Debt Capital markets: Takeovers mean all change in DCM league table

It will take months if not years before we know with any certainty who the ultimate winners from the financial crisis will be. But having purchased the US businesses of Lehman Brothers it seems that Barclays Capital will be among them.

The immediate impact of the acquisition is that it is now the biggest underwriter of debt. According to Dealogic, it has leapt to the top of the end of plus Lehman’s US bond deals, third-quarter global DCM league table, ahead of JPMorgan. The UK bank boasts $313 billion of bonds underwritten, with 8.7% market share, compared with the US bank’s $287 billion with 8%. At the half-year mark Barclays was on 6% compared with JPMorgan’s 8.3%.

Debt market bankers Euromoney spoke to admitted to being impressed by the purchase, as it is a very good fit with relatively little overlap between the two firms in the US.

"It gives them [Barcap] a very global feel. They were already making very good strides in the US – that’s a true global brand now," says a head of syndicate.

In addition to its DCM position, the bank claims that it is now a top three player in the trading of interest rates, US high grade and high-yield corporates, and US MBS/ABS.

For several years, Barcap has been regarded as a bulge-bracket debt house in Europe and Asia. But like all European banks, it had struggled to make much headway in the US by breaking into a top-five position.

At the end of June this year, Barcap was reasonably placed in seventh, with 6.1% market share ($73.2 billion), just a pip ahead of Lehman on $72 billion. Three months later, and the combined unit is in second place in the dollar market on 12.8%, pushing Citi into a distant third place (9.3%).

As is always the case with a big integration, there are dangers ahead. Most obvious is the possibility of big culture clashes as Lehman Brothers is well known for having a strong culture. Its bankers’ fighting spirit helped the firm to punch above its weight in fixed-income capital markets for many years. "Maybe the Lehman operation will take control in the US?" suggests one banker.

But when it comes to integration, the takeover of Merrill Lynch by Bank of America will be even more complicated. The deal does not close until the first quarter of 2009 but there is substantial overlap in the US, where both firms are in the top five for debt. The combination would have an 18% domestic market share but it would be remarkable if the amalgamated entity was able to keep all that business.

The integration of the non-domestic operations should be relatively straightforward given Merrill’s comparative strength. BoA’s combined global DCM volume would see it on 9.4%, overtaking current leader Barcap.

Crunch time for volumes

There is some bad news for the winners of DCM to contemplate: they might be winning more of the pie but the pie is getting smaller. The third-quarter global volume of deals completed so far this year is down 29% year on year at $3.58 trillion, the lowest total since 2002’s $2.86 trillion.

Third-quarter volumes in 2007 were far healthier at $5 trillion, putting the impact of one year of the credit crunch in stark relief.

Few will be surprised to find out that issuance from structured finance and high-yield sectors was largely responsible for the overall DCM decline. RMBS markets remain firmly shut, meaning that structured finance volumes fell 80% from $1.94 trillion to a meagre $379 billion. High-yield volumes are down by about half at $104.7 billion. The only growth area of note was the sovereign, supra and agency sector which rose nearly 50% to $1.13 trillion.