"It's a clear trend as banks move into growth mode. The banks started waking up on the investment-grade side six to nine months ago, then moved into the higher quality leveraged deals and well known names," said Glenn Stewart, managing director and head of loan syndicate for Bank of America. "We are seeing more activity in the leveraged side, for the BB/Ba1 issuers and now expect to see banks move into the Ba3/BB- side."
Bankers said Alcan's $3 billion loan backing the acquisition of Pechiney is roaring on the investment-grade side, while CenterPoint Energy, like Scotts, increased its revolver at the expense of an institutional piece.
Eric Lloyd, managing director and head of loan syndications for Wachovia Securities, agreed that the pro rata market is back. "We are beginning to see a real increase in activity in pro rata lenders from the mid-BB to investment grade credit ratings range." He added that as banks have worked through the credit cycle they are looking at opportunities to lend money based off of a belief in the relationship and the cash flows of companies.
During the recession, banks retrenched from lending. But they have since cleaned up the balance sheet, and as the economy picks up, are seeking earnings growth. "The cracks are already opening and banks are knocking on our door," Stewart stated, noting domestic and European banks and even one or two Japanese banks are showing interest in participating in the pro rata portion of deals. The Federal Reserve Board recently reported bank tightening is over, with only 3% of banks still tightening lending, the lowest percentage since August of 1998.
But the uptick is not just about an improving economy. "Banks are more active, but not with the old style structure," said Stewart. Revolvers alone are fundamentally not a good investment and are now a much smaller part of the capital structure, so banks are committing across two or three tranches, he said. As a consequence, liquidity is improving.
Another consequence is that banks are no longer dumping the pro rata. "Banks were selling portfolios on the marketplace over the last two years and this has all but stopped," said Stewart. This change can be seen in the attitude of the commercial banks that are acting and viewing themselves as the manager of the residual loan portfolio on a more active basis, Lloyd commented. One recent twist is that loan asset managers are also trying to get in on the act. TCW raised a collateralized loan obligation that invests in pro rata loans and PIMCO is said to be working on a similar deal (LMW, 10/6).