More foreign banks see underwriting asset-backed securities as their way of breaking into the close-knit world of Wall Street.
In the past six months several foreign banks have been scouring ratings agencies and rival banks for asset-backed underwriters and analysts. Headhunters and investment bankers say Canadian Imperial Bank of Commerce, Barclays Bank PLC, Deutsche Bank AG, Societe Generale, and Westdeutsche Landesbank AG have been the most active.
Executives at the foreign banks hope to follow U.S. banks such as Chase Manhattan Corp. and J.P. Morgan & Co. in using the asset-backed market for entree into the clubby world of securities underwriting. But there are indications that the European banks are late to the game.
Asset-backed underwriting, at least in the public markets, is showing signs of cooling off after a year of tremendous growth. Issuance was $70 billion in the first half, according to Lehman Brothers, off 5% from the same period a year earlier. And a handful of big Wall Street firms, including Lehman Brothers, Merrill Lynch & Co., and Bear Stearns, continue to dominate the market.
As a result, to generate business the European banks are fighting for speculative deals. These include leading deals for securities backed by movie tickets, lottery winnings, airplane fuel contracts, and tax liens.
Still, executives at the New York-based investment banking units of foreign banks maintain that asset-backeds are joining junk bonds as a cornerstone of financing noninvestment-grade companies. And the market is new enough that today's exotic $20 million offering may be tomorrow's next big asset class.
"The market for asset-backeds is hot now," said Kenneth M. Wormser, managing director for structured asset securitization at CIBC Wood Gundy Securities Corp., a division of the Canadian Imperial.
Mr. Wormser was hired away from Citicorp last December with a mandate to expand the bank's asset-backed business into non-investment-grade companies. He said he hopes asset securitizations will become as much a part of financing leveraged buyouts as junk bonds.
Asset-backed securities resemble bonds except their credit-worthiness is determined by a specific cash flow, such as credit card bills owed to a bank, instead of the company's overall credit rating.
Foreign banks say they can compete for asset-backed deals because the right relationship very often isn't everything for companies looking to raise money by securitizing a new asset class-they are more interested in the right price.
"Whoever can underwrite the deal for the least money usually gets the deal" in new asset classes, said James X. Callahan, formerly a chief bond trader at Prudential Securities and now executive director at the Pentalpha Group, a Greenwich, Conn. consulting firm. "That's the future for the European investment banks doing business here."
Investment banking fees for underwriting private asset-backed deals are tiny by current Wall Street standards. Underwriters say a typical fee on a subprime auto securitization is 1 basis point. That comes to $500,000 for a $50 million deal, not an unusual size for an exotic offering.
"We're not going to compete with Merrill and Lehman," said CIBC's Mr. Wormser. "We're going to develop our own business."
And that business will likely involve underwriting some pretty bizarre- by current standards, anyway-asset classes.
Dalia Lagoa, head of securitization at Societe Generale, says her bank will focus on bringing securities backed by health-care receivables and franchise fees to market. The French bank recently brought over Richard Brounstein, formerly head of private placements at UBS Securities.
Of course, it's the dream of every underwriter to have today's exotic asset class turn into tomorrow's commodity.
A few banks seem to have a head start in grabbing the brass ring. For example, asset-backed securities have been slow to develop in Europe, although bankers insist investors there are clamoring for the product. So Barclays' BZW Ltd. division hopes to develop and then dominate the European credit card securitization business.
The group's securitization desk in New York, run by Allen E. Appen, director of debt capital markets, has led securitizations for European investors backed by MBNA Corp.'s credit card receivables. The bank recently hired Ed Harycki, a securitization executive at MBNA, as director at its New York asset securitization group, and analyst Nichol M. Bakalar, who came over from BancAmerica Securities, to fill out the group.
To date, the only foreign bank that has managed to do asset-backed deals with Wall Street's bulge-bracket brokerages is Deutsche Morgan Grenfell, the investment banking arm of Frankfurt's Deutsche Bank.
The group's asset-backed desk is run by Michael H. Evelyn, a former Merrill Lynch executive. He recently brought over Lisa Anderson, an analyst at Donaldson, Lufkin & Jenrette, and last week hired Kimberly Cummings, an analyst at HSBC Securities Corp. Mr. Evelyn and Ms. Cummings worked together until 1995 at Chase Manhattan's securities unit.
Last month Deutsche Morgan Grenfell co-managed MBNA's most recent asset- backed issue, valued at $706 million. Through July 2 it had been part of 11 deals. Still, it ended the first half of the year ranked 16th among asset- backed underwriters.
Whenever a product gets hot on Wall Street, the pay for most everyone involved goes up, often dramatically. These days it's good to be young and in asset-backeds.
The turnover at the different firms is causing salaries to rise "on a steep curve," said Gene Shen, managing director at the Whitney Group, a New York executive search firm. But because asset-backed groups are seldom bigger than a dozen bankers, banks can play without making commitments as large as other parts of investment banking require, he said.
The most significant consequence of the recruiting is that asset-backed desks are staffed by ever-younger and less experienced people.
"The market is more competitive than ever," said Ms. Lagoa of Societe Generale. "Talent is scarce, and that means people don't need the same level of experience as before. One year at a ratings agency seems to be enough."
And it seems the market for talent to staff the mushrooming asset-backed desks will get only more intense.
Whitney Group's Mr. Shen says Japanese banks are likely to start building their asset-backed desks within a year.
"They're all looking to reassess their presence in the U.S.," he said. "They realize they don't have the network for corporate finance."