Banks Are Easing Terms for Middle-Market Lending

Critics who argue banks are not lending might want to check with middle-market companies. Demand for new loans may be recovering slowly, if at all, but banks are trying to win these companies' business with more attractive terms.


"We have seen a return to maybe 2006 pricing and lending terms, structural terms," said Laura Whitley, head of middle-market banking for Bank of America . "Where you may have seen two covenants in the past, if one will do, it's what clears the market."

There are thousands of middle-market firms in this country. With revenue ranging from five million dollars to half a billion dollars, banks of all shapes and sizes compete for their business.

It's a fight that pits local credit unions against the largest national banks. And it's not just the higher-yielding loans banks are looking to capture from these clients, but additional fee-generating business like cash management and asset management services. So middle-market companies looking to take out loans now will find plenty of banks willing to lend at very reasonable terms.

"The (banking) industry has recapitalized itself over the past two years, so the industry is awash in liquidity, but there is no place for that liquidity to go," said Sandler O'Neill analyst Scott Siefers. "For whatever demand there is, pricing competition is extraordinarily intense. That puts pressure on even the strongest companies out there."

Having sharply fallen off from 2008 through most of 2010, middle-market borrowing showed signs of life in the fourth quarter of last year. But it fell back in the first quarter of 2011. What did not decline was the money banks have to lend. Data from ThomsonReuters shows all in costs for middle-market borrowers dropped to historic lows in the first quarter as banks tried to entice companies into borrowing.

"Definitely more aggressive than we were a year ago but perhaps not to the extremes we saw in the heady days of froth, so to speak, prior to the financial crisis," said Siefers.

Along with better pricing, terms are easing up. Last fall, when Miami-based World Fuel Services went to Bank of America to put together a syndicate for a loan, the company's CFO Ira Birns said restrictions were looser than they were just a year or two before.

"Up front fees are substantially higher than we paid in 2007," Birns said about pricing right ahead of the financial crisis. What the marketer and deliverer of fuel to marine, aviation and land-based businesses found was that the terms of the loan were more lenient. Birns said the publicly-traded company, which posted net revenue of $440 million last year, has never issued public debt. It's not rated, but Birns speculated the firm's credit rating would be somewhere on the border of investment grade, or just below.

"The banks certainly have treated us like an investment-grade company based on the covenant package we received on the bank deal," he said, referring to the fact that rules linked to the loans about future acquisitions by World Fuel were much less restrictive.

A Big Bank Edge?

Analysts said despite a loosening up of restrictions on loans, banks are not so desperate to lend they are taking on lower quality credits in this market. They are still focused on capturing better quality clients, just as the clients are focused on doing business with the better quality banks.

A Bank of America branch.
Nell Redmond
A Bank of America branch.

"Those banks that are well capitalized, that have stronger credit cultures . In other words, they didn't get themselves deep into trouble," Sandler O'Neill's Siefers said, "Those are the banks that will win as we look forward over the next several years."

Some banks are already declaring victory.

"I think the better banks, of which I think JPMorgan is one of them, are stealing share from the weaker banks," said Todd Maclin, CEO of JP Morgan's commercial banks. "Our customers do their homework. They want to know if I get a loan committment from you — are you going to be there when I need the money? I need to expand or grow my business — are you going to be there?"

BB&T's chief commercial credit officer Tol Broome said this flight to quality has helped his bank. In the fourth quarter, the Winston-Salem, NC-based bank saw middle-market lending increase 6.9 percent. Broome credited that growth more to market share gain than organic growth.

"We're not picky in terms of who we take it away from: community banks and credit unions and in other cases larger national banks," he said.

The larger national banks maintain they have some other advantages over their smaller rivals. Bank of America's Whitley said the money her bank has spent investing in new technology provides an advantage to BofA's middle-market clients that's not available to clients of banks that cannot afford to spend on tech. JPMorgan's Maclin believes the bank's global reach is a selling point for customers whose business increasingly is linked to overseas markets whether it be for exports, or sourcing.

"Because we're a U.S. bank they feel comfortable using us in India, China and other parts of the world," he said.

Analysts are less convinced the technology and an international presence are major selling points for middle-market companies.

"I'm having a tough time distinguishing who has an advantage with the platforms," said Stephen Moss, analyst with Janney Montgomery Scott LLC, when asked about the advantages of technology in serving middle-market clients. While Siefers downplays the advantage brought by banks' international platforms.

"A typical middle-market customer doesn't have that much in the way of overseas operations so its credit needs tend to be domestically centered," he said.

In this highly fragmented market analysts believe it's the relationship that matters most — a relationship that can take five years to build, but could last decades. This helps level the playing-field for smaller banks, which might have stronger ties to local businesses than big national banks. Still, with many smaller banks hamstrung by loan portfolios heavily invested in the still-troubled commercial and residential real estate market, bigger banks can deploy their most potent weapon, capital. Not only can they take on new loans offered at favorable pricing for the borrowers, in return for those favorable prices they can ask the borrower to give them other business like cash and asset management. It is a scene credit market analysts see being played out repeatedly in the middle-market space.

Among the banks analysts say are making the most headway these days: Wells Fargo , JPMorgan, Bank of America and regional banks including BB&T, Fifth Third , PNC and U.S. Bancorp . However with competition being so fierce these analysts say, the profit margins on these loans have come down quickly.

"Whatever demand there is, the profitability dynamic is not what people hoped it would be," said Siefers.