J.P. Morgan & Co., rising rapidly as an underwriter of investment-grade bonds, is leading a $700 million issue for British Aerospace Finance Inc., a Delaware unit of a leading European defense manufacturer.

The issue, priced Thursday, was split into two parts: $200 million of 10-year notes priced to yield 7.039%-58 basis points more than Treasury securities-and $500 million of 30-year instruments priced to yield 7.563%, or 78 basis points over Treasuries. Moody's Investors Service rated the issue A-3, and Standard & Poor's gave it an A rating.

The issuer, a unit of Hampshire, England-based British Aerospace PLC, had planned to raise only $500 million but bumped up the amount in response to strong investor demand. Even at the larger size, the issue was two times oversubscribed, market sources said.

It was co-managed by Lehman Brothers, CS First Boston, NationsBank, and UBS Securities.

While many U.S. commercial banks are making inroads in the high-yield bond market, only a handful are cracking the investment-grade market. And Morgan is far ahead of the others.

"We distinguish ourselves from other commercial banks in the sense that we've been a leader in the securities business for many years," said John Massad, head of Morgan's debt syndicate.

Among all underwriters of investment-grade bonds, Morgan climbed to fourth place in 1996 from seventh in 1995, according to Securities Data Co. And it is on track to win the No. 2 spot, behind Merrill Lynch & Co., for the first half of this year.

"Morgan is destined to become more powerful," said analyst George Salem of Gerard Klauer Mattison. "They have more capital, more muscle, and in five years, they'll be much closer to the bulge bracket firms than they will be to the other commercial banks."

First Tennessee Bank, Chase Manhattan Bank, and NationsBank are the other commercial banks starting to make names for themselves in the huge investment-grade fixed-income market.

Investment-grade bonds have made up 84% of all corporate new issuance so far this year, up from 80% in 1996, according to Andy Nybo, head of research at PSA Bond Association.

"We believe that commercial bank affiliates will have a credible presence and some of them will be long-term survivors in the business, but our focus from a competitive standpoint is on the bulge bracket firms," said J.P. Morgan's Mr. Massad.

Morgan's relationship with British Aerospace began in 1993, when the bank helped the company to culminate a financial restructuring, by advising them on a five-year credit facility, and participating in the loan.

The next year, Morgan advised Airbus, in whom Morgan is a major shareholder, on a revolving credit. In 1995, Morgan co-led another credit for British Aerospace with four other British Firms. Later that year, Morgan advised them on selling their 50% stake in Burwood House, a holding company for superstores and shopping centers. Earlier this year, Morgan advised British Aerospace on its acquisition of Reflectone, a manufacturer of flight simulation equipment.

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