Commercial banks made major strides in junk bond underwriting last year, with seven U.S. bank holding companies taking places in the industry's top 25.
That representation was up from five in 1996, as BankAmerica Corp. (No. 18) and BankBoston Corp. (22) joined Chase Manhattan Corp. (4), J.P. Morgan & Co. (6), Bankers Trust New York Corp. (8), NationsBank Corp. (14), and Citicorp (20).
According to figures provided by Securities Data Co., the U.S. banking companies' share of the market rose to about 25% from 23%-and the pie got considerably bigger. Total junk bond issuance jumped to $103 billion, from $40 billion.
Chase, for example, rose to fourth place from seventh as manager of $9 billion of issues. The dollar amount more than tripled, while its share of the market increased by 2 percentage points, to 8.7%.
J.P. Morgan rose two places, to sixth, at $6.2 billion. That, too, was up 200%, while its market share rose to 5.9% from 5.2%.
Bankers Trust's BT Alex. Brown unit, up to $5.7 billion from $3.6 billion, ranked eighth, according to the initial Securities Data Co. estimates. But Bankers Trust claimed it should actually be at $8.7 billion, just behind Chase, in fifth place.
The high rankings reflect how U.S. banks and affiliates of several international banking organizations-including Canadian Imperial Bank of Commerce, United Bank of Switzerland, HSBC Holdings, and Societe Generale of France-are making inroads into an area led by investment banks.
Donaldson, Lufkin & Jenrette, Merrill Lynch & Co., and Morgan Stanley & Co. topped the list in 1997 with a combined 35.3% share of the market. Indicating more intense competition, the comparable three-firm concentration in 1996-DLJ, Merrill, and Salomon Smith Barney-was 41%.
Arthur Penn, managing director and global head of fixed income capital markets at BT Alex. Brown, said Bankers Trust's integration of Alex. Brown and its focus on the burgeoning European high-yield market gave it an "edge" in an increasingly competitive market.
About a third of the firm's high-yield backlog now derives from the Alex. Brown industry groups that have been merged in, Mr. Penn said.
BT Alex. Brown will continue to focus on "being able to provide the client with unbiased advise, up and down the capital structure," he said, not just bank debt and bonds.
At J.P. Morgan, high-yield syndicate head John Gilbert said a "broad team effort" is paying substantial dividends.
"It's really a function of investment in the high-yield product across the firm, not just with sales and trading but also with our investment bankers who are increasingly familiar and more broadly experienced with the products," Mr. Gilbert said.
"We're more excited than anything that we are very much in the growth phase for the development of this franchise," he added.
The "junk" rankings cover bonds rated BBB-plus and below. They do not include emerging markets bonds or issues of preferred stock that are sold to high-yield investors and make up large parts of what underwriters consider the high-yield business.
Nearly 80% of new high-yield bonds were issued through Securities and Exchange Commission rule 144a in 1997, up from 26% in 1996, according to Securities Data.
Total returns for high-yield bonds reached 13.5% this year, according to the Bear Stearns high yield index. That return, well above the 9% average coupon for high-yield, was stretched out by returns exceeding 20% in the telecommunications, cable, and broadcasting sectors.
Paul Greenberg, head of high-yield research at Bear, Stearns & Co., No. 6 in the junk bond ranking, said he expects the market to continue to do well in 1998 as long as the economy continues to be favorable and "razor thin" spreads prevail in the high-grade bond market.
Mr. Greenberg pointed to the "power" of demand for junk bonds from new high-yield investors, including collateralized bond obligations. About 50 pure high-yield CBOs were established last year, he said.
CBOs are "a force that is going to be with us," Mr. Greenberg said. He added that the structured products have had a "calming" effect on the market.
CBOs start buying as soon as bonds start trading down, acting as a "catcher's mitt" for any downturns in the market. In fact, when the high- yield bond market turned volatile in the fall in response to the Asian financial crisis, about 80% of the buying volume was from CBOs, he said.
