By Lynn Adler
NEW YORK (LPC) - Bank fees earned from arranging US syndicated loans fell in the third quarter amid a summer lull as bankers awaited the US$13.5bn financing backing Blackstone’s US$20bn buyout of Refinitiv, the biggest buyout deal to test the markets since the financial crisis.
A soft third quarter was offset by a move towards new money loans, which offer higher fees than debt refinancings, and by record first-half fees on a flurry of mergers and acquisitions (M&A) loans.
The rush into Refinitiv’s loan and bond buyout financing in September resulted in lower pricing, a shift of debt to loans from bonds, and set a more aggressive tone for fourth quarter lending.
Blackstone’s purchase of 55% of the newly named Refinitiv, which includes LPC and IFR, from Thomson Reuters closed on October 1.
“Refinitiv was overhanging the market in the summer. Now, there’s a risk-on attitude among investors after seeing how well the Refinitiv deal did,” said Jeff Nassof, a director at Freeman Consulting Services. “That will have a big impact on the fee pool, because the fees on new money deals like this are much higher than on refinancings.”
Total US syndicated lending slumped to US$432bn in the third quarter, the lowest quarterly amount since the first three months of 2016. However, 38% was new money lending, which is the highest quarterly share of the loan market in more than two years, LPC data show.
The rise of more profitable new money deals - which include loans for acquisitions, loans backing the creation of new companies as units are carved out of existing businesses, and the upsizings of existing credit facilities - helped offset the drop in fees from the drop in overall loan volume.
Arranging banks made US$2.5bn of fees from underwriting leveraged loans for highly indebted companies in the third quarter, down 27% from a year earlier, according to Freeman Consulting, which estimates fees based on Refinitiv data.
Leveraged loan fees in the first nine months of 2018 of US$8.8bn were roughly flat with the same period of last year, showing a 2.2% decrease.
Third quarter lending to leveraged companies of US$177bn was around 40% lower than the third quarter of 2017, even with a post-Labor Day rush that also included large buyout loans for chemicals company Akzo Nobel and physician outsourcing services provider Envision Healthcare.
ENCOURAGING SIGNS
Bank fees earned from lending to blue-chip investment grade companies also slid in the third quarter, dropping 22% to US$523m from a year earlier.
The first half of the year was dominated by mega mergers, mainly in the healthcare, media and technology sectors, before activity stalled in the third quarter.
Companies are still focused on growing by acquisition, and the pace is expected to pick up after a slow summer for corporate marriages, bankers and lawyers said.
“On the investment-grade side, loan fees track M&A very closely,” said Nassof. “Acquirers are still in a pretty aggressive mindset.”
Prolonged regulatory review periods caused some companies to hesitate before pulling the trigger on big mergers. Concerns about the potential fallout from tariffs, trade wars, and upcoming midterm elections also contributed to the summer slowdown, bankers said.
But the logjam seems to have broken now that Cigna (NYSE:CI) Corp’s US$52bn acquisition of pharmacy benefits manager Express Scripts Holding Co and retail pharmacy CVS Health (NYSE:CVS) Corp’s US$69bn acquisition of health insurer Aetna Inc (NYSE:AET) appear to be on course for completion.
“We’re very encouraged about Cigna and Express Scripts – it bodes well for deal approvals,” a senior banker said. “Companies are looking for top-line growth, and it’s hard to achieve that organically so acquisitions are the way to go.”
In the first nine months of the year, investment-grade lending fees of US$2.07bn were 22% higher than the US$1.70bn earned in the same period last year due to the first half deal wave, according to Freeman.
The third-quarter drag on US syndicated lending to low- and high-rated borrowers has helped pull down the total US investment banking fee pool.
Adding bank earnings from equity and bond underwriting, as well as M&A advisory to the syndicated loan arrangement fees, the total US investment banking fee pool dropped 18% in the quarter from a year earlier to US$11bn.
Year to date, the US$37.4bn earned is down 3.5% from US$38.8bn seen in the first nine months of last year.