Even though the high-yield debt market is starting to lose steam, banks are continuing to expand their origination and trading staffs.
KeyBanc Capital Markets doubled its personnel last month by hiring four professionals from Chapdelaine Credit Partners, a bond broker that closed in January. In Canada, where junk bonds are on a similar trajectory, Bank of Montreal's BMO Capital Markets transferred two executives to its high-yield desk in Toronto two weeks ago.
After the financial crisis a number of firms entered or expanded in the high-yield sales and origination field, many of them taking advantage of pullbacks by large firms. By contrast, KeyBanc's buildout is an example of a more recent trend: Firms scooping up workers from boutiques that are now being squeezed out.
Chapdelaine Credit Partners, a unit of Chapdelaine & Co., was one of many boutiques Wall Street executives founded after the collapse of banks such as Bear Stearns and Lehman Brothers, when working for larger banks lost its appeal for some bankers and tighter credit markets created an opportunity for new entrants.
Many of the boutiques have closed now that the debt markets, and the high-yield one in particular, have recovered and large banks are once again putting their own money to work.
"You've seen some of the boutiques go under, and others are floundering," said Wes Sparks, lead manager for global high yield at Schroder Investment Management.
Ray Lemanski, head of KeyBanc's high-yield group, said it is boosting its capacity to distribute bonds. "A lot of the bank loans are being refinanced into bonds. The two businesses are very, very close, not only at the issuer level, where the issuers are looking for more integrated financial solutions, but also increasingly in the investor base."
Laury Carr joined KeyBanc as a high-yield sales manager and will oversee three former Chapdelaine colleagues: Jim Glanzer, Emmett O'Hara and Steve Baker. All four now work in the New York office of KeyBanc, the investment banking wing of KeyCorp of Cleveland, Ohio's second-largest banking company, and all four have worked for such larger firms as Bear Stearns and Jefferies & Co.
"Their Chapdelaine experience provided more of an entrepreneurial bent" and will help the newcomers work with middle-market clients, which are KeyBanc's bread and butter, Lemanski said.
"Their experience — a combination of a large firm and one that's entrepreneurial — is beneficial."
Strong issuance in January and February produced robust overall figures for the first quarter. The number of bonds issued worldwide in the first quarter rose 36.2% from a year earlier, to 237, and the combined value of issued bonds rose 40.3%, to $117.9 billion, according to Dealogic.
In the U.S. alone, the number of bonds issued rose 36%, to 200, and their combined value rose 35.6%, to $94.2 billion.
However, by the end of the quarter, the high-yield market had started pulling back from some of its excesses. Spreads on high-yield bonds had widened in response to concerns about events in Japan and the Middle East. Also, investors had begun to push back against some of the more aggressive terms issuers had been demanding, including features designed to fund dividends and PIK toggle notes. And a handful of deals were even pulled from the market.
Nevertheless, bankers say the outlook for high-yield debt should remain positive at least through year's end.
"We still project a total return of about 10% in 2011," Sparks said. "And I believe 2012 will also be decent in terms of low instances of default. So many companies are refinancing their loans that, even if the economy suffers, the default rate should remain low."
Lemanski said he would look to hire even more sales trading people, but "like anything else, we want to phase it in." Some hires would be opportunistic, with the bank hiring someone desirable who would not be available six months to a year later. He said he wants a "good, tight cadre" of professionals.
The market is ripe for high-yield issuance by midmarket companies, Lemanski said, and KeyBanc, which focuses on the real estate, consumer, industrial and energy sectors, can differentiate itself from competitors.
"Most firms start by hiring their distribution team first, often with big contracts, before they figure out exactly how they are going to produce new issue product. When that product fails to materialize, everybody is disappointed, and the firms pull back from their initial commitment to the business," Lemanski said.
"Key proved to itself that it could leverage its lending franchise into getting itself into high-yield deals and then added distribution to leverage their existing efforts. In my mind, [it's] a more sensible approach."