Chase Manhattan Corp.'s securities subsidiary ranked an unimpressive 18th among U.S. underwriters of high-yield "junk" bonds in 1993. So skeptics can be forgiven for scoffing when Chase says it intends to be one of the top five players in the junk bond market within four short years.
But Kathylynn O'Donnell, 38, the street-smart, no-nonsense executive vice president who runs all of Chase's capital markets businesses, insists it can be done.
"It's not like we're deciding to produce wine," she said in a recent interview with American Banker, making the point that junkbond underwriting is complementary to Chase's core businesses.
Other big commercial banks with similar ambitions could make the same point. For now, though, Chase is putting its money where its mouth is, spending big bucks to recruit top Wall Street talent.
Q.: Is the junk-bond business your top priority right now?
O'DONNELL: Globally, it's one of several top priorities. In the U.S. market, we have several priorities that are complementary. The high-yield-bond business is a priority that stands out potentially above the rest. But we are working on several fronts.
Really what differentiates one front from another is the length of time it will take for us to see significant results. And so we're working on several fronts simultaneously, but our expectations are on a different time frame. We have the high-yield business on a more accelerated time frame than we do on some of the other fronts.
Q.: What's the basis for your apparent confidence that you can go from essentially a nonplayer in junk bonds today to one of the five largest underwriters in a relatively short time frame?
O'DONNELL: Well, several things. One is that I believe that the intensity of our customer relationships on the banking side of the house is there. And I think the talent to analyze those credits and those companies in that segment of the market is there.
And so the question then became: Can we leapfrog the rest by making a very big push on the securties side to complement and complete that picture in a way that we will be able to step ahead of the rest?
What that comes down to is recruiting the talent on the securities side with sufficient history and expertise that we automatically get the depth of experience by bringing in talent from the street that it would take you years to grow internally.
Q.: Your most recent hires from CS First Boston were from the sales and trading side of the business. On the origination side, do you rely on Chase's corporate finance group to originate business with issuers, or are you developing your own origination capability within capital markets?
O'DONNELL: It's a complementary picture. We have within capital markets a high-yield-origination department, and it has been built since 1991 with professionals from Wall Street.
That department is run by Nick Daifotis, who came from Merrill Lynch. That department works with Bob Murphy [head of corporate finance] on the banking side of house. That is where the customer relationships are.
The relationship manager's responsibility is to determine when it would be appropriate to look at a financing opportunity and to present to the client the right financing opportunity that we can put before him.
Q.: These are corporate finance relationship managers you're talking about?
O'DONNELL: Exclusively. That's their job -- to spot the need of the client for finance, and to bring to bear the various segments of capabilities that the capital market group has in order to put a financing on the table. It could range from a syndicated loan to a bond issue.
It could be both. And so what they'll do is they will reach into the capital markets group, where we work in an integrated way with the relationship manager and the client, and go through what his objectives are, and his alternatives.
Q.: In competing for business, how will Chase differentiate itself from commercial and investment-banking competitors?
O'DONNELL: We will differentiate ourselves by explaining to the client that he should look beyond the fact that we're a section 20 company of a [commercial] bank, and look beyond a 1993 or 1992 league table, and look very seriously at the people that are in our group.
Because if you look at the people that are in our group, they participated -- and in some cases were a leading force -- in what drove the league table standings of bulge-bracket investment banks. That's the experience that we'll bring to our clients.
While our own track record may show that we led two deals and co-managed x others, the people that we have brought in over the last two years -- and the last few months in particular -- their cumulative experience is hundreds of deals.
That's what you're retaining when you pick us as a lead manager. You're retaining the experience and track record of those poeple.
Q.: What's your strategy on the investment-grade side of the corporate bond business?
O'DONNELL: The investment-grade sector of the market is where you tend to find frequent issuers. And we are looking in particular at those who have medium-term note programs. Having a top-rated derivatives capability at Chase is giving us a competitive advantage to spot attractive opportunities in the market, and make those a reality.
In the case of frequent issuers, they have certain hurdles that they want to see as being available to them in order to issue. They have large needs, so they're constantly issuing. They make it clear what their hurdles are, and they are very receptive to talking to us if we're able to meet those hurdles.
Also, we do not want to build a capability in high-yield as a stand-alone business, only to be disintermediated as our clients improve in credit quality.
Q.: So you want to be able to follow them as they migrate to investment-grade?
O'DONNELL: Absolutely.
Q.: Chase just recently received equity underwriting powers. How do you plan to pursue that business?
O'DONNELL: The path we will follow is complementary to the debt side. For example, the emerging-markets area is a very logical place for us to begin building an equity capability, because it has immediate economies of scale and competitive advantages.
In the case of high yield, we have immediate applicability, in particular where you talk about debt issues that are brought to market with equity kickers.
Q.: Are you going to recruit heavily from Wall Street to staff your investment-grade-debt-and-equity underwriting businesses, or will you build from within?
O'DONNELL: We'll do a combination, but it's likely to be weighted more toward street talent. Where we will be able to get some economies in-house is off of research that we're already building for high yield. That can be expanded to include an equity focus. So we'll be able to expand the focus.
And we will be able to have some economies of scale with our existing sales force, particularly when you talk about debt issues with equity warrants.
Q.: In loan syndications, Chase has been a major player, but never the dominant force, as Chemical Bank is now, or as Citibank was in the past. Are you satisfied with Chase's position in that business?
O'DONNELL: I'm satisified with our relative position in loan syndications. We're not out to be the dominant player in any single market. What we want is to be in the top brackets of the markets that we consider to be strategic. Syndicated loans is one, and we are in the top bracket.
We want to be able to offer the client whatever financing makes the most sense for him and the investor community. So if the client is thinking of a syndicated loan, but it turns out that a bond deal could be an interesting alternative, I don't want our people to have a bias because we've got to be number one in the league table to skew the client in favor of one market or another. We really want to present to the client what is the best opportunity.
It doesn't matter from year to year whether you're No. 1, or 2, or whatever. What matters is that you're in the top bracket and you're showing the client the best thing for him and you're bringing the market quality deals.
Q.: What are you telling your clients right now about market conditions?
O'DONNELL: There's still a lot of volatility in the market, so it pays for an issuer to be prepared, and to be ready for those periods of stability when they arrive, in order to approach potential investors in a more calm environment.
We're also recommending that in order to get issues placed in this type of environment you not only have to be ready for the periods of stability, but you have to be more sensitive to investor concerns about volatility.
That means we have to be more dynamic to address their need as it relates to structure, whether it be from the maturity of the issue, or the interest-rate structure of the issue.
