Even as major banking companies are building full-size securities operations, many find themselves on the outside of underwriting deals for the very firms they know better than anyone - their own.
Take the slew of bond deals announced by banking companies in recent weeks. At least two regional banking companies - Wachovia Corp. in Winston-Salem, N.C., and U.S. Bancorp in Minneapolis - used the aid of another investment bank to help lead, or take the sole lead, on their own bond deals.
For Wachovia's $500 million bond sale, whose pricing was delayed last week by a second-quarter earnings revision, Wachovia Securities joined Merrill Lynch & Co. as the joint lead manager. Merrill also acted as the book runner.
Similarly, U.S. Bancorp tapped the market for its $500 million issue earlier this month, turning to Lehman Brothers as the sole lead manager. Its own securities affiliate, U.S. Bancorp Piper Jaffray, acted as a co-manager.
With many regional banking companies still trying to break into the big leagues of the underwriting business, an invitation by a bulge-bracket Wall Street firm to help manage a deal can be a way to build that business more quickly.
At stake are bragging rights that can help a bank's securities unit get its foot in the door to underwrite corporate securities. "It's sort of a marquee transaction," one investment banker said. "It's hard to go to a large corporation and say we ought to lead yours when we haven't done our own."
"We have important relationships with Wall Street firms that we want to maintain," said Douglas L. Williams, executive vice president and co-head of capital markets for Wachovia Securities, in Atlanta, which was a joint lead on four of the last five debt issues brought to the market for its parent company Wachovia. Merrill Lynch, Lehman Brothers, and Credit Suisse First Boston alternated as co-joint leads for those deals.
To be sure, by granting underwriting work to its own section 20 subsidiary, a banking company can save money on fees that would otherwise go to a Wall Street investment bank. Even though the fees end up being recorded as income for the banking company, such discounting, which brings down the total cost of the bond, can act as an added incentive for the bank to turn to its own people to manage the bond.
But ultimately, it is the buyers of these bonds who push for the inclusion of a Wall Street firm as part of the underwriting team.
Even with a company like Chase Manhattan Corp. or Bank of America Corp., which regularly use their securities arms to lead in-house deals, investors say they still like to see a bulge-bracket firm involved. "That means significantly more liquidity in the secondary market," said Robert Kinsey, an investment-grade portfolio manager for Pilgrim Mutual Funds, a subsidiary of Reliastar, in Phoenix.
Not all commercial banks have equally developed debt-underwriting capabilities. Chase, for instance, was the third-biggest underwriter of investment grade debt last year. Bank of America ranked eighth, and First Union Corp., which also leads its own deals, ranked 11th. Sometimes their position as lead on their own deals raises the question: Could an outside firm have done the same deal, better?
Robert P. Rinek, managing director and head of the financial institutions group for U.S. Bancorp Piper Jaffray, says it helps to have an independent party pricing the deals.
"Investment grade deals are priced on thin spreads, and if you're not a fairly significant player, you can lose your shirt," Mr. Rinek said.
