As commercial and investment banks invade each other's turf, their once-cordial relationship is turning combative. And nowhere is this more evident than in the race to serve below-investment-grade companies.
This lucrative market has commercial banks scrambling to underwrite high-yield debt - and investment banks clamoring to make leveraged loans.
What's behind the role reversal? Simply, a desire to defend long- standing relationships by expanding into their rivals' businesses.
"You won't be able to have a successful high-yield bond business without a successful high-yield loan business and vice versa as the markets converge," said John F. Yang, the head of loan syndications at Merrill Lynch & Co.
The rivalry is intense, with each side firmly convinced that it is making the bigger strides. But the truth is decidedly elusive.
Commercial bankers point to their inroads in the high-yield debt market, and on the surface it looks like they might be right. In the first nine months of this year, six big banks secured places among the top 20 lead underwriters, snaring 18% of the $48.9 billion volume, according to Securities Data Corp. Leading the pack: Bankers Trust New York Corp. and Chase Manhattan Corp.
But investment bankers beg to differ. Three Wall Street firms - Merrill Lynch, Goldman, Sachs & Co., and CS First Boston - have broken into the top 20 lenders on highly leveraged transactions. All have landed some high- profile assignments.
Investment bankers commanded only 6% of a $90 billion market in the first nine months of this year, according to Loan Pricing Corp. But they are quick to say that they have made their mark in record time.
Some commercial banks have been managing high-yield issues since the early 1990s. But only in the past two years have investment bankers started to crash the commercial lending party.
"Look at the progress investment banks have made in the loan business in the first two years as compared with what commercial banks did in their first two years," said a lender at an investment bank.
While each side is claiming the upper hand, some customers are not so sure. Many maintain loyalty and confidence in the players' traditional strengths, preferring commercial banks for loans and investment banks for bonds.
"There's still a split between skill sets," said Jesse Greene, the treasurer at Eastman Kodak. "The convergence is coming, and we are watching and waiting for what they will do."
Expertise in mergers and acquisition advisory could give the investment banks a leg up. Many leveraged financings are linked to acquisitions; when an investment bank is advising a deal, it's often easy for them to snare the financing role as well.
Some banks have been building their M&A capabilities. For instance, Bankers Trust recently bought James D. Wolfensohn & Co., a well-respected merger boutique. And Chase Manhattan has wooed a top M&A adviser from Salomon Brothers.
Even so, investment banks have another possible edge: access to higher- level executives at their clients than is typical for commercial banks.
"Investment bankers historically have dealt with chief executive officers and chief financial officer," said Michael S. Klein, a managing director and head of the financial entrepreneurs group at Smith Barney Inc. "Commercial bankers typically have dealt with lower level issues and may not have the entry to propose a strategic transaction."
Commercial bank executives are well aware that they haven't lived up to their full potential as one-stop shops for financing.
"Our mission in high-yield securities is not fully realized," said James B. Lee Jr., the head of global investment banking at Chase Securities. "As good as we are, we're still not the globally recognized brand name yet that we plan to be. That takes time."
Ken Lang, a managing director in leveraged finance at J.P. Morgan, said that many companies - both commercial and investment banks - are growing their businesses from scratch. "That takes time to do. You can't just open the door and put a shingle there and business will walk in."
Both sides are waiting for the other to cry uncle once adversity - a market slowdown or perhaps even a recession - sets in.
Commercial bankers say the lending business is easy for investment banks to enter - but could be hard for them to stick with.
"Some of the investment banks will experience digestion problems going forward," said Joseph Rizzi, the head of structured finance at ABN Amro, Chicago.
But seasoned investment bankers counter that it's the commercial bankers who have already bowed out of the high-yield bond business once before. And that can make it hard for them to attract top talent.
"One bank went in and out of the market four times," said an investment banker now working at a commercial bank, who did not want his name used. "The best players say, 'Hey, why do I want to join you? I'm not sure you're committed.'"
Investment banks have their own baggage to overcome as they enter a new market, some commercial bankers say. How willing are they, for instance, to hold pieces of the loans they originate?
But other commercial bankers acknowledge that investment bankers are likely to solve such questions. "The investment banks are not stupid," said ABN Amro's Mr. Rizzi. "If a key success factor is holding some of the loan, then they'll figure out how to do it and manage the risk accordingly."
And corporate customers say that commercial banks aren't perfect on this score themselves.
"To be frank, a lot of the commercial banks don't hold a great deal of the loans either," said an executive at a leveraged buyout firm. "People talk about that for competitive reasons."
For the most part, clients and investors like the fact that commercial and investment banks are entering each other's bailiwicks.
As new entrants in underwriting, banks are helping some new names tap the capital markets and helping some better known companies find alternatives to loans.
"Banks tend to have more of a middle-market clientele, so they can bring medium-size companies that might not have historically gotten quite as much Wall Street attention to the market," said Jerry Paul, a portfolio manager at Invesco Corp., a mutual fund company in Denver.
Bankers Trust and Chase Manhattan brought a $100 million high yield deal to market last week for Carters, the children's clothing manufacturer. "The banks allowed that company to access the high-yield market instead of being stuck in bank debt where it would have had a more rigorous amortization schedule," Mr. Paul said.
"Both sides are developing some really good capabilities because of the competition," added Pete Chayahl, a vice president and treasurer at 360 Communications, a spinoff of Sprint Corp. "It's very healthy for me as a user."
Observers say it will take five to 10 years for the rivalries to be sorted out. But some predict that the eventual winners will have plenty to brag about.
"The top five leveraged bank lenders will be, for all intents and purposes, the same as the top five high yield leaders," said Robert C. Griffin, executive vice president in loan syndications at BankAmerica Corp., San Francisco. - Jennifer Goldblatt contributed to this report.