Lenders to the middle market are looking to form clubs on credits as the number of players in the market decreases and institutional buyers lose interest in the deals. Market sources predict that banks such as FleetBoston Financial, Heller Financial, and First Union, will have to increase the amount of deals they co-underwrite in order to combat a reduction in the number of banks playing in the market and a pullback by institutional buyers from deals they see as illiquid in the secondary market. With fewer buyers, lenders are looking to share exposure so they do not end up holding too much. Officials at FleetBoston Financial declined to comment. Officials at First Union did not return calls.
Ken Leonard, head of syndications at Heller Financial, said middle market liquidity has fallen off as a result of credit quality issues, scrutiny of many banks by the Federal Reserve, and a credit pinch resulting from many banks pulling out of the market. In addition to banks, institutional lenders are looking elsewhere. "Institutional lenders are getting the same pricing and multiples they can get in the larger market and they're able to trade. With them falling away there's just no liquidity," he said.
Currently, Heller is working on numerous club deals in the $30-60 million range. "Although our primary intent is not to club transactions, that's where many of the smaller sponsored transactions are going," he said. Leonard added that pressure to club deals originates from both lenders wanting to reduce their own risk and sponsors pushing them on lenders to reduce syndication risk.
Bankers said lenders such as Dresdner Bank have either pulled out or curtailed their activity in the middle market, providing a smaller available group of lenders for syndicates. A Dresdner spokesman confirmed the bank had pulled out of middle market lending to focus instead on its advisory and asset management businesess.
Another banker said middle tier lenders are looking to become partners with other banks that do similar deals in order to reduce risk. He cited BNP Paribas and LaSalle Bank's recent co-underwritten $105 million deal for Chicago-based Hyatt Corporation's Continuing Care Retirement Community as an example of a bank clubbing with a lender with a strong regional presence.