I-Grade League Tables May Overdo Commercial Bank Underwriting Role
Investment banks without ties to commercial banks held their own against those firms that usually benefit from the commercial banking relationships of their parent companies. In what was a record year for investment-grade bond underwriting business, David Hendler, an analyst at independent fixed-income research firmCreditsights, argues that the dealer subsidiaries of large commercial banks, in particular Banc of America Securities, should not be so quick to claim victory in their battle to win underwriting business.
In analyzing the 2001 Bloomberg league tables for investment-grade bond underwriting Hendler has pared down the underwriting statistics, eliminating what he calls "fluff," such as short-maturity deals which do not bring in significant fees or attract many institutional investors. He has also removed "self-led" deals (i.e, Goldman Sachs underwriting an issue by Goldman Sachs). "This is basically the fire drill capital markets desks do when they go pitching for business," Hendler says. While J.P. Morgan Securities and Citigroup's Salomon Smith Barney are unaffected or better after Hendler's "fire drill," B of A drops four places in the rankings. "Pure" investment banks such as Morgan Stanley and Goldman Sachs, climbed two notches each even though total volumes fell (see accompanying chart).
Hendler argues that B of A deserves the eighth place spot because the bank does a large number of short-dated deals (42% versus a median of 20%), with a heavy concentration of less profitable bank deals, such as deposit notes, certificates of deposit and short-dated floating rate notes. Hendler says that B of A lacks the seasoned sales force and banking relationships of a Goldman Sachs, and so it struggles to bring attractively priced deals in a variety of industries. "While Banc of America would argue that its won the battle, we would say they're just entering the battle," says Hendler.
Not surprisingly, B of A executives are underwhelmed by the power of Hendler's logic. Jeff Kane, global head of high-grade syndicate at B of A, argues that the most lucrative and competitive deals are those with maturities of five years and longer, by which system his firm ranks fourth. Kane concedes that he doesn't know where Banc of America would rank if self-led deals were taken out, but says Morgan Stanley led a lot of its own deals and ranks behind Banc of America in terms of five-year deals.
|Reported High Grade Leaders||Adjusted High Grade Leaders|
|Manager||$ deals (billions)||Manager||$ deals (billions)|
|1 Salomon Smith Barney||167||1 Salomon Smith Barney||119|
|2 Merrill Lynch||119||2 J.P. Morgan Securities||95|
|3 J.P. Morgan Securities||113||3 Merrill Lynch||65|
|4 Banc of America||90||4 Lehman Brothers||60|
|5 Lehman Brothers||87||5 Morgan Stanley||56|
|6 CSFB||79||6 Goldman Sachs||48|
|7 Morgan Stanley||64||7 CSFB||45|
|8 Goldman Sachs||58||8 Banc of America||43|
|source: Bloomberg, Creditsights|