As the high-yield market continues to surge, more banks are linking up their high-yield and emerging-markets shops.
Citicorp Securities Inc., BT Alex.Brown Inc., and NationsBanc Capital Markets Inc. are among those that have made the move. Now BancBoston Securities Inc., ING Barings, and BZW Securities Inc. are following suit as they staff up their junk bond groups.
While structures vary from bank to bank, many changes involve situating the emerging-markets and high-yield sales, trading, and research professionals within shouting distance of one another and uniting them under a single chief.
"Everyone talks about the convergence of the markets as if it's about to happen, but it's essentially here," said Rick Miller, a managing director and head of high-yield research at BancBoston Securities. "It's important that the research end of the capital markets function is able to deliver the product that incorporates the world, not just the local markets."
The changes underscore the ongoing convergence of the high-yield and emerging-markets asset classes. Investors have been attracted to yields on high-quality issues from non-investment-grade countries for quite some time. As the highly liquid U.S. market continues to attract foreign issuers and a nascent junk bond market develops overseas, interest in non- investment-grade corporates from non-investment-grade countries also grows.
"This is an intelligent thing for banks to do," said one high-yield investor.
Positioning high-yield and emerging-markets sales professionals close together helps them provide investors with a "grasp of all relevant factors that are affecting the market and a good feel for the credits and credit trends of the issuers" that could not be achieved by being immersed in just one market, the investor said.
"We think there are synergies between the businesses, and in many cases they overlap pretty dramatically," said Art Penn, managing director and global head of fixed-income capital markets at BT Alex.Brown. "It makes sense to work more and more together."
Bankers Trust, a pioneer among commercial banks in the junk bond market, played a vital part in opening up the high-yield business in the emerging markets. This year BT Alex.Brown arranged the first French franc-dominated high-yield issues for an unrated company, Moulinex SA, one of Europe's largest manufacturers of small household goods.
In November 1995, Citicorp led a $150 million zero-coupon Yankee bond issue for Communicacion Cellular SA, a cellular company based in Bogota, Columbia. Some hailed the issue as the wake-up call to the market, and issuance has taken off ever since.
In 1995 high-yield bonds issued by Latin American companies made up 2.5% of total issuance. In 1996 that moved up to 8.5% of the market, and so far this year it's 10.9%, according to Securities Data Co.
The surge in issuance also points to investor appetite.
About three years ago, high-yield institutional investors began allocating portions of their portfolios for emerging markets corporate issues, in addition to the handful of mutual funds that had registered as emerging markets funds.
Some estimate that these days, the universe of high-yield mutual funds, which is well over $100 billion, has allocated 10% to 15% of its assets to emerging markets.
High-yield investors have poured their money into these credits, hoping that adverse political and economic situations in some emerging markets will reverse and allow for healthy returns.
"There are certain countries where there can be excellent value over time by identifying companies with high yields that are going to be improving credits," one investor said.
Bankers acknowledge that by marrying the departments they can offer a more global perspective on industries and provide more seamless execution to their international clients.
"Strategically, we're reacting to a market reality," said Malcolm J. Stewart, head of global emerging markets and high-yield securities at Citicorp, which merged its groups in April.
The organization "assures that we always get the best solution at the right time, and frankly it's a more efficient way to approach the market," Mr. Stewart added.
"The research community is going to have to expand its skill base in order to incorporate the knowledge of the foreign issuers that includes the increasing knowledge of country risk, as well as local industry knowledge," he said.
Industry observers quickly point out that the commercial banks are merely following in the footsteps of Morgan Stanley, Dean Witter, Discover & Co., Merrill Lynch & Co., and other investment banks that similarly restructured long ago.
"The investors and the investment banks are still sorting out exactly how far the different categories will stretch, and that process will never end," said one market observer.
Though the products seem alike in the minds of investors, the analyses remain distinct.
Emerging markets analysts scrutinize economic condition, balance of payment, and sovereign risk, while high-yield analysts assess a corporate issuer's credit risk and country.