After climbing the ranks of high-yield bond underwriters in 1997, U.S. commercial banks ceded some ground to the market's largest players last year.
Securities firms affiliated with U.S. commercial banking companies - excluding Citigroup's Salomon Smith Barney unit - led 18.6% of new junk bond issues in 1998, according to Securities Data Co.
That dragged their share down to about the 1996 level. Banks' share had surged in 1997 to about one-fourth of the market, before falling back in 1998.
Bankers attributed the loss of share to the junk bond market's difficulties in the second half of 1998. Turmoil in the world's stock markets spooked junk bond investors in August, causing new issuance to come to a screeching halt.
Though the market started to rebound in the fourth quarter, the climate remained rough. Corporations that chose to issue high-yield bonds tapped the market's most established players to manage their deals, bankers said.
"In times of turmoil, which we certainly had last year, issuers tend to go with the larger underwriters," said Art Penn, managing director and head of global high-yield capital markets at Bankers Trust Corp.
Indeed, the market's top three underwriters-Donaldson, Lufkin & Jenrette Inc.; Morgan Stanley Dean Witter & Co.; and Salomon Smith Barney-grabbed a bigger piece of the pie in 1998. The three firms controlled 41% of the $146 billion high-yield market in 1998, compared with 33% for the top three a year earlier.
As the field consolidated at the top, a bevy of bank and nonbank mid- tier firms saw their share shrink. Still, since entering the business in the mid-1990s, commercial banks have fared well, some market participants said.
"They have certainly taken market share from the mid-tier firms in this business," said Bennett Goodman, the executive in charge of high-yield at Donaldson Lufkin. He added that commercial banks with large balance sheets and relationships with leveraged buyout shops would emerge as the most formidable competitors.
Meanwhile, junk bond executives at Chase Manhattan Corp., Bankers Trust, and BankAmerica Corp. all said they plan to resume marching up the league tables in the near term. Bankers at Chase, the No. 1 junk underwriter among commercial banks, expressed the most confidence.
"Our goal is to hit No. 1 within the next three years," said Chris Linneman, managing director and co-head of high-yield capital markets at Chase.
The banking company was ranked No. 6 among high-yield underwriters in 1998, with a 6.2% share, according to Securities Data. That was down from No. 5 and an 8.3% share a year earlier.
Some market sources said that without the ability to offer a full product line-including equity underwriting-Chase would find it difficult to reach its goal.
But a deal like its much-rumored intention to merge with a Wall Street giant, such as Merrill Lynch & Co., would instantly make Chase a contender for Big Three status in the high-yield market, a senior junk bond executive added.
Bankers Trust has differed from Chase in its approach to the junk bond market by focusing on more highly leveraged credits-those companies with B credit ratings and below.
These deals tend to be smaller in size but more profitable on the basis of dollar volume for underwriters. According to Mr. Penn, Bankers Trust ranks No. 3 in this market segment.
In addition, Bankers Trust has zeroed in on financial sponsors-or leveraged buyout shops-which make up about one-third of the junk bond market and are widely expected to grow in importance this year.
BankAmerica also plans to gain market share, though it is not looking to crack the top five in the near term, said Tom White, managing director and head of credit fixed-income at the Charlotte, N.C., banking company.
"Our objective is to become one of the premiere providers of leveraged finance," Mr. White said.
BankAmerica, which merged with NationsBank Corp. Sept. 30, was ranked No. 12, with a 2% share, last year. On a pro forma basis, the combined bank was ranked No. 12, with 3.1% of the market, in 1997.
A major change on the junk bond landscape involved the year-old merger of Salomon Brothers with Smith Barney, and the marriage of the firms' parent, Travelers Group, with Citicorp in October.
Salomon was ranked No. 3 in high-yield origination last year, with 12.7% of the market, up from No. 4, and 9.7%, a year earlier. Including Salomon, U.S. commercial banking companies controlled 31.3% of the junk market in 1998.
Salomon Smith Barney will reap benefits from its new affiliation with a commercial bank, including the ability to offer a more seamless credit product, said Chad Leat, Salomon's head of high-yield capital markets.
Mr. Leat attributes much of Salomon's climb up the league tables in 1998 to cross-selling between clients of the old Salomon and Smith Barney. That accounted for about one-third of the firm's business last year, Mr. Leat said.
Donaldson Lufkin remained the top-ranked firm last year-where it has been since 1995-with almost 15% of the market. And with 112 new issues, roughly 32% more than its nearest competitor, the firm's deals ran the gamut in size and complexity.
Mr. Goodman said the shop was able to solidify its top ranking because it is willing to tackle the most unconventional deals.
"Many people would have thrown up their arms and said this is too complicated" when they saw certain issues DLJ managed last year, Mr. Goodman said. He cited a $220 million junk bond deal for Oxford Healthcare and a $3.3 billion junk bond deal for Niagara Mohawk as particularly tricky.
In 1998 two other U.S. banking companies with small junk bond shops, BankBoston Corp. and First Union Corp., showed up on the league tables, with a combined market share of about 1%.
Foreign banks and their affiliates had about 8% of the dollar- denominated junk bond market; Credit Suisse First Boston had about 5% of the market and was ranked No. 9.
The domestic junk bond market includes Yankee bonds-dollar-denominated debt issued in the United States by foreign companies.
Other foreign banks in this market included CIBC Oppenheimer, the U.S. securities subsidiary of Canadian Imperial Bank of Commerce (15th), Deutsche Bank (19th), ING Barings (22d), and Barclays Capital (25th).
