Sixty-nine percent of fund managers agree that consolidation has had a negative effect on the market this year, but responses indicated that they think this in varying degrees. The general consensus was that consolidation has placed the power of the market in the hands of a few banks. One manager went so far as to describe the market as an oligopoly. With bigger banks grabbing more of the market, "The survivors are taking advantage of their growing strength," said one manager, not specifying just how it is they're doing this. That power shift, some said, has taken some of the aggressiveness out of the market. "Banks are less aggressive in general," one respondent said. "Investors have [fewer] options, so suspect banks are able to take more out of trades. You get the sense there's more complacency."
Roughly 20% of respondents were less alarmed and said there hasn't been much impact to date. "Not materially. Liquidity in a tough/down market is still going to be thin regardless if you have 10 active desks or 25." And 11% of shops thought consolidation has had a beneficial effect on the market. "Although it's taken a few dealers out of market, the bulk it's added to the merged dealers has helped increase the number of names covered and volume," noted one optimist.
Overall, it seems there are concerns that consolidation always means another player vanishes and so too its capital. "The combination of consolidation and fewer desks taking positions in loans has hurt liquidity," one investor wrote. One buyer predicted that we should say, "Goodbye to liquidity. Trading desk capital has virtually been reduced to zero. Hence, trading expertise has also trended to zero as well." But even those who said liquidity would be crimped noted a Catch 22: where smaller primary or trading desks have been morphed into bigger groups, names coming out of the smaller units become more liquid. "Old J.P. Morgan deals are now more liquid. Same for old DLJ deals," one investor noted.
Some respondents focused on the effect consolidation has on the pro rata decks of deals. "It reduces the number of institutions that can write big tickets for revolver and the 'A' loan," one investor said. And that pinch has been felt in the market. The past year has seen a particularly tough market for the syndication of pro rata deals, often pushing that paper into institutional tranches or later being moved in the secondary market. "Consolidation reduces the number of pro rata lenders and the dollars available for pro rata facilities. Also, [it creates] additional supply of pro rata in the secondary, often at prices that can attract institutional investors."
Two Sides Of The Consolidation Coin
Heads
"I think fewer dealers perpetuates liquidity because of efficiency. Dealers cover a broader scope of credits, color on trading levels and on markets is disseminated more quickly."
"The merged entities are stronger ... Fewer weak sisters."
"It has the potential to improve the liquidity/execution in the market as the resources of two separate efforts combine into a single, better staffed desk."
Tails
"Less coverage, less competition, less capital."
"The combination of consolidation and taking positions in loans has hurt liquidity."
"It's too consolidated. The FTC didn't ask our opinion."
