Commercial banks maintained a steady share of the high-yield bond market in the third quarter, even amid a major decline in new issuance.
Companies issued $20.5 billion worth of junk bonds in the quarter ended Sept. 30, according to Securities Data Co. That was down from an average of about $50 billion in each of the first two quarters. Securities subsidiaries of commercial banking companies were lead managers for 21.8% of the high-yield debt in the third quarter-in line with their market share recently.
Junk bonds have been the favored product of commercial banks eager to get into securities underwriting and other investment banking businesses. Analysts said the high-yield market's slowdown will affect third-quarter earnings of the handful of large banks that underwrite junk bonds.
These banks will take a hit in two ways-from sparser fees for origination and through a decline in the value of bonds in their inventories, said Sally Pope Davis, a bank equity analyst at Goldman, Sachs & Co.
Still, she said, "there is a possible silver lining for the banks." Some companies that cannot tap the high-yield market may turn to the syndicated loan market for financing, Ms. Davis said. In this way, a junk bond shop affiliated with a commercial bank may have an easier time keeping its corporate clients during a downturn, she said.
The secondary market for junk bonds has cratered since mid-August, dampening investors' appetite for new issues. The high-yield market tends to mirror the stock market more than it does the broader bond market, particularly in a downturn, observers said.
"Ever since the stock market started to take a nosedive a couple of months ago, the high-yield market has mirrored it very closely," said Martin Fridson, global high-yield strategist at Merrill Lynch & Co.
In the third quarter, Bankers Trust Corp. was ranked No. 6 among lead underwriters, the highest standing for a commercial banking company. It had an 8.1% share of the high-yield underwriting market, up from 2.9% in the second quarter.
Chase Manhattan Corp. dropped three places from the second quarter to rank No. 9, with 4.4% of the market. And J.P. Morgan & Co. dropped one spot, to No. 11, with 2.9% of the market.
Three other banking companies that have acquired securities firms or merged with other banks in the last year bolstered their junk bond prowess.
Toronto-based Canadian Imperial Bank of Commerce bought the U.S. securities firm Oppenheimer last year. And CIBC Oppenheimer leaped three places, to No. 12, with a 2.5% market share.