Business lending has been a lonely source of recent growth for banks, and already it's coming under scrutiny for signs of a bubble in the making.
Issuance of syndicated credit jumped about 40 percent from the first quarter to $547 billion in the second quarter, according to data from Thomson Reuters LPC. That's more than five times the crisis-induced low of $98 billion in the third quarter of 2009.
Even before the June 30 figures could be tallied, anxiety was developing over the narrowness of credit spreads and the willingness of some lenders to push the envelope on loan pricing and terms. Banks did little to calm those concerns as they took down a larger share last quarter of syndicated credit issued to the riskiest borrowers. Banks funded 43 percent of syndicated leveraged loans in the second quarter, up 7 percentage points from the prior quarter.
The heated competition for business loans drew a mild warning from Federal Reserve Vice Chairman Janet Yellen, in a speech she gave in early June. Noting the "considerable" leeway that underwriters have to make post-commitment adjustments to loan terms, based on market demand-a comforting trend that should reduce banks' chances of getting stuck with "hung" deals that they would be unable to sell in a downturn-she promised special vigilance over the market nonetheless.
Banks' share of leveraged loans has fallen since late 2008 and early 2009, when issuance collapsed and banks were virtually the only source of capital for corporations that needed to borrow. (There has been less flux in banks' share of investment-grade syndicated loans, a market in which nonbank investors have never been major participants.) When the crisis was still fresh, syndication of leveraged loans was characterized by "deals that had to come to the market for refinancing, and banks stepped in," says Maria Dikeos, director of analytics at Thomson.
The ranks of nonbank investors, including structured vehicles, still have not fully reconstituted themselves, however, and banks' share of leveraged deals remains higher than it was before the crisis.
One factor in the share increase for banks is that some lenders have been willing to move further down the credit spectrum, if selectively.
"Banks are flush with cash and looking for ways to drive revenue," says Mark Huffstetler, managing director for syndicated finance at SunTrust Banks, ranked by Thomson as the 13th-biggest book runner by volume in the first half, with $16 billion of deals.
Huffstetler emphasizes that banks still won't venture too far from investment grade. He also notes that different pieces of deals fall into distinct classes in terms of structure and risk, creating clear boundaries for bank and nonbank investors. Nonetheless, Huffstetler says, "there's a crowding-out that can occur in the mid-to-high, double-B" space as banks hunt for assets.
Steven Miller, a managing director at Standard & Poor's, says banks "have ramped up their appetite for obvious reasons—funding costs are low, default rates are low, people trying to build their net interest margins, so there's more interbank competition."
The net effect has the market thinking about its appetite for froth.
