| Headline: Awards for Excellence: best high yield bonds bank Source: Euromoney Date: July, 2000 BEST BANK FOR HIGH-YIELD BONDS DLJ Bennett Goodman is somewhat wary of his title as global head of high-yield debt for Donaldson Lufkin and Jenrette. “It’s something of a misnomer,” he says. “We don’t simply underwrite high-yield bonds. We’ve placed a comparable amount of leveraged loans and mezzanine debt. We have a $1.7 billion fund for the latter which has been particularly active.” It’s a sentiment repeated all over Wall Street: this business should be called leveraged finance. Given the lack of high-yield deals over the past 12 months or more a mixture of loans and mezzanine, as well as high-yield issuance, has been used to raise capital for companies, especially in the US. “Last year we could issue a high-yield bond with a 10% coupon to finance a debt-to-cash flow multiple of five times for a company,” says Bennett. “This year, we can finance up to a four times multiple with bank debt, and the last multiple of leverage with a mezzanine structure including an equity participation which, combined, might yield a return of up to 20%.” There are several reasons for this, including interest rate increases by the US Federal Reserve, the poor performance of high-yield funds and the exceptionally ebullient behaviour until lately of the US stock market. High-yield issuance has dropped markedly, down over 60% on last year, and Goodman estimates that high-yield funds have experienced cash outflows in four out of every five weeks so far this year. This is an environment that ought to favour the bigger investment banks and universal banks with greater capital, more products, or both. Or those, such as Salomon Smith Barney, that have the best reputation in the sector that has dominated issuance until recently: telecoms. But DLJ retains its number one slot in the US for straight high-yield issuance for the seventh year, 10 years on from when the firm made its first big push into the market following the demise of Drexel Burnham Lambert. Every year since DLJ took the top slot, back in 1993, other houses have tried to dislodge it, but failed. Bennett attributes this to DLJ’s commitment. “Leveraged finance is the main event at this firm, from [CEO] Joe Roby on down. We have the credit skills and the ability to structure and distribute transactions, as we have proved in the high-yield marketplace. On top of that we’ve built a leveraged loan business, a private equity business for LBO funds, a CBO business, a distressed debt business, and a high-yield business for Latin American companies.” DLJ has a broader and stronger franchise than virtually all its competitors. The story looked rather different over in Europe, where DLJ was a latecomer. Morgan Stanley Dean Witter, the old Bankers Trust, Goldman Sachs and CSFB had been doing most of the work in the early and mid-1990s but DLJ only became involved in a serious way about three years ago. But now the firm ranks second in non-dollar issuance, just behind Morgan Stanley over the past 12 months, and just behind Goldman Sachs for the year so far. From June 1999 to June 2000 DLJ has a total market share of 16.82% for all issues, dollar and non-dollar, 1.5% ahead of Goldman Sachs, having underwritten 50 deals. And Europe is just starting to understand the market, says Goodman. “Europe is a small market constrained by its investor base. In the US there are mutual funds with $10 billion or more dedicated to high-yield. They used only to invest $5 million to $10 million at a time, and now it can be $100 million or more. Europe is still a way off yet, lacking the fund size as well as enough credit analysts to cover the sector.” In preparation for the growth of this market, Goodman is still on a recruiting drive in Europe, having recently sent Steve Rattner over to run the business, as well as hiring from other houses. And he is optimistic about the future, in the medium term at least. “The market has picked up slightly in June, with cash inflows to mutual funds and more deals being done, such as our $400 million offering for Tenet Healthcare. There is a big backlog waiting to be done, which will absorb most of the cash ready to be invested and temporarily depress the market. But I expect to see a lot more deal flow, and big billion dollar deals, before the end of the year, especially after Labor Day [first Monday of September].” AC |
