October 12, 2017 / 4:59 PM / a year ago

LPC: Bank fee income spikes with record US syndicated lending

NEW YORK, Oct 12 (Reuters) - Bank fees earned from arranging a record US$1.75trn of US syndicated loans in the first nine months of the year hit an all-time high, as companies continued to lock in cheap financing costs amid ardent investor demand.

US syndicated loan fees in addition to M&A advisory, equity and bond underwriting fees, also set a record in the third quarter, according to Freeman Consulting Services.

Companies tapping the loan market to back mergers and takeovers joined the usual flood of refinancing that slashed loan interest margins, boosting income for lenders.

“Debt is still cheap. It’s still a really compelling market for borrowers,” said Jeff Nassof, a director at Freeman Consulting.

US syndicated lending to high-grade and junk-rated companies accelerated in the third quarter. Low loan pricing allowed many borrowers to cut costs on existing debt, and more firms expanded by buying complementary businesses.

While borrowers welcome President Donald Trump’s plan to overhaul and cut taxes and include a “tax holiday” for companies bringing overseas cash stockpiles back to the United States, the prospect of lengthy legislative wrangling is prompting more companies to borrow now before interest rates rise.

“Tax reform is still up in the air, but nobody wants to wait anymore,” Nassof said.

Fees earned on arranging leveraged loans to low-rated companies spiked by 80% in the third quarter from a year earlier to US$3.8bn, boosting year-to-date fee income to a record US$9.86bn, according to Freeman, based on Thomson Reuters data.

Loans to highly-rated companies jumped 49% in the third quarter from a year ago to US$628m, the highest quarterly amount since the fourth quarter of 2014, lifting this year’s fee income to a record US$1.6bn.

“If the tax situation does resolve there’s even more potential upside for the market – the real blockbuster US$10bn-plus transactions could be unleashed,” Nassof said.


The steady push by borrowers to tap credit markets continues to be backed by strong investor appetite as demand continues to outweigh supply.

Collateralized Loan Obligation funds, or CLOs, are the largest buyers of leveraged loans. About US$82bn CLOs were arranged in the first nine months, which already tops 2016 issuance, according to Thomson Reuters LPC Collateral.

Retail investors have also poured nearly US$17bn into bank loan mutual and exchange traded funds this year as of October 4.

The Federal Reserve is widely expected to raise interest rates again in December, which is boosting appetite for floating-rate syndicated loans.

Banks are still eager to lend and reduced regulatory resistance for recent acquisitions is allowing lenders to help companies to replace short-dated acquisition bridge loans with permanent longer-term debt more swiftly.

Antitrust rulings scuttled two mega insurance company mergers earlier this year – between health insurers Aetna and Humana as well as Cigna and Anthem - after dragged out examinations. But recent jumbo acquisitions have been closing quickly.

Recent deals have “had a shorter fuse, which the market likes, and we’ll probably see more of that,” one senior banker said.

Deals with quick turnarounds include financings backing Gilead Sciences’ US$11.9bn acquisition of Kite Pharma, Discovery Communications’ US$14.6bn purchase of Scripps Network Interactive, and Crown Castle’s US$7.1bn purchase of Lightower Fiber Networks.

Bank fees of US$38.3bn earned this year through September for arranging syndicated loans, M&A advisory, and equity and bond underwriting are 23% higher than the same period last year and most bankers and strategists anticipate a continual increase in coming quarters.

Northrop Grumman replaced a bridge loan lined up last month with an US$8.25bn longer-term debt offering this week to back its acquisition of aerospace and defense technology company Orbital ATK. Fees on the September bridge loan were counted last quarter, while the fees on the bonds will be factored into fourth-quarter income.

“For many deals announced in the third quarter, the bridge loans closed, but not the permanent financing,” said Nassof. “As borrowers lock in this financing over the next few quarters, the loan and bond markets should get continued support.” (Reporting By Lynn Adler; Editing by Michelle Sierra and Tessa Walsh)

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