By Lynn Adler
NEW YORK (Reuters) - Bank fees from underwriting U.S. leveraged loans surged in the second quarter from a five-year low the prior quarter as issuance jumped, yet ongoing bouts of volatility pressed this income down to a four-year low in the first half of 2016.
New lending mounted as recession fears eased, oil prices stabilized and banks cleared a backlog of large loan commitments stalled by market turbulence that began late last year.
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The $2.09 billion of fees banks earned on leveraged lending in the second quarter topped meager first-quarter income by 76 percent, according to Freeman Consulting Services. But the first quarter took a toll, and fees totaled a four-year low of $3.28 billion by the end of June, down 16.5 percent from the first half of last year.
One dynamic making new lending easier is a clearing of the backlog of loans that banks got stuck holding after they committed to deals many months ago, before volatility escalated and froze the loan market.
“As the markets improved into the second quarter, the banks got a lot of those legacy commitments off of their books, freeing them to do more originations,” said Jeff Nassof, a director at Freeman.
A loan lingering since last November to support The Carlyle Group’s $7.4 billion buyout of software company Veritas, for example, was ultimately priced last month.
Banks initially had to fund the buyout, which closed in late January, after failing to sell the debt package last year. In June, the banks were able to place among investors the $2.8 billion loan segment at a steep discount.
In another sizable lending commitment on bank books since last year, banks in May priced a $5 billion loan, the largest U.S. syndicated term loan since last November, as part of a massive financing for computer giant Dell Inc’s $67 billion acquisition of data storage company EMC Corp. The buyout was announced last October.
“When banks have big blocks of commitments on their books that they can’t sell it really inhibits their ability to commit to new financing,” Nassof said.
As the lending blockage cleared, U.S. leveraged loan issuance jumped 64 percent in the second quarter from the first three months of the year, Thomson Reuters LPC data show.
“The big picture fundamentals are still in place: the low interest rates and the big investor demand for yield,” said Nassof.
However, after slumping to a four-year low in the first quarter, the total $344 billion issued in the first half was almost 16 percent below a year earlier, according to the data.
Leveraged lending for the rest of the year hinges largely on the economy’s recovery, Federal Reserve policy and demand for the floating-rate assets if interest rates stay low for even longer than expected.
Bouts of volatility sparked by the fallout from Britain’s vote last month to detach form the European Union, and from the impending U.S. elections, could also dictate the pace of lending and related fee income for banks, investors and strategists said.
Total global investment banking fees fell by almost a quarter to a four-year low in the first half from a year earlier as volatility hit debt markets and M&A activity, Reuters reported this week.
(Reporting by Lynn Adler; Editing By Jon Methven and Michelle Sierra)