Back In Vogue: The Term Loan A?

October 8, 2007

While the large investment banks find themselves laden with leveraged loans they had intended to syndicate, one banking analyst predicts we’ll see more of the originate-and-hold pattern. And not the forced variety.

Punk, Ziegel & Co.’s Richard Bove said last week that he expects to see the long-time preference for syndication reverse a bit, though he does not believe the market will return to the days when virtually all underwritten loans remained on banks’ balance sheets.

“We’re already seeing more [originate and hold],” Bove said. “The issue is whether it’s a short-term phenomenon based upon a momentary crisis in certain segments of the market, or whether it represents a significant shift in the nature of the way the business is going to be done. I don’t know the answer to that, but I’m guessing that it’s more of a longer-term phenomenon than one might have imagined a few months ago.”

The reasoning behind this hypothesis is simple: multiples. According to Bove, the originate-and-hold model made for decades of consistently high multiples, while the current market illustrates just how lousy multiples can be.

Banks “can either be patient and build up a profit over a long period of time through interest payments, or they can take it immediately by making a sale of the asset and taking a profit at that point,” Bove said. “When banks followed the originate-and-hold technique, the multiples on their stocks were 50% higher than they are today.”

The other part of the equation is the borrower. Has the disruption in the market changed the mindset of borrowers to believe that loans underwritten by a bank and held make more sense for them? Moreover, has the thought process of the lender changed?

When it comes to investment products such as mortgage-backed securities, some banks do seem to be rethinking their involvement in the market or at least the extent of their participation and their methods. And while no bank appears on the verge of ditching its loan syndicate, we have seen an increase in pro rata tranches. The question is, as Bove said, how extensive and extended the trend becomes.

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