Jim Casey remembers the fast times when Michael R. Milken ruled Wall Street as the billionaire king of junk bonds.
But now even those heady days of the 1980s, when Mr. Milken played kingmaker and rainmaker in the great takeover wars of that era, seem a little tame.
The market for high-yield securities, as junk bonds are more politely known in the business, is booming as never before. And Mr. Casey, one of today’s junk-bond kings, is in the midst of a run unlike anything Mr. Milkensaw from his X-shaped trading desk in Beverly Hills.
Like many blue-chip corporations, companies with less-than-sterling credit are rushing to sell bonds and take advantage of low interest rates. In the first nine months of this year, a record-breaking $275 billion of junk bonds have been issued worldwide, up from $163 billion during the period last year, according to the financial data provider Dealogic, a research company.
“Other than 1988 at Drexel, this is the best time I’ve ever seen, and it’s getting better,” said Mr. Casey, who worked at Drexel Burnham Lambert with Mr. Milken and now runs the junk-bond business at JPMorgan Chase. “In high-yield, it’s undeniable that these are the best years that anyone has seen in their career.”
Of course the Milken era of the Predators’ Ball ended with the collapse of the mighty Drexel and the market it virtually invented. Mr. Milken today is a philanthropist and businessman, after spending two years in jail.
While no one foresees a junk-bond bust on the Drexel scale, the explosive growth of the market for risky corporate bonds has some people worrying. Interest rates have fallen so far — the yield on two-year United States Treasury securities sank to a record low of 0.36 percent on Thursday — that investors are turning to riskier and riskier securities for relatively high yields. The typical junk bond pays an annual rate of 7.5 percent.
Wall Street is happy to oblige. As one veteran high-yield banker put it: “You need to put in the dish what the dog wants to eat.”
A similar serving of low rates and high risk has intoxicated Wall Street before. After the dot-com bubble of the 1990s and the housing and credit bubble of the 2000s, analysts worry that investors and bond underwriters are getting careless again. That is particularly true given the weak economy, which is straining many marginal companies, including some that are selling junk bonds.
“We’re starting to see the market get ahead of itself,” said Diane Vazza, head of global fixed-income research at Standard & Poor’s.
Borrowers are increasingly able to raise money on easy terms that recall the frothy days before the financial crisis of 2008, Ms. Vazza said. In the 1980s, junk bonds were often used to finance corporate takeovers. Today most companies are selling them to refinance existing debt at lower rates. Others are selling junk bonds to pay dividends to private equity firms that acquired the companies before the financial collapse.
“These deals are getting done more easily than they should, given that the economy is not on solid ground,” Ms. Vazza said.
Junk-bond veterans like Mr. Casey insist Wall Street is being careful this time.
“I don’t think there’s any question that the risk profile of the companies has gone up, but things are not out of hand,” he said. Defaults on junk bonds are the lowest ever, he added, and about 75 percent of the deals are aimed at refinancing, rather than taking on additional debt.
Risky or not, the new kings of junk are walking a little taller. “It’s improved the status of leveraged finance,” said David Flannery, a lean, intense 40-year-old who heads up high-yield lending at Bank of America.
That is a shift from the traditional hierarchy on Wall Street, which favored the Ivy League crowd in investment banking and equities, not the scrappy types who populated the junk-bond desks.
“You need an edge — you deal with very smart, very aggressive players,” said Richard Zogheb, a seasoned high-yield player and now co-head of debt and equity capital markets at Citigroup. “If you don’t push back and you don’t display confidence, you get run over.”
Mr. Casey studied accounting as an undergraduate at Bentley College outside Boston, but he did not want to follow that route. “I found accounting to be incredibly boring, and I wanted to work in an area that was much more vibrant,” he said.
Vibrant is certainly one way of describing Drexel when Mr. Casey joined in the summer of 1987. “It was a great place; we had 70 to 80 percent market share,” he recalled. “At Drexel, you didn’t pitch business. The phone rang and you picked it up.”
While junk may be hot again, it is a very different business today. Drexel’s near monopoly is long gone, and as befits a junkyard, it is the scene of a fierce struggle for market share. Unlike investment banking or advising on mergers and acquisitions, where white-shoe firms like Goldman Sachs or Morgan Stanley have first call on business with more traditional clients, a few hundredths of a percentage point in underwriting fees can make all the difference in securing a deal.
“This is a rough and tumble business,” Mr. Casey said. “The smaller the margin, the tougher the fight. If you get more margin, you can be more genteel about it.”
Often that means Mr. Zogheb, Mr. Casey and Mr. Flannery are facing off. “We know one another, and we compete aggressively,” Mr. Flannery said. “Our clients are sophisticated, and they know how to feed that competition.”
Besides having the ability to obtain capital cheaply, Bank of America and JPMorgan are also benefiting from the after-effects of the financial crisis.
and JPMorgan are also benefiting from the after-effects of the financial crisis.
JPMorgan is just about the only big financial institution that emerged with its reputation and finances intact, a drawing card with clients. Bank of America is benefiting from its acquisition of Merrill Lynch, a deal that turned two middle-tier players into one junk powerhouse. Citigroup, once a bulge-bracket player, has fallen to No. 4, with Credit Suisse taking third place so far this year, according to Dealogic.
“After the strong headwinds of the last few years, we have great momentum in our debt underwriting businesses in 2010,” said Mr. Zogheb of Citigroup. “We will not sacrifice revenues or take undue risk in order to achieve a No. 1 league table position.”
As in any street fight, there is plenty of trash talk: Bank of America, the whispers go, is cutting fees to gain business. JPMorgan, the gossip goes, is bullying clients and threatening to pull back on other loans if they go elsewhere for junk-bond offerings. And Citigroup is supposedly reeling from deep staff cuts that came after the bank’s broader problems in 2008 and 2009.
is supposedly reeling from deep staff cuts that came after the bank’s broader problems in 2008 and 2009.
All three banks insist the scuttlebutt is baseless.
Whatever the case, Mr. Flannery’s team at Bank of America surprised the competition earlier this year when it unseated JPMorgan, which had been the top global underwriter of high-yield debtsince 2005.
So far Bank of America has managed to hold on — barely. In the first nine months of the year, Bank of America led $29.61 billion worth of high-yield offerings globally, compared with $28.95 billion for JPMorgan.
It might not seem like much of a difference, but neither bank is giving ground.
“We’re a clear No. 1 any way you slice it in high yield,” said Mr. Flannery at Bank of America.
With only a few months left in 2010, Mr. Casey promises JPMorgan will be able to close the gap. “We expect to be on top for the year,” he said.