BlackRock Inc., which bought and sold more than $3.4 trillion in bonds for its clients last year, is using its size and Wall Street ties to acquire chunks of debt directly from issuers.
BlackRock has started a capital-markets unit that will give its money-management clients direct access to bond sales and may expand to equities later, Steve Sterling, the head of the unit, said in an interview. Sterling last month joined New York-based BlackRock to start the capital-markets effort, from private- equity firm Carlyle Group, where he led the U.S. credit unit.
Chief Executive Officer Laurence D. Fink, who made BlackRock the world’s largest fixed-income manager with last year’s acquisition of Barclays Global Investors, is seeking ways to lower costs for clients by leveraging his firm’s $3.36 trillion in assets and last year started his own trading platform. Unlike Kohlberg Kravis Roberts & Co. and Citadel Investment Group LLC, which have set up securities units to rival Wall Street banks decimated by the financial crisis, BlackRock won’t underwrite any deals or seek extra fees.
“We see our size and scale as a competitive advantage,” Richard Prager, BlackRock’s head of global trading for fixed- income, said in an interview. “We can partner with the Street and work with borrowers to source assets on a very systematic basis” for investors.
BlackRock’s size will allow it to negotiate better deal terms from bond sellers for its clients, Prager said. BlackRock’s ability to put its fixed-income research to use to identify potential deals will also help investors earn higher returns, he said. The company has $1.1 trillion in bond assets and about $1.6 trillion in equities.
U.S. companies have issued $317 billion in investment-grade debt this year through May 14, compared with $505 billion during the same period in 2009, led by underwriters JPMorgan Chase & Co. and Bank of America Corp.’s Merrill Lynch unit, according to data compiled by Bloomberg. High-yield debt issuances in the U.S. total $109 billion so far this year, the data show.
Bank of America is the second-largest holder in BlackRock’s voting shares, according to data compiled by Bloomberg.
Initial public offerings are also up, as 233 companies around the world have completed IPOs valued at $57 billion so far this year, compared with $4 billion a year earlier.
Fidelity Investments, the biggest mutual-fund company, struck a deal last year with KKR & Co. to distribute shares of companies held by the buyout firm to individual investors. Fidelity, based in Boston, also agreed to distribute IPOs and other offerings underwritten by Deutsche Bank AG to its brokerage clients. KKR, founded by Henry Kravis and George Roberts, three years ago started a capital-markets unit that underwrites deals alongside other investment banks.
Citadel Investment, the hedge fund run by Ken Griffin, is pushing ahead with plans to build up a securities unit to compete with Wall Street investment banks. Last year, the firm started a trading group for leveraged loans and high-yield bonds. It has yet to make progress in merger advising and securities underwriting, as key executives hired to lead the unit have left over the past two years.
BlackRock will rely on its own fixed-income investment teams as well as investment banks that are underwriting the offerings to bring deals to the unit’s attention, Sterling said. The firm will also use its relationships with companies that it has invested in through its funds, he said.
BlackRock will mainly seek investment-grade and high-yield debt sold by companies. Sterling said BlackRock’s bond- investment teams will work with companies to structure debt offerings, and in some cases may be able to suggest alternatives to proposed offerings.
He said BlackRock recently worked with a non-U.S. company, which he declined to name, and advised the firm to change its proposed issuance to an investment-grade offering from a high- yield offering.
Since the onset of the credit crisis in late 2007, BlackRock has built a name for itself by advising financial institutions and governments worldwide on how to value and dispose of mortgage-related assets. The BlackRock Solutions unit uses proprietary systems to price fixed-income securities. BlackRock was selected last year as one of eight asset managers to buy toxic assets from banks under the U.S. government’s Public-Private Investment Program.
In a market where liquidity is scarce, BlackRock could agree to be a majority investor in deals before they come to market, eliminating some risk for issuers that they wouldn’t be able to sell their offering, Sterling said.
Companies’ access to capital was cut off during the credit- market squeeze in 2008, especially for the riskiest offerings. U.S. high-yield sales slumped to $64.3 billion in 2008, less than half the amount in 2007, according to data compiled by Bloomberg. As the credit markets rebounded in 2009, companies raised $163 billion in high-yield debt.
BlackRock built a global trading network last year, to help reduce its reliance on Wall Street brokers, while not completely stopping to trade with them.
Founded in 1988 mainly as a bond manager, BlackRock gained a reputation in the mid-1990s after helping General Electric Co. dispose of a $10 billion mortgage bond portfolio. In 2006, BlackRock acquired the investment unit of Merrill Lynch and company to get a wider range of stock funds.
The acquisition of Barclays Global Investors on Dec. 1 gave the firm exchange-traded funds and made it the world’s largest asset manager, with offices in 24 countries and about 9,000 employees. The firm also leapfrogged Pacific Investment Management Co. in Newport Beach, California, to become the biggest fixed-income manager.