The globalization of the high-yield market has one American bank preparing to set up shop in London and some banks already there stepping up their efforts.
NationsBanc Montgomery Securities Inc., BZW Securities Inc., and Deutsche Morgan Grenfell are all recruiting to serve the emerging market for overseas junk.
They would like to offer non-dollar high-yield debt for issuers overseas and bring international companies to the market that has developed in the United States.
As interest rates have fallen in Europe, investors have grown hungry for higher-yielding investments and have been moving down the credit-quality curve to get them.
Fixed-income investors have increased yield by arbitraging among currencies. But the difference in spreads has been tightening, making it harder to arbitrage successfully. Spreads will only get narrower with the anticipated European monetary union, said Frank Knowles, co-head of European corporate research at Merrill Lynch & Co. in London.
As a result, all the major U.S. firms active in the U.S. high-yield market are starting to deal with the anticipated increase in European junk bond deals, Mr. Knowles said.
Though U.S. investors say they are not as hungry for non-dollar securities, because of the added risk, they are interested in diversifying their portfolios with dollar-denominated issues from non-U.S. companies.
"I see a continued integration of global markets and expansion of international issuers selling bonds in U.S. dollars," said Gary Goodenough, a portfolio manager with New England High Yield Fund.
Bonds from international issuers "tend to offer higher yields, and give us a chance to participate in other economies that might be a source of risk diminution," Mr. Goodenough added.
To be sure, U.S. investment banks have had a presence in London for years. Most credit Bankers Trust International PLC with pioneering the European high-yield market three years ago, when it began its effort in Europe.
BT brought to market the first deals denominated in Italian lire, British pounds, and French francs. Since then 15 non-dollar issues have hit the junk bond market.
In July, Bankers Trust and Credit Lyonnais led a five-year $56.7 million senior unsecured floating rate note issue for Moulinex SA, one of Europe's largest manufacturers of small household goods.
Youssef Khlat, a managing director and head of the European debt syndicate group at Bankers Trust, said the entry of newcomers is "actually a good thing" because it should help develop the market.
"Ultimately, investors take comfort from the fact that there is more than a handful of people providing liquidity on a number of transactions," Mr. Khlat said. "The key is to have ... many experienced professionals here, to help get the market to the next level."
The onus will be on the new banks in town to establish a good network of relationships in Europe, strong distribution capability, and optimum execution.
David Roberts, director of sovereign research at NationsBanc Montgomery, said hiring bankers in London and New York to serve this new market is a step in the "evolution" of his company's efforts to expand its emerging markets business. "Our approach has been to build from the existing high- yield business."
At BZW Securities Inc., the investment banking division of Barclays PLC, Joseph Bencivenga, managing director and head of global high-yield markets and emerging markets, has been devoting much effort to building a "truly global high-yield business" in London and New York.
"What we're really doing is providing integrated finance solutions to the burgeoning European market," Mr. Bencivenga said.
