Fixed income: Jefferies goes gangbusters in fixed income


Helen Avery
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Boutique investment bank expanding in fixed-income trading; Plans origination expansion and a push into Europe

Jefferies, historically a high-yield house, has been slowly expanding its fixed income offering since establishing itself in 1990. Over the early 2000s, that started to broaden out into corporate bonds and some rates, and municipals and mortgages. Over the past 18 months, though, the firm has stepped up the pace, adding more than 100 employees to its 300-strong fixed-income business through acquisitions, team recruitment and one-off hires.

In June, Jefferies became a primary dealer – yet another step in the firm’s strategy to increase its product offering in fixed income. Tim Cronin, head of the group at Jefferies, says that the decision to become a primary dealer was made in 2008. "It was clear by looking at the dislocations in credit and mortgages last year that volatility in Treasuries was going to start to increase dramatically. Add to that the fact that the number of primary dealers was decreasing as firms went bankrupt or were swallowed up, and it was clear that there would not be enough primary dealers to underwrite debt, especially with all the programmes that the Fed and Treasury were undertaking."

"We have most of the asset classes covered right now, so the real opportunity for growth we think will be Europe"

Tim Cronin, Jefferies

In January, the groundwork was set with the hiring of Daniel Markaity and Christopher Bury, 27-year and 13-year veterans, respectively, from Merrill Lynch to run the rates business, with further hires in London in April. Ultimately, there are plans to push into Tokyo so that Jefferies will have 24-hour trading capabilities in rates.

In mortgage- and asset-backed securities, Jefferies began the expansion in April last year when it took on a team of mortgage specialists from RBS Greenwich Capital. That team has since expanded into London and Germany, and Cronin says there are opportunities to further increase the team’s global presence. In May, further hires were added in Chicago.

To increase municipals coverage, Jefferies acquired Depfa First Albany Securities from Depfa Bank in March this year, adding more than 70 employees in sales and trading, investment banking and advisory.

Finally, Jefferies has added to its coverage of emerging markets debt by hiring in New York and London, and expects to add Asia and emerging Europe to its Latin American coverage.

The expansion has been paying off. First-quarter 2009 revenues for fixed income and commodities were five times those of the first quarter last year, at more than $203 million. The increases have more than compensated for the losses experienced in Jefferies’ high-yield and managed funds businesses. Total net revenues for the first quarter were about $347 million.

Cronin says trading is still the core competency within fixed income, although there is the ability to originate in both municipals and MBS. "We have embarked upon having a capital markets calling effort whereby we have a banker on the trading desks who talks to the issuing clients about buybacks, restructuring as well as new-issue underwriting. But it is a new area for us.

"We typically don’t lend money to these large issuers so it is not a natural entry. However, we do trade more of their secondary bonds than most of the big firms. We know where the debt is trading, the levels, etc, but it would take time before we can truly offer origination in any significance."

The next point of expansion, says Cronin, will be geographic. "We have most of the asset classes covered right now, so the real opportunity for growth we think will be Europe."

As competitors struggled last year and early this year to retain staff, Cronin says that in the US the talent pool was vast. "We had a stable platform, with no balance-sheet issues and a growing fixed-income effort, so it was easy to attract talent. As things have normalized, I see the big banks are trying to retain their talent and are paying for them."

Europe is now going through similar issues, believes Cronin, opening up the region to outsiders. "There are talented people in Europe and clients there that mirror what we have been through here in the US. There is definitely an opportunity for us to grow there."