longer perform the role he always has. Then they start losing control and do some stupid things.” |
