NEW YORK, Oct 6 (Reuters) - Bank fees earned by underwriting U.S. leveraged loans sank in the first nine months to a four-year low, down sharply from the same period last year, as lenders arranged fewer of the most profitable deals.
The $5.24 billion of fees banks made on leveraged lending fell 27 percent from the same three quarters last year to the lowest level since $4.73 billion in 2012, according to Freeman Consulting Services.
“When you look at fees for arranging leveraged loans, as opposed to loan volumes, the market looks even worse,” said Jeff Nassof, a director at Freeman Consulting. “The most lucrative deals for banks arranging loans are the ones that are the most dead.”
Leveraged lending fell 11 percent to about $555 billion in the first nine months of the year, according to Thomson Reuters LPC.
Banks typically arrange profitable financings used when sponsors undertake leveraged buyouts (LBOs), but many private equity firms have lost out to cash-rich corporate buyers this year.
“LBO loans tend to pay arrangers the highest fees, but sponsors are now being beaten for deals by large corporates,” Nassof said. “The corporates are relatively well-positioned to outbid sponsors via share-based bids, or using investment-grade debt financing.”
Credit Suisse, Deutsche Bank, Barclays and UBS are more reliant on sponsors for leveraged finance fees in the United States than their American counterparts, according to Freeman Consulting.
Although deal announcements picked up in September as some borrowers attempt to push transactions through before the U.S. elections and possible December Federal Reserve rate hike, leveraged lending overall has declined.
In addition to the elections, Fed policy, economic uncertainties and competition from cash-heavy corporations, leveraged buyouts continue to be curbed as regulators enforce lending guidelines designed to limit the amount of debt in those deals.
Fee income has been hit by waves of volatility throughout the year as macroeconomic and political considerations dominated the loan market and wider capital markets.
The second quarter this year was the busiest for new lending, after a first quarter dogged by recession fears, sliding oil prices, and a backlog of large deals stalled by market turbulence that reared up in late 2015.
In the third quarter, fees of $1.84 billion were 38 percent lower than the same period last year and were the lowest for any third quarter since 2012.
Overall U.S. investment banking fee income so far this year has also slid, Freeman Consulting data shows, as the merger mania that prevailed last year faded.
The $29.6 billion in total feels, which include mergers and acquisition (M&A) advisory feels, equity and bond underwriting fees as well as syndicated loan arranging fees, was the lowest since the same nine months four years ago.
“The M&A backlog is still fairly strong, but new deal announcements are down, and should be quiet through the elections,” Nassof said.
Companies have become wary of overpaying for M&A deals, with the stock market hovering around record highs and the S&P 500 Index’s price-to-earnings ratio around its highest level since the 2008 financial crisis, Reuters reported last Friday. (Reporting By Lynn Adler; editing by Tessa Walsh and Michelle Sierra.)