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Competition gets fierce in the most lucrative niches
Wall Street may have underwritten more stocks and bonds than ever in the first half, but it's getting tougher and tougher to make a buck at it. Overall underwriting was up 17% for the half to $574.8 billion, according to Securities Data Co., but fierce competition in lucrative debt areas like junk bonds, and a rocky first half in general for equitiesespecially for initial public offerings-led to a 26% tumble in gross spreads for debt and a 32% slide for equities.
The most lucrative underwriting niches felt the worst pinch. The average fee for a junk bond slid to 1.711% in the half from 2.342% in the year-ago period, and for debt convertibles to 2.090% from 2.544%. IPOs, meanwhile, maintained their average fee (5.932% in '97 versus 5.951% in the first half of '96), but saw gross spreads tumble 40% to $975 million from $1.6 billion in the year-ago period.
Oddly, even though total equity fees generated fell to $2.2 billion from $3.2 billion a year earlier while the average equity fee shrank to 4.882% from 5.123%, many equity pros seemed remarkably blase about the situation. Some even deny that the situation exists. "In the U.S., there isn't any trend toward significant fee erosion," says one veteran underwriter, who contends that the erosion has instead occurred in emerging markets like Latin America:
But most equity underwriting pros concede that the fee situation is getting tougher and tougher. Their dewyeyed brethren, they say, are guilty of: a) denial; b) myopia, or focusing only on the deal of the moment; or c) an unshakable optimism born of the bull market.
The facts, though, are undeniable. Even spreads on secondary equity issues tumbled in the first half to 4.275% from 4.493% a year ago, as total fees generated on secondaries fell 24% to $1.2 billion.
One of the few spreads to hold its own this year was in the convertible arena, which continues to be as hot as ever. Spreads on convertible preferred securities in the most recent half were 3.016% compared with 3.03% in the '96 period. That spread was kept tight by the top three firms in convertibles-Merrill Lynch, Goldman, Sachs & Co. and J.P. Morgan-which...