Banks Thrive on Refinancing Buy-Outs --- Falling Rates Spur Boom as New Loan Demand Stays Weak
NEW YORK -- Even as corporate loan demand stays weak, banks are finding hefty profits from restructuring some buyouts of the 1980s.</br></br>Since last summer, the banks have collected more than $500 million in upfront fees by refinancing nearly $20 billion of loans on the balance sheets of debt-heavy companies. Another $90 million to $100 million in fees could come from the $6.2 billion Time Warner Inc. loan now in the bank syndication market, bankers say.</br></br>It's not a bad deal for the companies, which will end up with sharply lower interest payments and reduced debt levels through new loans, equity issuance and retirement of high-yield "junk" debt.</br></br>Banks come out ahead several ways. First, there's the upfront fees -- similar to points paid by home buyers -- that run as high as 3% of the loan's size. The fees, separate from the interest rates charged on the loan, are paid by companies, usually to several dozen American and foreign banks to obtain a commitment.</br></br>Longer term, the banks benefit from wider profit margins because they're not passing along the full reduction in their cost of funds as interest rates have declined. And these richer loan deals are less risky since many of the leveraged companies have stable operations and are selling stock to pay off some of their junk bond and bank debt burdens.