Banks Advanced During Quarter In Shrinking Junk Bond Market

Commercial banks nearly doubled their share of a shrinking high-yield debt market in the second quarter.

The banks grabbed 40% of the issues, worth $12.5 billion, according to Thomson Financial Securities Data Co., but total issuance plunged 42%, to $31.1 billion. The volume decline was attributable to last fall's financial meltdown, which made investors hesitant to hold risky securities.

"The crisis in Asia disrupted world financial markets last year, stopping new issues," said Rick Miller, head of high-yield research at BancBoston Robertson Stephens. "Issuance has started to pick up, but it is nowhere near the pace of last year."

Junk bond underwritings, though down from $53.8 billion in the same quarter a year ago, were up from $28.1 billion in the first quarter, Thomson Financial Securities Data said.

While bank gains in high-yield debt underwriting were made largely through purchases of securities firms, other companies, such as Chase Manhattan Corp., which have not done such deals, continued their climb up the league tables.

Chase, in fact, was fourth among underwriters in the latest quarter-its highest ranking since the capital markets team was formed in 1993- underwriting 15 deals worth $3.12 billion.

Chase also ranked fourth for the six months through June 30, behind Donaldson, Lufkin & Jenrette, Citigroup Inc., and Morgan Stanley Dean Witter & Co.

Part of the reason for Chase's strong showing was two 11th-hour deals- for AstraZeneca PLC and Avis Rent A Car Inc.-worth a combined $1.04 billion.

Chris Linneman, co-head of high-yield capital markets for Chase, credited the success to its hiring prowess and its training system.

Chase has hired from the outside and trained internally, which has helped it build a talented staff, Mr. Linneman said.

Chase, third among U.S. bank holding companies in assets, with $361 billion, has also aggressively tapped its existing corporate relationships, which were built through its top-ranked loan syndications franchise. This has been especially successful with leveraged buyout sponsor firms.

"We clearly use that to our advantage," Mr. Linneman said. "As a result, we have been the leading leveraged debt house for the last couple of years."

Banks are carving out more of the junk bond market even as it contracts. Last year's collapse in developing economies sent investors fleeing from any bonds riskier than U.S. Treasuries, driving the price of junk debt down and drying up the market for new issues.

"There has been an aversion to risk," said Michael Guarneri, director of high-yield debt research at Lehman Brothers Holdings Inc. "Default rates have picked up as investors see weaker returns."

Analysts said that junk bond mutual funds have also sustained blows from sellouts by jittery investors.

In addition, disasters at junk-bond-holding hedge funds such as Long- Term Capital Management led many of these buyers to cut back on their holdings, analysts said.

Long-Term Capital was a major junk bond buyer, analysts said. They and others cannot borrow as much money for investment purposes, lessening the demand for junk.

There has been some recovery in the high-yield market since the fall. Last year's financial turmoil began with falling markets and shrinking economies in Asia. That part of the world is beginning to emerge from its problems, pulling other markets, including junk bonds, back up, analysts said.

"There's been a sense that Asia has bottomed, and most U.S. financial markets have improved," led by the stock market, Mr. Miller said.

"World financial markets took a deep breath and things aren't as bad as we feared late last year, though they aren't as good as we thought they were early last year," he added.

Defaults and rising interest rates have hurt the junk bond market in recent weeks, analysts said. Last week was the first in seven that junk bond mutual funds saw an inflow of funds rather than an outflow.

If the Federal Reserve Board does not repeat Wednesday's quarter point hike in short term rates, and Treasury bond rates stop rising, "I would look for issuance to pick back up in the third quarter," Mr. Miller said.

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