Risk Management

Company Borrowing Converges on Few Banks

Three U.S. banking giants account for about 70 percent of lead credit relationships with U.S. companies, according to a recent study.
Stephen TaubDecember 20, 2006

Big U.S. companies are borrowing an extraordinary amount of money and buying the bulk of their services from a small circle of the nation’s biggest banks, a recent study of large-corporate banking found.

Three U.S. banks—Bank of America, Citigroup, and JP Morgan–account for roughly 60 percent of lead corporate banking relationships and 70 percent of lead credit relationships with U.S. companies, according to Greenwich Associates. (The research firm interviewed 825 large U.S. companies between May and July for the study.)

Even so, thanks to the extended duration of the currently easy credit environment, U.S. companies feel they have no shortage of options when it comes to obtaining financing, the researchers say. To be sure, 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, in a press release.

But there are some solid reasons that these banks, after accumulating such huge market shares, are unable to forcefully dictate terms, he adds. Among them: easy money. With credit default rates persistently low, banks at every level — including the top three — are staying largely competitive among themselves as lenders. Further, the debt capital markets have remained strong.

Mid-size companies over the past several years have, moreover, been able to tap into such new sources of credit 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,” said Greenwich Associates consultant Jay Bennett.

The consulting firm also contends that corporations aren’t taking advantage of the widespread availability of financing to diversify their credit bases. It found that 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 percent.

Even in syndicated credit arrangements, lead banks hold about 22 percent of the average company’s debt, with second banks holding another 15 percent, according to the study.

Nevertheless, when Greenwich asked study respondents if their current level of credit concentration raises risk management concerns, 97 percent said “no.”

To Greenwich, that means companies are not doing a good job tracking or leveraging their buying power. “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.

The rigor of management of banking risks does seem to be slackening at corporations. In 2004, for example, more than 45 percent of U.S. companies—and between 50 percent and 60 percent of companies with more than $2.5 billion in revenues—followed a formal process for reviewing their banks and rewarding new banking business, according to the study. But today that proportion is less than 35 percent for all U.S. companies and less than 45 percent for the biggest companies.

Raftery recommends that corporate finance managers start to think about how they manage their bank relationships. Many banks use a running average of annual revenues to rank the importance of corporate clients. Thus, if a company waits until the market turns, it might be too late to advance its standing and preserve credit lines and other key bank services, he warns.