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3Q06 U.S. Syndicated Lending: Early turbulence and subdued volumes – but new issues offer silver lining
New York, September 29, 2006 - The third quarter came in like a lion for the U.S. syndicated loan market, but appears to have taken on more lambish qualities in late September, according to Reuters Loan Pricing Corp.
Overall syndicated loan issuance ended at $356 billion for 3Q06, falling nearly one-third from 2Q06's record levels, but eking out a 3% gain over year-earlier figures. With markets turning sterner, overall refinancing volume fell 40% from 2Q06 levels and plummeted 49% for leveraged loans – those backing companies with a rating of less than BBB-/Baa3 and with a loan margin of at least 1.5% over LIBOR. Additionally, loans within the riskier end of the credit spectrum, provided by non-bank or institutional investors (such as hedge funds, mutual funds and Collateralized Loan Obligations or CLOs), fell by 64% to approximately $55 billion.
The overall drop in volume largely reflects a seasonal variation: The third quarter tends to be slower than the second quarter. However, when compared to 3Q05, new lending – particularly merger financing – held up well. 3Q06 M&A lending jumped 47% to $78 billion, compared to the year-earlier period. Last quarter, it was the investment grade market that saw the sharpest increase in M&A financing, but with LBOs stacking up, leveraged M&A lending also increased by 22% to $46.7 billion.
Despite a decline in overall lending between the second and third quarters, the loan market looks ahead optimistically to a quarter likely to be shaped largely by LBOs and M&A lending. The major LBO deals that have grabbed headlines during the last few months are now poised to bring some $50 billion of loans to be syndicated within the next few months. Of this, a $16 billion financing backing HCA Inc.’s $33 billion LBO alone will be a major test of the leveraged loan market. M&A activity and loans backing stock-buybacks also are expected to leave their marks on investment grade lending, bankers prophesize. And given the success of jumbo M&A financings during 3Q06, such as the $24 billion loan backing Anadarko Petroleum’s acquisition of Kerr-McGee, bankers are quite comfortable about the state of the investment grade loan market.
But even with a large pipeline of loans beckoning, there are increasing murmurs about where the market stands in the credit cycle. Even though default rates remain benign and secondary prices of leveraged loans largely stable, are we getting closer to the end of the credit cycle? Perhaps credit is deteriorating at the margin: the 2006 Shared National Credit (SNC) Review indicated that substandard loans have begun to rise – particularly in non-bank lender portfolios
Overall league tables
Though J.P. Morgan retained its lead spot with $92.77 billion of market volume and 26% of market share, the top 3Q06 league table rankings saw some notable changes from 2Q06. Citigroup edged out Bank of America to take the second slot, with $57.78 billion of market volume and a 16% market share. Credit Suisse also made inroads by taking over Wachovia Securities’ previous fourth position. UBS AG, which was not even in the top 10 list last quarter, climbed into the sixth position. .
| 3Q2006 Lead Arranger League Table |
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| Rank | Bank Holding Company | Volume | # of deals | Market Share |
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| 1 | J.P. Morgan | $92,772,474,251 | 190 | 26% |
| 2 | Citigroup | 57,784,745,000 | 90 | 16% |
| 3 | Bank of America | 54,602,874,251 | 167 | 15% |
| 4 | Credit Suisse | 21,873,500,000 | 30 | 6% |
| 5 | Wachovia Securities | 20,478,443,000 | 80 | 6% |
| 6 | UBS AG | 15,837,250,000 | 16 | 4% |
| 7 | Deutsche Bank | 12,971,095,000 | 23 | 4% |
| 8 | Royal Bank of Scotland Plc | 8,208,735,024 | 10 | 2% |
| 9 | Merrill Lynch & Co. | 6,306,750,000 | 21 | 2% |
| 10 | Goldman Sachs & Co | 6,017,500,000 | 13 | 2% |
Leveraged lending
The leveraged lead arranger league table again saw changes in the top rankings since last quarter: J.P. Morgan took the top slot with $23.33 billion, Bank of America, which led the table last quarter, came in second with $12.66 billion. Citigroup ($10.51 billion), Credit Suisse ($8.13 billion) and Deutsche Bank ($6.97 billion) rounded out the top five.
| 3Q2006 Leveraged Lead Arranger League Table |
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| Rank | Bank Holding Company | Volume | # of deals | Market Share |
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| 1 | J.P. Morgan | $ 23,335,200,000 | 74 | 22% |
| 2 | Bank of America | 12,662,850,000 | 63 | 12 |
| 3 | Citigroup | 10,514,995,000 | 29 | 10 |
| 4 | Credit Suisse First Boston | 8,131,000,000 | 26 | 8 |
| 5 | Deutsche Bank | 6,971,095,000 | 17 | 7 |
| 6 | Merrill Lynch & Co. | 6,156,750,000 | 20 | 6 |
| 7 | Wachovia Securities | 4,958,443,000 | 36 | 5 |
| 8 | UBS AG | 3,837,250,000 | 15 | 4 |
| 9 | Goldman Sachs & Co. | 3,237,500,000 | 11 | 3 |
| 10 | Bear Stearns Cos. | 2,902,500,000 | 9 | 3 |
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