Broadpoint to acquire BNY fixed-income business, eyes expanded high-yield, converts, mortgage role

By Paul Deckelman

New York, Jan. 31 - Broadpoint Securities Group Inc. will acquire the institutional fixed-income division of BNY Capital Markets Inc. - and the New York-based investment bank anticipates that the combination will let it add high yield and convertible debt issuance as financing options for its largely middle-market corporate clientele.

"The secondary trading and distribution capability" which Broadpoint is acquiring, "particularly in high yield and convertibles, will enable us to offer additional financing alternatives to our mid-sized clients," Lee Fensterstock, Broadpoint's chairman and chief executive officer, declared on a Thursday morning conference call explaining the deal.

Secondary operations could produce primary issuance

Fensterstock later told Prospect News that the BNY unit being acquired has "really good relationships with the buyers of high yield bonds" through its junk trading desk, "so if we have a client who needs financing - and it's likely that our client is not going to be investment-grade - and if they want to issue straight debt, we have on our side the investment banker who can help structure that, and now, with [BNY fixed-income head] Joe Manello's group, we actually have the desk that can trade it and distribute the securities."

This, he continued "enables us to essentially be in the new-issue high yield business. From their [i.e. the acquired unit's] side, they have the sales [force] and the buyers, while we have as clients the potential issuers - so hopefully, we'll get some transactions done."

Besides being a conduit for the issuance of new junk or convertible debt, Fensterstock said that the secondary business itself "is profitable and stands on its own as a business that can be grown."

Employees to get the lion's share

Broadpoint announced on Wednesday that it had agreed to acquire the fixed-income operation from BNY Capital Markets, which itself is a subsidiary of The Bank of New York Mellon Corp., a New York-based asset-management and servicing company. The deal is expected to close by March 31.

Broadpoint will pay BNY Mellon approximately $850,000, covering the fee to the bank for the business itself as well as the cost of fixed assets such as furniture and equipment, assumption of office-space leases and the like. Additionally, 6.2 million shares of restricted stock or restricted stock units, which will vest over 5 years, will be granted to the employees of the division who choose to remain with the new owners. Those employees will also have the opportunity to receive an earnout from the profits of their division. The company's Nasdaq-traded shares closed Wednesday at $1.19 per share.

Fensterstock, in explaining the deal's unusual structure - particularly its relatively small up-front pricetag - said that "our conclusion was that the value was really with the people [who work for the company], so the way the deal was structured was to essentially pay the value to the people who had created the business."

The Roseland, N.J.-based company began its life in 1992 as Mendham Capital Group Inc. and was purchased by the company then known as Bank of New York in 1998. It consists of 49 professionals, including 9 traders, 22 salespeople, 8 desk analysts and 10 support staff. Almost everyone is expected to remain with what will now be known as Broadpoint Fixed Income, including the current leadership cadre led by Manello, who will be the executive managing director and head of fixed income for Broadpoint. The leadership group also includes Greg Sullivan, who will be managing director and head of sales, John Hale and Riaz Haidri, who will both hold the title of managing director and co-head of trading, and Michael Rowe, who will be managing director and head of research.

The unit - which operates a comprehensive sales and trading platform that specializes in high yield, distressed, investment-grade corporate, Treasury, government agency, convertible bond and equity securities - has over 800 account relationships with insurance companies, hedge funds, money mangers, mutual funds, commercial banks and corporations. It traded approximately $35 billion in market value securities in 2007.

Current situation not a factor in deal

Although a number of large money-center banks have posted losses in recent quarters on fixed-income trading as the result of the widespread credit crunch that began in the subprime lending industry last year and spread throughout the credit markets in the United States and elsewhere, and some have even cut back their activities in this area or have left it entirely, Fensterstock does not believe that this was the motive behind BNY Mellon's desire to sell its business, noting that the first overtures and the preliminary talks date back to late spring of last year,

He told Prospect News that the seeds of the deal were sown last June, when he was approached by investment banker Eric Gleacher, who'd had some discussions with BNY Mellon - formed by the merger earlier last year between the venerable Bank of New York and Pittsburgh-based Mellon Corp. - which indicated a willingness to divest itself of the fixed-income business as part of its strategy of focusing on its core areas of providing asset and wealth management as well as asset servicing, clearing and execution, issuer, and treasury services for institutions, corporations, and high-net-worth individuals. Emphasizing that he could not speak for BNY Mellon, the Broadpoint chief opined that "I think [the transaction] is independent of the cycle we're in right now."

Mortgage trading growth potential seen

That current credit cycle has made mortgages something of a risky business - but Fensterstock further said on the conference call that the deal would work to enhance Broadpoint's own mortgage operations.

"We believe additionally that there will be significant synergies between our mortgage trading desk and the new fixed-income sales force, enabling us to expand our mortgage client base, while our mortgage sales force will be able to leverage the new fixed-income trading desk to sell fixed-income products to their client base."

He explained to Prospect News that "we have really an excellent mortgage-trading business with our own [existing] client base, who are specialists, and for the most part, you need buyers of mortgage product" - while the operations being acquired "have as a significant component of their client base hedge funds, who are 'product-agnostic' and who are just looking for opportunities. So those clients could potentially be buyers of mortgage securities - and in this environment, we would think that it would frankly be a significant opportunity" for those buyers.

He continued that "because of all of the problems that we've seen, these securities have been beaten down, and to the extent that we can identify value in them, then the [current] BNY sales force can market that to their clients, which is a client base that we [currently] don't do business with."

Expansion ahead

In announcing the transaction, Broadpoint said that it "expects to raise additional capital to grow the newly acquired business from its majority shareholder, MatlinPatterson Global Opportunities Partners II." Fensterstock, when asked about the possibility of future expansion of the fixed-income business once the deal closes, noted that the unit being acquired is "very much engaged in virtually all of the fixed-income asset classes. So I think the expansion would be along the lines of expanding the client base, as opposed to the products."

He added, however, that "probably first and foremost, the priority is to use that secondary capability, the distribution, to expand our investment banking business [and] becoming a factor on the new-issue side, whether its in convertible bonds or in high yield."

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