Bookrunners Pile into High Yield Bond Deals

Bond underwriting isn’t just one of the few bright spots on Wall Street, it’s also becoming one of the most crowded.

There’s been a notable increase in the average number of bookrunners on high yield bond deals this year, a trend some market participants attribute to smaller and regional banks trying to break into a business traditionally dominated by market heavyweights like Bank of America Merrill Lynch and JP Morgan.

The average number of underwriters per U.S. junk bond deal has increased to 4.0 this year from 3.2 last year, according to Dealogic.

As of Sept. 14, 68.1% of U.S. junk bond deals priced this year had five or more bookrunners, according to Thomson Reuters. By comparison, 45.7% of deals priced in 2011 had five or more bookrunners. In 2010, the percentage was 43.9.

A significant percentage of U.S. deals priced this year, 14.7%, had eight or more bookrunners, up from 5.4% last year, according to Thomson Reuters.

The number of bookrunners is not necessarily correlated to the size of a deal. For example, on Sept. 13, Cablevision sold $750 million in 5.875% senior notes due 2022 using 14 bookrunners: Bank of America Merrill Lynch, Barclays, BNP Paribas, Credit Agricole CIB, Deutsche Bank, Goldman Sachs, JPMorgan, Natixis, Nomura, RBC, SunTrust Robinson Humphrey, UBS, U.S. Bancorp and Guggenheim. A week later, Valeant Pharmaceutical International announced a $2.25 billion offering with just three: JPMorgan, Goldman Sachs and RBC

The increase in what might be called clown car bookrunning can be seen in the investment-grade bond market as well, although it’s not as pronounced as it is for junk bonds. Investment-grade U.S. bonds average 3.2 bookrunners per deal this year, up from 3.0 last year, according to Dealogic. Global investment-grade bonds have an average of 2.3 underwriters this year, up from 2.1 last year.

There’s no doubt the junk bond market is on fire right now, with more than $222 billion in new issues priced year-to-date. But the number of deals with multiple bookrunners is also a function of the strength of the high yield loan market.

“The development of the capital markets over the last 15 years has led to very strong linkage between the provision of capital through bank revolvers and term loans, and the provision of more traditional investment banking services such as bond underwriting,” explained Reuben Daniels, co-founder, chief client officer and managing partner at EA Markets. Daniels is a veteran of Barclays, Deutsche Bank and JPMorgan, and his firm provides capital raising, restructuring and risk advisory services.

Daniels traces this linkage to the 1999 repeal of the Glass-Steagall Act, which put boundaries between what commercial banks and investment banks could do. Now depositary institutions are free to perform underwriting services as well as invest in higher risk securities. 

“The adoption of the universal banking model has led to a situation where banks aspire to be a one-stop shop for clients, and clients have been trained to demand the capital from the banks in exchange for providing those banks with other non-lending fees and economics,” Daniels said. “So when banks are lending money, those banks are going to expect to be compensated through bond underwriting.”

He noted that as more credit facilities came up for refinancing, more banks sought access as bookrunners on the bond portions. This intensified after the credit crisis of 2008, when all banks became universal banks. The investment banking world of today is one where services are not as specialized as they were 20 or 30 years ago, and that the underwriting market is very commoditized and industrialized.

“The problem for the financial services industry is that the results are quite perverse,” Daniels said. “Linking the lending of capital to the participation in the underwriting business has led to a commoditization of the securities underwriting business. … In other words, when everybody wins it’s the same as nobody winning.”

“You have some aggressive new underwriters that are trying to get business,” said Marc Gross, a co-portfolio manager with RS Investments. “They’re trying to get on books and improve their profile.”

Even with the increasing numbers of bookrunners, the lead “left” bookrunner is the one with most of the allocation power. And with few exceptions, the lead left bookrunners’ position is usually held by an experienced and dominant bank player. “The lead left is getting most of the financials,” said Gross. “I don’t think it makes a difference to them if there are six small guys on the books. I don’t think they really care that much. I don’t think the financials of the transactions change that much. There might be 14 guys on a deal, but some of them might have 1% of the deal.”

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Reuben Daniels