Merrill Lynch's latest spate of personnel cuts has dealt a severe blow to its attempt to remain a formidable high-yield trading and underwriting operation, say senior buy- and sell-side high-yield executives. Many speculate that a lack of familiarity with the junk sector among senior management, coupled with sharp losses in its trading book, have been the basis for its rapid pullback. Indeed, former Merrill high-yield officials are said to be telling competitors that Merrill's high-yield losses will total more than $50 million this year alone.
Layoff estimates over the last month for Merrill's leveraged finance group, which includes distressed credits and bank loans, run as high as 40 (for the latest cuts, see stories on pages 4 and 6). David Lund, head of the newly formed global credit products group, which includes leveraged finance, would not comment on the number of cuts. He says only that Merrill remains committed to its high-yield, distressed, and bank loan businesses.
Merrill's high-yield desk currently has just two traders: Mike Smith, a "mid-level" hire from Fleet BancBoston, and Rob Leone, a v.p., without much trading experience, according to traders at rival firms. A group head at a competitor describes Merrill's high-yield effort as "the blind leading the blind." Merrill also has two traders in distressed credits: managing directorEric Dobbin and v.p. Dan Napoli.
Senior high-yield executives at other firms also have questions about Merrill's new head of high-yield, Jeff Chandler, who was previously global head of debt e-commerce. A high-yield executive who has worked with Chandler says that he has an investment-grade trading background, but no high-yield experience. High-yield executives at rival firms say Dow Kim, Merrill's new head of fixed income, is unfamiliar with high yield and doesn't recognize its importance.
Merrill held the third or fourth spot in the high-yield debt underwriting league table through most of the 1990's but has slipped steadily since the 1999 departure of Thomas Gahan, former head of finance and distressed debt, for Deutsche Banc Securities. Since Gahan left, Deutsche has regularly lured high-yield talent away from Merrill.
Merrill's high-yield operation is not expected to shut down entirely. One senior high-yield official outside Merrill says the high-yield group may be able to pay for itself by drawing upon long-standing relationships and landing co-manager underwriting assignments. "They can probably clip the co-management fee and keep the lights on," he says.