As bank after bank has merged and vanished over the past decade, corporations have worried that they would have less choice, higher prices, and scarcer credit. In fact, there’s evidence that at least some of those fears have been justified. And with more consolidation likely ahead, this could be just the beginning.
To be sure, some corporate services, such as bond underwriting and non-investment-grade lending, have benefited from new nontraditional market entrants. However, corporate customers have watched options fade for other services, including securities settlement, cash management, certain term loans, and credit facilities.
The pricing impact of consolidation has been somewhat mitigated by brisk competition among surviving banks and new nonbank participants. “There are fewer suppliers in some areas,” says James Wolf, a senior vice president at Mellon Financial Corp., but elsewhere, “competition has gotten fiercer.” Certainly, with the U.S. economy flagging, defaults on the rise, and banks out to earn more on their capital than is possible on low-margin loans, lenders are warier. Still, having the number of banks and thrifts fall by almost a third, to 11,495 since 1989, doesn’t help.
Banking consolidation has hit lending the hardest. “The bottom line is that the appetite of banks has gone down because there are fewer of them,” says Bruce Ling, global co-head of syndicated loans at Credit Suisse First Boston (CSFB).
That’s especially clear in credit facilities. “They are much more interested in things that do not require them to commit their capital for substantial periods of time,” says Joe Maurer, treasurer of Levi Strauss & Co. There’s also limited enthusiasm for joining loan syndicates. When Ames Department Stores Inc. needed an $800 million asset-based loan earlier this year, three banks offered to lead the deal instead of the six or seven that came by in 1999 with $650 million in similar loans. “Consolidation has clearly limited choice and competition,” says Ames CFO Rolando de Aguiar. “It has limited flexibility in terms of going to different people for leasing services, asset-based finance, and checking and depository accounts for our stores.” He also worries that his ability to negotiate better terms is being hurt.
Newly merged banks also tend to reduce their loan holdings to any one borrower. Take First Union and Wachovia. When they merge this fall, they plan to cut exposure to the 13 percent of their corporate customers that overlap. “We are going to be actively managing that exposure,” Wachovia’s chief risk officer told analysts at the April deal announcement.
So if you are one of these borrowers, you had better find another loan source. You will also have to look elsewhere if one of your banks merges with a competitor that has tighter credit standards, or if your lender has credit woes of its own.
Non-investment-grade corporations may be luckier than investment- grade borrowers, although the latter can easily tap the capital markets. For non-investment-grade companies, nonbank lenders are filling the gap.