Credit Due – After Jimmy, Banking is Different

By Randy Schwimmer

The untimely passing last month of Jimmy Lee, JP Morgan Chase’s vice-chairman, at the age of 62, left many in the banking world reflecting on the legacy of a man who changed the face of buy-out finance. But it gave us the opportunity as well to consider the state of the industry he leaves behind.

Tributes to the premier deal-maker of our generation noted the breadth and scope of his accomplishments, ranging from corporate mergers, to (in the latter stage of his career) internet IPOs. He was in the mix of every large LBO of the past three decades and his private equity relationships went to the top of the biggest firms in the world.

But Jimmy’s greatest impact was in loan syndications. Beginning in the late 1980s at Chemical Bank, he changed the distribution of leveraged loans from a clubby, bank-only game to one dominated by funds. By figuring out exactly how much paper could be sold, and to which accounts, he unleashed enormous liquidity on behalf of his private equity clients. This distribution engine put his firm on top of the league tables year after year.

Later, as his vice-president responsible for middle market syndications, I had a front row seat for Jimmy’s most transformative innovation. During the Russian debt crisis, volatility left banks exposed to extreme swings in loan pricing. Why not mirror bond practice and allow loan underwriters to adjust pricing, or even structure, to the market?

Not all his bankers bought into the innovation known as “market flex”. One asked at a staff meeting: “If you can change the deal, what’s the client paying for?” And how would the competition react? If they stuck to their guns, our dominant market share could be eroded. But Jimmy was betting the other deal arrangers would see the benefits as well.

When we launched the first financing with market flex, our team waited anxiously. The next day our largest competitor came out with a new LBO – with market flex. Loan syndication was changed forever.

Fast forward almost 20 years, and the industry has been altered again. The beauty of the one-stop shop – which could advise financial sponsor clients and provide the certainty of financing – that was Jimmy’s brand for so long, has been diminished. Regulatory pressures have curtailed banks’ ability to underwrite the most highly leveraged buyouts.

Today, asset managers and non-banks are disintermediating big banks as buy-out financing providers. Rather than backstopping deals with their balance sheets, new players are constructing virtual balance sheets using structured finance. Instead of doling out paper to buy-side funds in the market, managers distribute paper among CLOs, BDCs, SMAs, CMAs and SBICs within their control. Syndication has become an internal exercise.

What will leveraged lending look like in 10 years? We envision the large cap market growing to resemble the middle market, with larger buy-and-hold institutions underwriting deals – and not syndicating a dime.

So the passing of James Bainbridge Lee Jr. marks the end of an era. It’s hard to imagine one banker again dominating M&A, equity and debt issuance as he did. And his contribution to capital formation – the institutionalisation of the loan market – had a lasting impact.

Randy Schwimmer is senior managing director and head of origination and capital markets at Churchill Asset Management, a newly formed credit asset management firm affiliated with TIAA-CREF Asset Management. He is also founder and publisher of The Lead Left (theleadleft.com), a weekly newsletter about trends and deals in the capital markets.

This column first appeared in the weekly newsletter of Creditflux, a leading global information source for the credit trading and investment market.

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