Companies have to work for debt as investment banks toughen up

With the credit crunch straining the balance sheets of corporate Europe, some of the largest names in investment banking are turning to their debt businesses to take on advisory-only rivals in the long-standing war for corporate mandates.

Groups such as Citigroup, Credit Suisse, JP Morgan and UBS are fighting for industry kudos, as well as the cash from chief executives' big ticket mergers and acquisitions, rights issues and initial public offerings. The perception in the industry was that the larger firms had been losing out on these deals to specialist houses such as Lazard and Rothschild.

The credit crunch has changed everything, forcing companies to work for their debt. It comes after several years of easy money as banks, until mid-2007, fought each other to lend to corporations by improving the terms and progressively lowering the bar on access to finance.

But now the terms have hardened, and as companies need to borrow to help get through the recession or to refinance chunky existing borrowings, large investment banks are starting to play hardball. They are flexing their debt muscle to try to push smaller boutique M&A advisory firms out of big client deals. "Debt is no longer a commodity," said one senior European investment banker working for a large institution. "We had a situation with a FTSE 100 client where we said to them fine, if you want debt that's OK, but we will expect more of those mandates that are going to Rothschild and Lazard when it comes to corporate activity."

During the credit boom, boutique investment banks such as Lexicon Partners, Gleacher Shacklock or Greenhill, as well as larger and longer-established M&A-only advisory firms like Lazard and Rothschild, pitched their corporate advisory as being impartial. They focus on pure advisory rather than trying to flog other products such as loans to their clients, as the bigger banks were often accused of.

Now that banks are facing increased regulation and are more averse to lending, they are using the flipside of that argument to try to wrestle back business from the smaller firms by using the provision of debt as a currency. "The tone of the initial conversation between companies and bankers has changed recently," said a third person, close to a large bank. Another banker, at a large institution, said staff were instructed by senior management to use the lending relationship to in return demand their "fair share" of corporate business.