After catering to the highly leveraged in the 1980s, Bankers Trust New York Corp. is finding increasingly that its clients are moving upscale.
Called "rising stars" by bond analysts. the credit ratings of these companies are getting lifted from junk to investment grade.
Given the steady improvement in the balance sheets of corporate America, a decision by Bankers Trust earlier this year to pursue investment-grade deals appears to have been well timed.
Fruit of the Loom a Client
One of the newest rising stars is Fruit of the Loom Inc., the Chicago-based underwear manufacturer, which was upgraded by Moody's in October on the strength of the company's improved earnings, cash flow, and balance sheet.
Fruit of the Loom is also a long-time client of Bankers Trust, and investment-grade specialists in Bankers Trust's bond underwriting department have just co-managed a $300-million note offering by the company. CS First Boston led the deal, which was priced last week.
The other co-managers were investment-banking heavyweights Merrill Lynch & Co., and Morgan Stanley & Co.
Upgrades Outpace Downgrades
For the first time since 1984, there likely will be more up-grades than downgrades of corporate credit ratings in 1993, according to Moody's Investors Service, a major credit-rating agency in New York City.
And so far this year, there have been more than twice as many rising stars than last year.
Through October, Moody's has raised the ratings of 26 companies to investment grade, compared to 11 in the first 10 months of 1992.
John Lonski, chief economist at Moody's, said he expects the trend to continue.
"Looking ahead, with recession risks quite low, the odds favor a continued net improvement in the credit worth of speculative-grade issuers." he said.
Anticipating the development, Bankers Trust took its first steps last spring to expand into investment-grade bond and loan underwriting, areas that the bank had shunned in recent years.
High-Grade Deals Pushed
In April, Bankers Trust's securities affiliate, BT Securities Corp., hired Jacques de St. Phalle, formerly of Citicorp, to start up a high-grade bond business.
At about the same time, Kathleen Keator was moved to the bank's loan-syndication desk to take charge of a push into investment-grade deals. She previously worked on the client-relationship side of the bank.
Bankers Trust is also pitching its private placement skills to investment-grade clients.
The decision to build up the investment-grade side of these businesses came after several years of internal debate at the banking company.
Bankers Trust had zeroed in on lending to leveraged buyouts during the 1980s, amassing a stable of speculative-grade clients along the way.
When Bankers Trust obtained regulatory approval to underwrite bonds in 1989, it stuck to its niche, specializing in junk bonds.
The junk bond market was collapsing just as Bankers Trust was entering the business, but the timing turned out to be fortuitous, because it allowed Bankers Trust to cherry-pick top talent from other firms.
When the market came back a few years later, Bankers Trust was positioned to carve out a respectable chunk of the business for itself, rivaling the top players.
Meanwhile, by 1990 -- after the buyout boom of the 1980s had passed -- Bankers Trust was talking publicly about its need to rebuild relationships with major corporations.
The bank's lucrative but risky business of financing LBOs had been built on relationships with deal firms, such as Kohlberg Kravis Roberts & Co.
But up until late 1992, the bias of Bankers Trust's top management was toward financings for noninvestment-grade corportions, because these were the type of clients the bank felt it knew best.
By early this year, that thinking had turned around, as a growing number of these clients climbed up the credit-rating ladder.
Full Array of Services
Bankers Trust observers said the decision made sense for another important reason -- it expanded the banking company's product offerings to its existing investment-grade clients.
"To become really important to those customers, you have to provide a full array of financial services," said Judah Kraushaar, a banking analyst a rill Lynch.
Moreover, as a result of Bankers Trust's exploding business in derivatives and other risk-management products, the banking company's global client base is actually tilted more towards investment-grade than noninvestment-grade corporations.
Indeed, Bankers Trust plans to leverage the relationships it has developed though its derivatives and other businesses to gain bond-underwriting assignments. It is also pursuing new clients.
The marketing effort is "flat out," said Mark Patterson, managing director in charge of domestic debt finance at Bankers Trust.
In the case of potential new investment-grade clients, "the cold calls probably are more skewed to infrequent issuers" that do not tend to have established investment-banking relationships, said Mr. St. Phalle.
So far, Bankers Trust has yet to land an investment-grade underwriting assignment from a new corporate relationship. But the bank has already managed or co-managed more than half a dozen deals for existing corporate relationships.
In addition to the Fruit of the Loom offering, Bankers Trust's securities unit has won bond underwriting assignments from Dole Food Co., Phillips-Van Heusen Corp., McGraw-Hill Inc., and Private Export Funding Corp.
On the loan side, Bankers Trust's intention to pursue investment-grade credits was underscored in July, when the bank fully underwrote a $2.3 billion credit to finance the spinoff of Eastman Chemical Co. from its parent, Rochester, N.Y.-based Eastman Kodak Co.
Although Kodak is a longtime Bankers Trust client, the sheer size of the underwriting raised eyebrows from the bank's competitors in the loan market.
The Eastman Chemical deal "basically states how comfortable we are in our investment-grade capabilities," said Ms. Keator.
Bankers Trust also seems reconciled to the fact that lending to investment-grade borrowers generally is not very lucrative.