The corporate investment grade market has been a great disappointment. The boom was a two-year phenomenon that ended in 2001 – by volumes the market is back to its 1999 levels. With volumes buoyed up by the M&A boom, banks ramped up their capabilities, expecting increased disintermediation of credit risk. However, the world has regressed. No one considered that the loan market’s efficiency would last for so long.
Testing the limits of the DMOs
The US market is still far more profitable than Europe’s, and not just because US issuers are less aggressive when it comes to cutting fees and syndicates are smaller.
And pity the pain felt by the traditional monoline investment banks in Europe; unless they play a particularly smart or expensive game they get zero corporate bond business. Is it any wonder that corporate treasurers are overwhelmed with documents pitching hybrid capital transactions? Or that every bank now has an asset and liability management team trying to create pensions solutions? But how much business does all this marketing actually yield?
As a rule in the debt capital markets arena, fees are falling; where they are not, issuers are demanding more services [see this month’s feature on sovereign debt managers] or they are asking for direct subsidies, as is very common in the financial institutions business. Even subordinated bank deals in Europe are becoming loss leaders.
Structured finance has not been immune to this process. Residential mortgage-backed securities are now a completely commoditized business. Taking risk through principal finance or having proficiency in relatively opaque sectors such as CDOs is crucial to making any kind of money.
Debt capital markets have become a commoditized world where the most efficient producer wins. There is no secret related business that makes it more profitable than it appears at face value. It’s a grind, pure and simple. Given that there is very little that can be done about top line revenues, the focus must be on costs. And that means the bonus pools will be getting smaller.
