When announcing record results for the first half of 2005 earlier this month, Sam Molinaro, Bear Stearns cfo, made sure investors and analysts paid attention to the firms growing leveraged finance business. "Leveraged finance revenues were a record for the quarter," Molinaro said. "We've had a very strong string of probably the last eight quarters of very solid growth in leveraged finance revenues, that is a direct result of the effort we've made in coverage and covering our financial sponsor clients."
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| Bram Smith |
In the past few years, Bear Stearns has significantly increased its presence in leveraged finance, scoring mandates from sponsors in a range of sectors including real estate, gaming, health care and defense. Bram Smith, who joined two-and-half years ago to work with Keith Barnish and Larry Alletto, co-heads of leveraged finance, explained how management came to love the business. "We were able to show the members of senior management that we could underwrite a few hundred million dollars and get down to our hold target," said Smith. "We have had very few problem credits. We have also been able to distribute paper and broaden our investor base and the firm now believes syndicated lending is a good business. Our lending business may be similar in size to other securities firms, but within Bear's footprint, it's very important on a relative basis."
According to recent rankings by Loan Pricing Corp., Bear Stearns ranks sixth, year-to-date, in the LBO lead arranger category and fifth in the second-lien lead arranger category. Last year it solely arranged seven deals and year-to-date, nine. In terms of participating as a lead arranger in a deal, it was a lead in zero deals in 2001, 20 in 2004 and has so far been a lead in 13 deals this year.
The bank is currently a lead on the $420 million deal for BI-LO, a supermarket chain owned by private equity group Lone Star Funds and a $455 million deal with Credit Suisse First Boston to back Hellman & Friedman and JMI Equity Fund's acquisition of DoubleClick. Other recent financings include MetroPCS Wireless, ABRY Partners' Muzak, Kelso & Co.'s Insurance Auto with Deutsche Bank and Hughes Network with JPMorgan.
Smith stressed that because the team is smaller than some other shops, companies are drawn to it. When evaluating lending opportunities, he said, "We'll look at everything that comes in and of course make sure it meets the criteria of what we want: Do we like management, do we like the credit, do we like the structure, can we make money, can we sell it? We focus on due diligence and all deals go through the executive committee for approval. Unlike some of our other competitors, especially in the investment banking world, if we're lead arranger, we will hold a material piece of the deal. We not only sign for the loan at closing, but will typically maintain our hold position for the life of the facility."
Smith said the bank is not looking to do the biggest loans, but often finds itself garnering deals in areas in which it has a specialty, specifically real estate, gaming, health care and defense. "People like us in [those areas]; they will come to us because we have a natural advantage," Smith said. "We know the players, we know the industries, we know the credit side." He also said Bear has a huge distressed desk and his group will work with them for leads and often times investors who own distressed pieces will turn to Bear Stearns for exit financing.
"I think when clients use us, they like us because we give them a lot of personal attention. They are not lost in a huge shop and they are dealing with multi-faceted professionals that know how to figure out a leveraged finance solution without simply leading the client to do a bond or do a loan just because that person is a product specialist," Smith explained.
During his tenure, he said two changes he has seen in the market are liquidity and banks separation from the market. He would also like one other area to change. "I think you have to eliminate assignment fees," he said. "The key to growing the market is attracting more money. Anything you can do to attract liquidity is key." He explained that it is very unusual and he could not think of other product areas at securities firms where two institutions dominate a market like they do in the U.S. loan market.
Bram Smith, senior managing director, got his start in the business at Banker's Trust over 25 years ago. Prior to joining BT, he attended the Air Force Academy and flew helicopters for the Air Force, attended the Fletcher School at Tufts University and Harvard Business School. After more than 17 years at BT, Smith joined Morgan Stanley, where he spent seven years and helped bring them into the loan business. He joined Bear Stearns about two-and-a-half years ago.
