Sunrise and Ong Bet on Bonds
May 28, 2009
John Ong does not believe the leveraged loan market is coming back anytime soon. In fact, he and Sunrise Securities, the boutique investment bank he joined in May, are pretty much betting on it.
The leveraged loan market “won’t be what it was. It can’t be what it was,” Ong said. “The mispricing of risk and return that was plaguing corporate and structured credit, that’s not going to happen again.”
So Sunrise, which has raised equity capital for midsized companies since its inception in 1992, is building its debt effort with bonds in mind. The idea is that, because of the dislocation in supply and demand in the loan market, banks can no longer syndicate large pieces of the loans they underwrite, so loans will become a smaller part of the capital structure. And other products, i.e. high yield bonds and equities will make up the slack.
“As things recover, bonds as a percentage of midcap capital raising will be larger, more like it was in the 90s,” Ong said. “And firms like ours will have a good shot at a share of that market. And in the meantime, as clients contend with unsuitable capital structures, we have a role to play as unbiased advisors.”
Indeed, issuance on the U.S. high yield primary has come back stronger than its leveraged loan counterpart. Junk bonds make up more than half of the debt volume so far this year, according to Standard & Poor’s LCD, the first time that’s happened in more than a decade. Moreover, if you look just at leverage loan syndication to institutional investors, rather than including the pro rata piece held by the banks, bonds trounce loans 54% to 10% (see chart, below).
John Ong
Currently, Sunrise’s new fixed income effort consists of Ong’s team of three in debt capital markets, and another eight people in sales, trading and structured credit advisory. The team Ong leads as head of debt capital markets will focus on both capital raising and balance sheet restructuring. It won’t include a bankruptcy advisory effort, Ong said, choosing instead to focus on helping the ‘healthy enough’ survive or get healthier.
Ong joined Sunrise following his departure earlier this year from BNP Paribas, where he served as the global head of debt capital markets. Ong left in late January as the firm folded its stand-alone high yield group into debt capital markets and completely eliminated its relatively new distressed finance group. He’d joined the firm in 2000 as head of European high yield origination and capital markets.
The move from a bulge bracket bank to a boutique, one with a dominant equity culture at that, has been different but refreshing, Ong said. BNP employed more than 100,000 people, Sunrise fewer than 40. Ong reports to the owner of the company rather than a boss who reports to someone else who reports to someone else and on up the line. The small firm culture also provides him with the opportunity to think more broadly. Everyone does a little of everything, where at a larger firm, if you step out of your well-defined role, you might be stepping on someone’s toes, he said.
“It’s ‘just do it,’—contact the clients, contact the investors. Half the time I have to think like a sales person, half the time like a relationship manager,” Ong said. With a larger firm you have negotiations about everything down to who gets to go to meeting—how many seats are there? But with a smaller firm, everyone is welcome.
Though Sunrise doesn’t plan to stay quite so small forever. The firm has doubled in size in the last year, and management intends to continue growing. “We’re a boutique investment bank now,” Ong said. “But the vision is to be larger.”
The firm also sees a lot of opportunity in the problems in the structured credit business, and has therefore launched the sales, trading and advisory effort focused on investors. Nathan Low, the founder and president of Sunrise, began his Wall Street career with Salomon Brothers, where he helped develop some of the first mortgage backed derivative securities.
Meanwhile, Ong will focus on leading the debt capital markets team, and betting that the rally in high yield keeps right on rallying.
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