FleetBoston deal could exacerbate local credit crunch.

Whither Fleet Capital?

The asset-backed lending unit of FleetBoston Financial Corp., which agreed last month to be gobbled up by Bank of America in a $47 billion deal, has been an active and aggressive participant in the Los Angeles market.

But Bank of America Business Credit, with regional offices in Pasadena, is already the largest asset-based lender in Southern California with about 100 employees.

If history is any guide, there's a likelihood that one of the lenders will simply disappear.

Back in 1994, when Bank of America purchased Continental Bank, Continental's asset-based lending unit disappeared. Similarly, when Nationsbank acquired Bank of America in 1998, both had strong asset-based lending units that were merged into one.

The betting is on Bank of America's unit being the survivor, removing one more lender in a banking niche that's already seen considerable consolidation.

"At any step along the way there's been less credit available to middle market companies--the bar just rises and rises," said Brooks Dexter, senior managing director at USBX, an investment bank in Santa Monica. "Fleet Business Credit has been one of the more active lenders into the middle market but consolidation might take them out of the market entirely."

Yet because the merger of the two banks is so complex, there remains speculation as to which unit will be absorbed by the other.

"That's the $64,000 question," said John Roberts, Fleet Capital's senior vice president and marketing manager in Sherman Oaks. "Both businesses are very large, dominant players. It's not like they can absorb Fleet Capital easily."

Roberts noted that Bank of America has agreed to move its asset-based lending headquarters to Boston, which is Fleet's hometown.

Collateral lenders

Asset-based lending, also known as commercial finance, refers to business loans made to borrowers that pledge some form of collateral to obtain the loan. For middle-market companies, the loans provide secured financing typically to manufacturers or distributors that may have substantial operations overseas. These loans allow borrowers to leverage the value of assets such as inventory or accounts receivable and improve cash flows.

Most major banks have asset-based lending units, typically with $10 billion or more in commitments under management. Fleet Capital, with a regional office in Sherman Oaks, is considered a nimble and aggressive competitor in the market, typically for loans above $25 million. Bank of America's unit is focused on loans to middle market companies of $50 million or more.

The problem is that with so few asset-based lenders, many customers have credit lines with both banks. And the successor company, the thinking goes, will want to limit its exposure on such high-risk loans to each customer.

"Every time we see a merger we love it because it takes away a competitor," said Michael Sharkey, president of LaSalle Business Credit LLC of Chicago, which has a regional office in Glendale.

Already business is being thrown to competitors as a result of the merger.

Sharkey said be approved a loan last week for a large retailer after Bank of America Business Credit determined that the combined commitment with Fleet Capital was too much for them to swallow. The loan was resold to LaSalle.

Bank of America officials declined comment.

Other local asset-based lenders that could benefit from reduced competition include Foothill Capital Corp. of Santa Monica and PNC Business Credit of Pasadena. There are also indications that middle-market lenders such as Union Bank of California and Wells Fargo & Co. are wading back into the riskier asset-based lending business.

"It's a tough, volatile business and it's a nasty business because asset-based lending is one where you have to have the guts to go in and sell a company's assets," said V. Charles Jackson, president and chief executive of Community Bank in Pasadena. "Big organizations don't like that kind of publicity and they don't have an iron stomach."

Jackson pointed out that there's a long history of asset-based lenders being sold off to bigger lenders, such as GE Capital Corp.

Michael Grenier, a senior vice president at investment bank Houlihan Lokey Howard & Zukin, is more concerned about the impact on mid-size borrowers.

"There's really one less option for people to turn to when we've already seen consolidation among banks and tightening credit standards," he said. "'Not often do you see two distinct institutions remain intact as a result of a merger."

Next Bank Behemoth

Bank of America purchases FleetBoston Financial Corp.

Deal Value: $47 billion

Post-Merger Deposits: $437 billion, largest in U.S.

Headquarters: Charlotte, N.C.

Primary Strengths: Consumer and commercial banking, global corporate and investment banking, asset management

Los Angeles strengths: Retail (BofA), asset-based lending (both), mutual funds (Fleet's Columbia funds, based in Portland, Ore.)