An investment bank's track record can influence investor participation in future deals and a recent study from FridsonVision presents a new measuring stick for high-yield debt offerings. It ranks underwriters by the average first week change in spread of their offerings compared to the Lehman Brothers U.S. High Yield Corporate Index. FridsonVision is a research firm run by junk bond strategist Martin Fridson.
By using an index and limiting exposure to one week, Fridson is able to limit the effect of extraneous market forces in evaluating performance. In the initial results, Wachovia Securities comes out on top, though virtually all major underwriters saw their deals tighten relative to the Lehman index.
The underwriting bank and its performance track record can absolutely influence the decision to participate in a new issue, says David Hinman, a portfolio manager at Pacific Investment Management Co. "We put underwriters into three tiers," he says. Tier-one banks are never a concern since they almost always "do the right thing" by pricing at reasonable terms and supporting the issue in the aftermarket. Tier-two banks are less consistent, he explains, noting that a tier-two underwriter may deter participation. With tier-three banks, the offering's credit and fundamentals would have to be superb to invest.
The bank leading the deal is "more than a tie breaker but not a deal breaker," agrees Michael Goldstein, a portfolio manager at Lord Abbett. Certain banks, such as Citigroup Global Markets, tend to be more aggressive in pricing. This results in a greater number of deals that perform less well in the aftermarket, he says. But the fundamental credit and relative value of the offering are the most important factors in determining participation in an offering, he adds.
The types of deals that banks underwrite also play a role in the aftermarket performance, says Tom Parker, portfolio manager at Barclays Global Investors. Wachovia priced a number of medium-sized deals from newer names, such as Esterline Technologies Corp. and Armor Holdings, which performed well because of their scarcity value, he notes. "Certain banks tend to be very aggressive in pricing, but that's pretty far down my list of considerations for investment," he says.