This introduction to general corporate banking is available in full in our corporate banking section.

Corporate banking is a financing group which provides lending and ancillary services to large corporate, institutional and government clients while serving as secondary relationship coverage to the investment banking team.

Loan products include revolving credit facilities (RCFs or revolvers), term loans (amortizing term loans, TLA or bank term loans), acquisition financing (equity, debt/bond and asset sale bridge loans), margin facilities and performance, financial and standby letters of credit – which sometimes overlaps with a separate trade finance division.

Aside from the primary industry coverage groups, corporate banks may have sub-segments, with common ones including Real Estate Finance (mortgages, advisory, securitizations), asset-based lending (ABL – lending on assets with a haircut), reserve-based lending (RBL – for natural resources with reserve bases such as oil and gas and mining), and project finance.

The Corporate Bank’s Role in the Investment Bank

Functionally, corporate banking is similar to (and to some capital markets employees, is essentially the same as) commercial banking. In both divisions, the bank lends money to businesses/corporates/companies, financials or governments and cross-sells ancillary products (accounts, supply chain financing, receivables factoring, letters of credit, etc.). As the client gets larger, the banking group for the client also grows larger, with credit facilities going from bilateral contracts to multiparty (the banking commitments will be syndicated out to several lenders).

However, the way most bulge brackets and Canadian banks view corporate banking is very different from the commercial bank. Corporate banking is a product group in the investment banking division which extends credit (lends or commits money) to institutional or large corporate clients as a relationship anchor for capital markets business, where the lending return is secondary (as it is a lot lower, as discussed below) whereas in a commercial banking relationship, the lending relationship is the driver of the bank’s profitability.

For an explanation to why this is, there needs to be an understanding of how a bank makes money (see our financials section). For lending profits, banks need to borrow capital from a cheaper source and then lend it out at a higher rate. The capital they must hold to lend money to someone else (where there is credit/default risk, amongst other risk) varies depending on how risky the borrower is.

Due to the much lower credit risk of large corporates, and their ability to access capital from a variety of possibly cheaper sources, the lending only return to the investment/universal bank is low relative to a local grocery chain (an exercise in buyer power). Also, for corporates, the products demanded from banks on the lending front are much less lucrative for the bank in terms of interest income. The fees on undrawn revolvers are not commensurate to the risk to the bank.

Once corporates get to a large enough size, they prefer to tap into debt capital markets via bond issuance as it is:

1. cheaper than bank debt for similar tenor (given similar terms);
2. more permanent capital (whereas banks prefer shorter tenor); and
3. less restrictive in terms of covenants (rules that the entity must abide by when indebted).

As such, the product that larger borrowers require from banks are not meant to be permanent capital, but to supplement liquidity (including commercial paper backstop facilities) which are usually revolving lines of credit that remain undrawn. For revolving lines of credit, banks face risk whether or not the facility is drawn because they have committed to provide money given the absence of any default – the problem is that when there is a large draw on a facility that is never drawn, the company’s financial problems are now at the forefront. Meanwhile, when nothing is wrong, banks receive much thinner commitment or standby fees as opposed to the drawn pricing.

Accordingly, the expected capital markets business is paramount to ensuring that the banks are compensated for the relationship. DCM and ECM are fee based and do not require for capital to be held on the bank’s balance sheet, while the costs are limited to overhead and compensation. Astute relationship managers will vie for the customers with capital markets needs, and a good relationship manager is inextricably linked to the product groups.

Corporate Banking in Canada

This dynamic is especially prevalent in Canada vs the US. Canadian capital markets are not as deep and developed as in the US, so there is an extremely limited leveraged finance where differing types of bank debt can be more profitable and more esoteric (and interesting). In the US, decisions at even the investment-grade level are more math based instead of a pure relationship play.

In Canada, a lot of Canadian corporates and governments require Canadian dollar debt and equity, so banks will continue to lend to clients with poor lending returns while chasing investment banking revenue. Each annual review period or with the extension of additional credit without clearing lending-only hurdles, banks will have to justify the relationship to a deal screening committee (separate from the credit committee, which is just a risk evaluation).

The Canadian approach is much more patient than that of the US, where global banks will exit the syndicate immediately when they feel return hurdles will not be met. US banks may also legally assign their rights as a lender to another counterparty to extinguish exposure.

However, given the globalization of capital and competitive pricing from global players, Canada is becoming an increasingly flexible market. On occasion, all banks can be guilty of sticking around too long at very aggressive terms for ancillary revenue opportunities, as evidenced by JP Morgan’s recent difficulties with ultra-levered Permian shale producers given an unsecured facility.

Global investment banks may not necessarily have a C$ ECM or DCM license, and for the ones who do, they may not be willing to front the same amount of capital to get the economics on the DCM or ECM as their balance sheets are more expensive (it is also more expensive for them to source the Canadian money cheaply as they do not have large deposit bases, which are the cheapest funding, that the Canadian banks do). Also, US banks may find some of the bite sizes for Canadian debt and equity syndicates too small to justify committing staff. Accordingly, where you will see global banks in lending syndicates are very large Canadian corporates with global needs (issue US$ debt/equity) and strong investment banking potential.

Loan Syndications in Canada

Just like syndications across the globe, syndications teams in Canada fight for league table credit (Bloomberg and Thomson Reuters). The bank that coordinates payments for the syndicated loan is called the administrative agent, and the agent is almost always one of the banks that leads the deals. If the bank is Administrative Agent, Sole/Mandated Lead Arranger and Sole Bookrunner, the syndications team is very happy.

Usually, the Arranger and Bookrunner titles will be handed out to more than one bank for credit support, so they will be Co-Lead Arrangers and Joint Bookrunners – the league table credit is then split in half. Sometimes banks will tell the customer that they will only extend credit if they receive a title. Some of the lower tier/non-Canadian banks will be satisfied with titles that do not draw a lot of attention – such as documentation agent or co-manager.

Overall, Canada is a very protected and relationship driven market and Big 5 Canadian banks will usually all be represented in a facility for most major Canadian companies (although we have seen some Canadian banks begin to exit facilities for return reasons). The Big 5 will then tend to split the economics for debt and equity issues pro-rata or better with their commitments to the syndicated revolver.

This is drastically different from the US – a JP Morgan, Goldman Sachs and Morgan Stanley will practically only enter a facility if they are leading to some extent and they are only leading because they want investment banking economics (an equity issue, debt issue, IPO or merger) – and they might try to do the entire debt raise or equity raise by themselves. Also, US bulge brackets are loathe to actually keep the loans on their books and sell them off (at a loss) almost immediately after they commit.

Many of the largest companies in Canada will have RBC as the lead bank on the basis that they have the most robust capital markets platform in the US – which is where these companies want to tap capital from (debt and equity). A lot of high-yield names are also forced to use RBC because they have a strong desk down south after buying the professionals of many an exiting European bank post-crisis.

Still, in terms of volume and number of leads, which are what league tables are based on, the other Canadian banks are very competitive.