Donaldson, Lufkin & Jenrette Inc., the undisputed king of the high-yield market, does not want to live on junk bonds alone.
The firm in recent months has hired several senior-level investment bankers for its fledgling investment-grade bond underwriting group. It also has developed a proprietary on-line bond research program to give to established and prospective clients.
Though DLJ executives say they are not looking to replicate their success in the high-yield market, they say they must upgrade their high- grade shop to offer their clients true one-stop shopping. The firm's increased commitment to high-grade debt is also designed to help it hold on to high-yield clients as their credit ratings improve.
"If we are going to be a full-fledged multi-product investment bank, this is a product that we have to have," said Hamilton E. James, chairman of DLJ's banking group.
DLJ ranked 11th in domestic investment-grade bond underwriting during the last 12 months, with a 1.1% market share, according to Securities Data Co. That ranking was up from 15th, with a 0.9% market share, a year earlier.
"The market share change you would expect to see will come primarily in 1999," Mr. James said. "They are still hiring new people and starting coverage."
Observers say the ability to offer high-grade bonds-a commodity product with low margins-is a strategic imperative for DLJ and for any other firm that wants to be perceived as a full-service provider.
"It would not have been necessary for DLJ five years ago when their clientele did not need that product," said Sallie Krawcheck, a financial services equity analyst with Sanford C. Bernstein & Co. "But the firm is trying to remake itself as a full-service investment bank, and it is an absolute necessity for them to offer the high-grade product."
"They don't want to lose clients as they grow up," said Raphael Soifer, a bank equity analyst with Brown Brothers Harriman & Co. "But there is not a lot of incentive in attracting new investment-grade bond underwriting. They should watch the extent of their commitment."
To that end, Mr. James said he would not consider underpricing high- grade deals in an attempt to increase market share.
"A lot of players in investment-grade do things that don't make economic sense," he said. "Historically we might do that to support an important relationship or as part of a larger deal, but we wouldn't do it for the window dressing of league tables."
Though DLJ has had a small investment-grade group since the early 1980s, most of its efforts in the fixed-income arena have been in high-yield. Then last fall it hired Chris Lynch from Smith Barney Inc. as a managing director and head of high-grade debt capital markets.
Since then, the firm has expanded the professional staff of its high- grade trading, research, and origination groups by about 40%, to 35 professionals.
Mr. Lynch said he intends to expand his staff, which covers high-grade origination. One area he said he will focus on is the financial services industry.
"We see that sector as a real opportunity for growth. DLJ has had a market-leading presence in insurance for a number of years," he said.
New York-based Equitable Cos. and its subsidiary, Equitable Life Assurance Society of the United States, has a 74% equity interest in DLJ.
Mr. Lynch said he also plans to expand into the European bond market and put an investment-grade underwriter in the firm's London office soon. Most bond market observers predict huge growth in Europe's bond market after the introduction of the common European currency on the continent Jan. 1, 1999.
Mr. Lynch's Smith Barney colleague, Paul Galant, also joined the firm in November to start a financial engineering group to develop technical products.
In job interviews with Mr. James, the two men emphasized their plan to develop an on-line data base capable of modeling bond portfolios for clients. Mr. James said he found the concept "compelling" and that it was a key factor in the decision to hire them.
"Once again, I wasn't looking to be just one more player in the industry. I wanted something that would make us unique," he said.
The on-line system helped DLJ win a mandate to sole-manage a small bond deal for Cinergy Co., a Cincinnati holding company for several Midwest utilities companies. Cinergy was the first test site for a trial version of the data base, which is known as Financial Engineering Desktop, or FED.
In April, Cinergy made DLJ a co-lead on a $100 million bond deal it was doing with Morgan Stanley Dean Witter & Co. Last week DLJ, which had not done any work for Cinergy before that, sole-managed a $50 million bond issue.
Mr. Lynch and Mr. Galant had worked with Cinergy while at Smith Barney, said Cinergy's treasurer, Bill Sheafer.
"I can't say that the mere presence of the (on-line) system influenced us to use DLJ, but it was an enhancement," Mr. Sheafer said.
Mr. Galant said he has demonstrated the system to about 150 companies and has more than 30 already on-line. His goal is to sign up about 100 companies by the end of September, including about 60 current DLJ clients.
Executives said the firm does not intend to charge for the system, which requires constant technical support, and it does not plan to provide it to all of its investment-grade customers. Rather, it is hoping that this will help boost its market share.
Ms. Krawcheck said she doubted the system would lead to a huge leap in new business, but she viewed its development as an up-front investment to enhance the firm's high-grade debt group.
"It's a small-margin business, and a small market share means even smaller profits. You have to bulk up in order to make any profits," she said.
"On the other hand, you can't discount this firm's ability to build up a new product line."
