Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

The banking boom for junk bonds is coming to an end.

The number of dealers that have won assignments managing U.S. high-yield bond sales this year is at its lowest point since the same period in 2012, according to data compiled by Bloomberg. In 2015, 73 firms have underwritten junk debt issues compared with 92 in the period two years ago.

Bond Banking Blues
Fewer firms are helping companies sell junk bonds
Source: Bloomberg

Smaller and midsize investment banks have cut jobs and consolidated. For example, Canaccord Genuity Group, the Toronto-based brokerage that significantly expanded its corporate-credit bond team just two years ago, eliminated most of its high-yield sales and trading positions Thursday.

What a change a few years makes.

Not long ago, high-yield banking was one of the hottest, most lucrative corners of Wall Street, offering average fees about three times as high as those on investment-grade assignments. While trading profits were shrinking, banking profits padded the pockets of big banks and smaller ones, with companies racing to take advantage of record-low borrowing costs. Yields on dollar-denominated junk debt shrank to as low as 5.7 percent in June 2013 from 22.7 percent during the 2008 credit crisis, according to Bank of America Merrill Lynch index data.

Not only do new bond sales mean underwriting fees, but typically they also generate trading activity because investors tend to be much more active in new bonds than older ones.

That era of easy money for less-creditworthy companies is over now, even before the Federal Reserve fully withdraws the punch bowl. Barclays expects this year’s volume of U.S. high-yield debt sales to total about $270 billion, the lowest amount of annual issuance since 2011, analysts said in a report on Friday.

Investors just aren’t as interested in buying junk debt now as they were two years ago, when company balance sheets looked better, the commodities supercycle was still going strong and the Fed was continuing its unprecedented effort to drive down borrowing costs.

Defaults are poised to rise meaningfully after the precipitous fall in oil prices. And the Fed is on track to raise interest rates as soon as December from about zero, where they’ve been stuck since 2008. After the much-better-than-expected jobs report on Friday, an increase next month is a virtual lock. In other words, borrowing costs are rising for these less-creditworthy companies. Yields on U.S. junk bonds have risen to 7.8 percent.

The net result for Wall Street is that there is less of this lucrative business to go around. Banks will need to look elsewhere for the next reliable blockbuster.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net