High-Yield Underwriting Business Heats Up With New Entrants

Foreign banks and some domestic newcomers have moved in on the lucrative business of underwriting risky U.S. high-yield bonds and leveraged loans, setting the stage for stiffer competition among banks--and possibly lower fees for their clients.

Two big French banks--Calyon, the investment banking arm of Credit Agricole SA (ACA.FR), and Societe Generale CIB -- have been involved in deals for speculative-grade-rated borrowers this year, to cite one example, as have such new entrants as Macquarie Capital Inc. of Australia and PrinceRidge Group LLC of New York.

All took advantage of the fact that the credit crisis had sidelined or in certain cases completely removed some firms that have long dominated this market. Still, some of those industry leaders, including Citigroup Inc. (C) and UBS (UBS), are pushing back, building up their staffs to bolster their market positions.

"We have been in the U.S. for a long time," said Andrew Schaeffer, Calyon's head of U.S. origination and syndication, including high-yield bonds. "We didn't pull back [in the crunch]. Instead, we expanded...as some of our competitors have retrenched or disappeared."

Last year's dramatic reshaping of Wall Street saw Bank of America (BAC) absorb Merrill Lynch, J.P. Morgan Chase & Co. (JPM) snatch up Bear Stearns, and Wells Fargo (WFC) take over Wachovia Securities. Many of the banks left were bogged down with toxic assets and reluctant to underwrite new deals, especially for companies with low credit ratings.

But high-yield bonds and leveraged loans have staged a remarkable comeback this year, with junk bonds returning over 50% this year. This has encouraged borrowers and investors to go back to the table. On top of this, rising confidence in the economy is leading to an increase in mergers and acquisitions and leveraged buyouts, both of which rely heavily on the capital markets for financing.

Companies may take on at least $125 billion in new leveraged loans next year if M&A continues, market participants calculate, compared with this year's unusually low total of about $70 billion. While junk-bond issuance in 2010 may not match this year's record, it is expected to remain strong. This is what has drawn more fee-hungry banks to the market.

"The big banks have limited underwriting capacity and they are looking for friendly allies to help with deals," said Steven Miller, managing director at Standard and Poor's LCD. Those allies tend to be banks with big balance sheets "but not fully developed platforms," he said. "These banks are intelligently using their balance sheets to make some money while they can."

Calyon, for example, has been hired as a joint bookrunner on 11 dollar-denominated junk-bond sales this year, propelling it to No. 15 in data provider Dealogic's 2009 table of industry leaders. That's the bank's highest ranking ever as a bookrunner on dollar-denominated junk bonds, Dealogic said.

Calyon has lent to Europe's speculative-grade companies for years but lacked the sales team and distribution network to be a significant player in the U.S. The consolidation on this side of the Atlantic has allowed Calyon to make significant hires in debt origination, syndicate, sales and trading in the U.S.

Similarly, Macquarie, Citadel Investment Group, PrinceRidge and Jefferies & Co. have all staffed up with capital-markets professionals over the past year.

"We viewed the playing field in 2009 as being level," said Robert D. Redmond, vice chairman at Macquarie. "Issuers have been more open and encouraging of new entrants. We have rarely seen as good an opportunity to build a capability to respond to this."

Established banks haven't been idle either. Citigroup, for example, hired Bill Hughes, a former Lehman Brothers banker, to head its efforts on leveraged loans, high-yield bonds and emerging-markets syndicate in the Americas. UBS, meanwhile, hired Allen Bouch and Scott Norby from Citigroup and Goldman Sachs, respectively, to shore up its private equity coverage.

"Underwriting income from leveraged finance was something of an unexpected novelty this year," Miller said in an email. "For 2010, it will be an imperative as banks work to build fee income from '09 levels."

All of this means that while there is likely to be plenty of underwriting work in 2010, the competition to win new deals will be fierce, Miller added, even as issuers pressure their banks to sign up for bigger underwriting commitments and lower pricing margins.

-By Kate Haywood, Dow Jones Newswires; 212-416-2218; [e-mail]