Lloyds TSB has risen to dominate the UK syndicated loan market since Chris Shawyer became its capital markets chief but he admits it will be tough to stay at the top, writes Edward Russell-Walling.

“It will be different this time around.” Brave words in any industry but, falling from the lips of a banker, positively audacious. Yet Chris Shawyer believes the next phase of the banking cycle will break the repetitive pattern of the past.

“The London loan market has always been very cyclical, typically repeating every seven or eight years,” says Mr Shawyer, the managing director of Lloyds TSB’s capital markets division. “Until now, the cycle and the pricing curve have been very symmetrical.”

A look at the pricing curve shows that, on past experience, syndicated loan pricing should be nearing the bottom of its trough. Whereas higher-rated corporate borrowers were paying 40-50 basis points (bp) some 18 months ago, the spread has tightened to 20-30bp and occasionally even less. So will banks pull down the shutters at the first signs of trouble? “I don’t believe so,” observes Mr Shawyer. “Bankers are relaxed and competing for business. Interest rates remain benign and there is no tightness of supply.”

Blurred national identities

Something has changed. One thing, Mr Shawyer points out, is a blurring of the former distinctions between European national markets. “Markets used to have their own strict national identities,” he says. “German, British, French loan markets were predominantly supplied by domestic banks. Each had its own character and there was no consistent pricing and/or product design.”

Today, however, the once “very cartelised” German market has become much more open. The French market has begun to head the same way after various large mergers. The result is that pricing and structures have converged. And, as disparate European markets continue to merge into a single playing field, London has become Europe’s centre for big international corporate loans.

“This cycle is the most competitive ever, with the most liquidity and the greatest diversity of supply,” he notes. “It’s the first time European borrowers have enjoyed more competitive pricing at this phase of the cycle.”

Competitive pricing can only go so far, however. “Banks are beginning to say ‘enough is enough’,” Mr Shawyer admits. “But when pricing turns, I don’t foresee a rapid increase to the next peak. Instead, I expect a much flatter upward trend.”

Previous peaks have been a cumulative response to events: credit concerns in a tightening economy, perhaps, or the Asian financial crisis. “We will see a turn but it will be through negotiation, not third-party events. So there won’t be a knee-jerk turning off of the tap. It will be more a question of how banks position themselves, depending on how they value their relationships.”

New ways of doing business

That is because the way the large banks and their large customers do business together has also changed. The business model of many banks is now driven by these relationships. They have learned to accept that lending by itself is not economically profitable. But if they do not lend to a big corporate customer, they do not get a share of its other, more profitable business. That includes cash management and money transmission, treasury and derivatives, not to mention the whole array of corporate finance and structured lending activities – what Mr Shawyer calls “the brainpower side of the relationship”.

“Lending is a now a commodity product,” he says. “But it’s the wedding band of the relationship. You must have it before you sell your other wares.” And that, he reckons, will influence the next stage in the cycle. Loan pricing, instead of racing universally upward once the first borrowers get in trouble, will remain tight for the best customers.

“High-quality borrowers with the ability to reward the bank across the whole relationship will continue to enjoy tight pricing,” Mr Shawyer predicts. “Those with whom the relationship is less strong, or which have a weaker credit profile, will face disproportionately wider pricing – though it will still be quite competitive by historical standards, thanks to broader supply.”

Mr Shawyer speaks with some authority on these matters because, on his watch, Lloyds has risen to dominate the UK syndicated loan market. It was the leading mandated arranger of investment grade UK loans (£15.9bn) last year, head and shoulders above the number-two bank, RBS (£11bn). Lloyds also won an award as the best loan arranger for financial institutions.

Oddly, most people thought of Lloyds TSB as a retail bank, at least until Eric Daniels became its chief executive in 2003. “There is now a more balanced view that we are active across the full customer base,” Mr Shawyer explains. “We always were a corporate bank – wholesale accounts for close to 50% of earnings and over half of the bank’s assets. But, until recently, that’s not what the bank wanted to push. Corporate banking wasn’t broken – it just needed sponsorship and drive.”

Drive is something it clearly has, although Mr Shawyer admits it will not be easy to stay at the top: “The hard part is to defend your position. And this year it is harder to defend than to attack!” He can see more consolidation ahead, noting that a mere 20% of banks are providing 80% of the credit.

“The big international corporate market is dominated by 20 banks,” he says. “So you would think they would have more power. In the last cycle, one would tend to walk away from some of these deals but you’ve got to be in it to win it, particularly now that corporates are more even-handed about handing out the ancillary business.”

Lloyds TSB is not an investment bank, so the lucrative business of advising on and managing public issues is out of its reach. It is, however, keen to raise its profile in leveraged finance, and Mr Shawyer notes with interest the rise of private equity culture.

The bank would also like a higher profile in Europe, where it ranks 13th to 17th, depending on the source, but mainly on the strength of its UK assets. “Europe is our hinterland and getting in there is a serious item on our agenda,” Mr Shawyer says. “But it’s not easy, and too many people have lost their shirts by trying to get in there too quickly.” CAREER HISTORY 1992: Managing director of capital markets at Lloyds TSB 1988: Head of loan syndication at Lloyds Bank Plc (now Lloyds TSB) 1986: Promoted to head of loan syndication at Lloyds Merchant Bank 1985: Director in debt capital markets at Lloyds Merchant Bank 1982: Responsible for loan syndication activities in the Middle East, Africa, Italy and Greece at Lloyds Bank International, London 1978: Assistant vice-president in loan syndications at Gulf International Bank, Bahrain 1974: Executive in the Eurocurrency loans division (loan syndication and loans agency) at William Brandts & Sons (becomes Grindlay Brandts in 1976) 1972: Joins Bank of America, London branch Shawyer is a director and former vice-chairman of the Loan Market Association

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