Morgan Inches Up in Underwriting Ranks
On the face of it, impressive gains in the first half of this year failed to bring J.P. Morgan & Co. much closer to its goal of becoming a major player in the securities underwriting business.
Though Morgan increased its volume of underwriting activity by more than 68%, to $4.8 billion, it moved up only one notch in the overall rankings, to No. 11 among lead underwriters.
Other firms chalked up big gains too, so the gap was as wide as ever between Morgan and the bulge-bracket firms - those that account for the bulk of total underwriting volume.
Kidder Peabody's Competition
For example, sixth-ranked Kidder Peabody & Co. led 69 deals totaling $21.4 billion. In the first half of last year, Kidder led 40 deals totaling $8.5 billion.
However, about $18 billion of Kidder's underwriting volume was accounted for by mortgage-backed deals.
"That's not third-party underwriting," said Joseph Cook, a managing director at J.P. Morgan Securities Inc., the securities underwriting arm of J.P. Morgan.
When both firms' mortgage-backed deals are excluded, the gap between Kidder and Morgan virtually disappears.
Bulge-Bracket Move Promising
Indeed, Mr. Cook said, if all mortgage-backed deals are excluded in the underwriting volumes, Morgan ranks seventh among lead managers, making a leap to bulge-bracket status a less daunting prospect.
In mortgage-backed deals, firms mainly buy packaged mortgages from Fannie Mae and Freddie Mac - the quasigovernmental agencies - and repackage them as collateralized mortgage obligations for the secondary market.
As such, underwriting firms are not raising capital for a third party, noted Mr. Cook in explaining Morgan's rationale for excluding these deals from the underwriting volumes.
In all, the volume of new debt and equity issued in the domestic market soared almost 59% to $261.9 billion in the first half of 1991 from $165.2 billion a year earlier, according to Securities Data Corp.
Top-ranked Merrill Lynch & Co. led 300 deals totaling $48.5 billion, capturing 18.5% of the total domestic market.
Among the commercial banks, the highest-ranked underwriters were Morgan; Citicorp, in 16th place; and Chase Manhattan Corp., ranked 18th.
Corporate Relationships Count
Among commercial banks, only Morgan is considered to have a shot at breaking into the big leagues of securities underwriting, because of the strength of its corporate relationships.
The surge in first-half underwriting volume resulted from a combination of factors.
Lower interest rates spurred corporations to issue a record $92.4 billion of so-called straight debt, which excludes asset-backed securities and mortgage debt, according to Securities Data.
Signs of Market Buoyancy
Underwriting volumes were also driven by a buoyant market for both initial and secondary stock offerings.
The mortgage-backed debt market also grew at a rapid pace in the first half, according to Securities Data.
Morgan's Mr. Cook said he expects "fairly brisk" activity in the corporate bond market in the second half of this year, but the nature of the market will be different.
Much of the activity in the first half came from corporations locking in attractive long-term interest rates.
But with rates having edged up in recent weeks, "we don't see as much long-bond traffic" now, Mr. Cook said.
Instead, he said corporate borrowers will ride the yield curve down, issuing shorter-term debt.
For underwriters, that means a more competitive market and lower fees.
"We don't see volume falling off, but we see different deals, and a tougher market," Mr. Cook said.
"It's already turned tough," he added.