Helping companies sell debt had been one of Wall Street's brightest businesses in recent years, but that's starting to fade.
Corporations are borrowing less, in large part because investors aren't as willing to lend. That means fewer fees for the big banks that help them sell the deals.
How much less? Well, take a look at high-yield bond underwriting in the U.S., one of the most lucrative corners of this business. It's off to the slowest pace since 2009, with just $17.7 billion sold so far this year compared with $45.5 billion in the period last year, according to data compiled by Bloomberg. The estimated fees tied to these sales have fallen to $138.9 million this year from $500 million in the period last year and $895 million in the period in 2013, the data show.
While investment-grade bond sales are still going strong, estimated fees have been coming down as banks compete fiercely for assignments. Even though such dollar-denominated issuance is up slightly this year, the estimated fees have fallen to $810 million in 2016 from $958 million in the period last year, Bloomberg data show.
This is a significant shift from the years after 2008, when corporations sold trillions of dollars of risky debt to investors who were looking to earn bigger yields as the Federal Reserve suppressed benchmark borrowing costs. This was a boon for banks. In 2013, for example, banks earned an estimated $5.1 billion for underwriting U.S. speculative-grade corporate bonds and $5.8 billion on dollar-denominated investment-grade issuance, Bloomberg data show.
The consequences of this shift will likely be significant, both for bank earnings as well as the companies trying to sell debt.
Revenue at JPMorgan Chase's investment bank may decline as much as 25 percent because of lower earnings from debt and equity capital markets underwriting, the division's chief, Daniel Pinto, said on Tuesday. RBC reported a drop in revenue at its securities unit in the first quarter, in part because of lower investment-banking fees.
These banks apparently can't offset any revenue declines in banking with more trading activity; volumes have been relatively stagnant, with a growing amount of ambivalence and unwillingness to commit on the part of investors.
On the corporate side, this means that companies need to actually start paying off their debts rather than just relying on the ability to refinance indefinitely. Chesapeake Energy, for example, signed agreements to divest $700 million in gas fields and other assets to pay off the remainder of a half-billion dollar debt that is coming due in three weeks, it said Wednesday.
The overall pool of underwriting fees for banks is dropping, without much to compensate for it. The slower pace of debt sales also signals more defaults ahead. Years of Fed stimulus helped keep the balls in the air, but they are starting to fall, and it's unclear what can hold them up at this point.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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