Senior high-yield banker sees 'second wave' of consolidation resulting in fewer players, tighter liquidity

By Paul A. Harris

St. Louis, Sept. 17 - A wave of consolidation that has swept over the high-yield market, triggered by the dramatic events which took place in the financial services business over the past weekend, will result in a smaller market with fewer participants and tighter liquidity, according to a senior high-yield banker.

The source, who spoke Wednesday on background, recounted that Bank of America Corp. has acquired Merrill Lynch & Co., and Barclays Capital is acquiring the investment banking business of Lehman Brothers Holdings Inc.

The result will further strengthen the Banc of America Securities high-yield underwriting business, which was already a stone's throw from the top of the 2008 league table totals.

According to Prospect News data, Banc of America Securities underwrote 15.5% of dollar-denominated high-yield business thus far in 2008, second only to J.P. Morgan Securities Inc., which leads with 16.6%.

Meanwhile a formidable new underwriting power will likely arise with the Barclays-Lehman combination, the official added.

"It's going to be a smaller market in terms of participants," the source said.

"The banks with balance sheets are going to more or less take over," the banker added, noting that this development has already occurred in 2008 with Banc of America Securities and J.P. Morgan Securities being involved in many of the year's deals.

Second wave

The official recounted that last weekend's events and the ongoing turmoil in the financial services sector unleashed a second wave of consolidation in the high-yield market.

The first wave came more than a year ago when the credit markets began seizing up due, in part, to the crisis in the mortgage business.

It resulted in underwriters in the leverage markets, especially the investment banks, being left with an estimated $300 billion to $450 billion of aggressively structured debt, most of it related to the leveraged buyout craze of 2006 and early 2007, left on their balance sheets.

"On the originations side there has been consolidation already," the banker recounted.

"There already were 'haves' and 'have-nots' in originations, based on balance sheets of banks, even before the most recent wave of consolidation.

"The 2007 crisis essentially put a few folks out of business, with regard to capital commitments from the investment banks, versus the commercial banks. Now the landscape is going to transform itself."

The official believes that as a result of this new wave of consolidation liquidity will tighten.

And when the primary market finally does reopen, which could be weeks away, investors are going to expect to see new high-yield issues generously priced and conservatively structured.

And the intensely competitive bidding among underwriters - some would say "reckless" bidding - to participate in mammoth, highly leveraged financings, will likely be a thing of the past.

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