There are significant transaction costs relating to the issue of paper into capital markets. Investment banks charge fees for managing and underwriting an issue. The lower upfront costs of borrowing from a bank may well outweigh any savings from a lower level of interest expense from issuing bonds.
Syndicated loans remove one advantage that bond issues may have. A syndicated loan is a loan made by a group of banks to a large borrower (the group of banks is referred to as the syndicate). The advantages of syndicated loans to borrowers are that they can borrow more in one go than they would be able to obtain from one bank alone. In this sense the syndicated loan market is in direct competition with the bond market. Such loans are either very large or higher risk than single-bank loans. Most loans usually have an arrangement fee. They may be traded in a secondary market. The lead manager usually takes responsibility for collecting interest and principal payments from the company and passing it on to the members of the syndicate.
Corporate loans have tended to become more specialized, for example providing short-term funding for an acquisition until the corporate has put in place longer-term funding from the bond or equity markets.
Banks have had to increasingly look at the total relationship with the corporate to justify low margin lending by also looking at the profitability of other fee generating businesses that the bank has with the client. This has become generally referred to as “credit leverage” or “tying” where the bank will only make the loan if the corporate agrees to give it business in another area where the bank can generate a compensating return, such as in investment banking.
Tags: Bonds, borrowers, capital market, Transaction costs