By Lynn Adler
NEW YORK, April 4(LPC) - Bank earnings got a first-quarter boost from arranging US syndicated loans, and should benefit more significantly in coming months as financings begin to close on large mergers and takeovers announced early this year.
An ongoing push by companies to refinance and cut costs on existing debt, along with a dealmaking wave stoked by US tax reform that cut the corporate rate to 21% from 35%, should keep lending active through the year and bolster related bank fee income, strategists and bankers said.
Fees from underwriting leveraged loans to highly indebted companies rose 13% from the year-ago period to US$2.57bn in the first quarter, the highest first three months in records dating back 20 years, according to Freeman Consulting Services.
Although leveraged lending volume was down 33% in the first quarter from the same quarter last year, according to Thomson Reuters LPC, Freeman said there was a shift toward more new-money issuance and more sponsor-led versus corporate-led deals that are higher-margin transactions.
For extending loans to high-quality companies, banks earned US$512m in the first quarter, also the highest first-quarter income in records dating back two decades.
“There's a big pipeline that suggests the rest of the year can be as strong as the beginning of the year,” said Jeff Nassof, a director at Freeman, which estimates fees based on Thomson Reuters data.
On the leveraged side, the announced US$13.5bn loan and bond financing supporting Blackstone (NYSE:BX) Group's purchase of a majority stake in Thomson Reuters' Financial and Risk unit, for example, has yet to launch or be counted in fee totals. The buyout for the F&R unit, which includes LPC, is the largest since the financial crisis.
The situation is similar for lending to investment-grade companies, with temporary financing lined up that has yet to be replaced by the permanent bond debt that magnifies fee intake.
Cigna Corp (NYSE:CI), for one, in late March had lined up a US$23.7bn 364-day bridge loan, a US$3bn three-year term loan and a US$3.25bn five-year revolving credit for the health insurer's roughly US$52bn acquisition of pharmacy benefit manager Express Scripts Holding Co, LPC reported.
“Even though announced deal activity is at the highest level that is has been since the middle of 2016, a lot of the deals haven't closed yet and a lot of the fees really haven't been recognized yet,” Nassof said. “We are seeing the bridge loan fees, but the fees for the bonds that will ultimately take out the initial bridges can be significantly higher.”
The dealflow was sufficient to overshadow the lost earnings potential from the largest loan commitment ever: a US$100bn financing to back Broadcom (NASDAQ:AVGO) Ltd's planned US$117bn takeover of Qualcomm (NASDAQ:QCOM) Inc that fell away when US President Trump blocked the deal in mid-March over national security concerns.
Freeman estimated at the time that the 12 bridge loan lending banks stood to split a total pool of US$20m to US$40m in fees once the acquisition was scrapped, having had an opportunity to earn up to 10 times that amount once including fees from long-term debt financing if the deal had gone through.
While income from putting together syndicated loans got off to a solid start this year, it was insufficient to boost the total US investment banking fee pool.
When adding bank earnings from equity and bond underwriting, as well as M&A advisory and syndicated loan arrangement, the total US investment banking fee pool dropped 9% in the first quarter to US$11.1bn from US$12.2bn in the year-ago period.
“M&A doesn't look exceptional in the first quarter but there's a lot of recent activity that hasn't been recognized in terms of fees yet, so I think this year will end up fairly good for M&A,” said Nassof.