Jefferies & Co. is planning a major advance in offering services to its middle-market clients and one of its top priorities is to develop ways to offer senior bank lending. "This is a business that makes sense for us in several different configurations and fits in with our business model. In conjunction with our financing abilities in the public and private markets, we will be able to provide senior debt to our clients," explained Ray Minella, director of investment banking capital markets. "We are focused on getting that capability up and running." In terms of timeframe, Jefferies "would like to have it done yesterday. This is a high priority for us," Minella stated.
John Shaw, president, added that Jefferies would look to build in-house, but could establish relationships with a bank or banks. He would not say which banks the firm is in talks with. According to Minella, the expectation is that Jefferies will employ its own capital, as well as capital from other institutions. Eventually, Jefferies could access the securitization market, but would expect that step to come later, "after the portfolio has been built, there is appropriate diversification, a track record has been established and credit policies and procedures have been tested and proven."
Minella said Jefferies is looking at a flexible senior debt capability with a mixture of asset-based and cash flow lending. The lending effort could incorporate "B" loans as well as mezzanine. "Although Jefferies has a wealth of experience in structuring credits, this will not be a function run by investment bankers, but rather by senior lending professionals," he added. There have been instances in the last year when Jefferies has participated in senior credits and then syndicated the participation off the desk. But instead of syndicating out of the bank loan trading desk, Jefferies would keep a greater percentage of the credits it originates, he noted, explaining the shift.
The size of the operation will depend on the path Jefferies ultimately takes. "If we begin with a de novo approach, I would expect the team will be less than 10. If we join forces with an existing operation, I would expect we would begin with a somewhat larger staff," Minella explained.
Joseph Schenk, the firm's cfo, commented that at the moment, Jeffries can provide its clients financing advice but cannot always provide the services they recommend. Recently, Jefferies advised a middle-market client to use a revolver but was not able to provide the financing to back this up. "We get hurt by firms like Banc of America Securities because they can afford to offer their customers a secured loan," said Schenk. "We have to have ability of execution," said Shaw. "This could get us to the ninth inning in terms of corporate financing." Analysts commented that having the capacity to offer lines of credit would make Jefferies more competitive when it comes to winning investment banking business.