U.S. Large Corporate Banking: Assessing The Risks of Credit Concentration
( Greenwich Associates )
(December 19, 2006)
-- Large U.S. Companies Predict Active Year for M&A --
Tuesday, December 19, 2006 Greenwich, CT USA - Large U.S. companies are concentrating an extraordinary amount of credit and other financial service business with a small number of the nation's biggest banks.
A handful of large banks are each named as lead bank or co-lead bank by 30% to 40% of U.S. companies with revenues and market capital over $2.5 billion. On a national basis, the data suggests these banks together hold roughly 60% of lead corporate banking relationships and 70% of lead credit relationships with these companies.
"Looking at the degree to which this business is concentrated with these banks, one would assume that this is a seller's market," says Greenwich Associates consultant John Colon. "There are a number of reasons why these banks, after accumulating such huge market shares, are not able to more forcefully dictate terms: among them easy money."
These comments are based on the results of Greenwich Associates' 2006 U.S. Corporate Banking Study. A new Greenwich Report presents the key findings of this research, including the implications of increasing credit concentration among U.S. companies, predictions about future levels of M&A activity, and an examination of compensation levels for finance and treasury professionals at corporations in the United States.
Is Easy Credit Making U.S. Companies Lax?
Thanks to the extended duration of the current benign credit environment, U.S. companies feel they have no shortage of options when it comes to obtaining financing. With credit default rates persistently low, banks at every level - including the top three - remain largely competitive among themselves as lenders, and the debt capital markets have remained strong. In addition, mid-size companies over the past several years have found themselves able to tap into new sources of credit such as hedge funds in the leveraged lending business. "Even in the midst of these favorable conditions, more than half the companies interviewed in 2006 say that credit availability is still increasing," says Greenwich Associates consultant Jay Bennett.
However, there is little evidence to suggest that corporations are taking advantage of the widespread availability of financing to diversify their credit bases. At the typical company, lead and second credit banks combined hold nearly two-thirds of outstanding bilateral credit, with the third bank holding another 15%. Even in syndicated credit lead banks hold about 22% of the average company's debt, with second banks holding another 15%. When Greenwich asked U.S. companies if their current level of credit concentration raises risk management concerns, 97% said "no".
"Rather than using the increasing competition among lenders to secure new credit relationships that can be called on in the future, it appears that the easy credit environment is encouraging companies to become less rigorous in the monitoring and managing of their bank relationships," says Greenwich Associates consultant Don Raftery.
What does this mean for U.S. companies? Don Raftery explains: "Although it might seem superfluous in such a generous credit environment, from a risk management standpoint it is critical for companies to begin thinking about how they manage their bank relationships. With many banks using a running average of annual revenues to rank the importance of corporate clients, if a company waits until the market turns, it might be too late to advance its standing and preserve credit lines and other critical bank services."
Large U.S. Companies Predict Continued M&A Boom
Half of the large U.S. companies interviewed by Greenwich Associates in 2006 expect to engage an M&A advisor on a domestic merger or acquisition in the next 12 months and nearly a quarter plan to use an advisor for an international transaction. "The expectations for the domestic M&A business represent an increase even over the bullish expectations expressed by these companies last year, when 45% of companies said they planned to be active," says Jay Bennett. The research results suggest that large companies plan to be especially active in M&A: more than two thirds of the Fortune 300 expect to engage an advisor for a domestic deal.
For more information contact:
+1 (203) 625 4354
Greenwich Associates is the leading international research-based consulting firm in institutional financial services. Greenwich's studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Toronto, and Tokyo, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies. Please contact us for further information or to arrange an interview with one of our consultants. You can visit our website, www.greenwich.com, for more information.