Turf War with Investment Banks for Leveraged Finance Business
Dunaief, Daniel, American Banker
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. …