Wall Street’s missing ingredient: Debt offerings

Photo: AP
Photo: AP


In a preview for other investment banks, Jefferies reported solid results with one notable exception

Despite everything going on, many of Wall Street’s businesses are actually doing pretty well. But a dearth of debt underwriting is holding firms back for the time being.

This was illustrated by results at Jefferies Financial Group for its fourth quarter running through November, reported on Monday evening. Fixed-income trading was up a whopping 71% from a year prior, as interest-rate volatility propelled a surge of activity. Advisory revenues from working with companies doing deals were also quite solid, only tepid in comparison to the big flourish in the latter part of 2021. The quarter’s advisory revenue was still nearly double what it was in the firm’s last quarter of 2019, as a benchmark. That is a big leap for the firm. Overall, fiscal year 2022 investment-banking revenues were the firm’s second-best ever, behind only 2021.

But reflecting the broader market, it was a very tough quarter for underwriting bond and other debt offerings, as companies shied away from tapping those markets at higher interest rates and investors demanded much better prices. This was especially the case in the so-called leveraged finance market, in which private-equity deals are funded by investment banks that originate debt and syndicate it out to the market.

Jefferies’s quarterly revenue from debt underwriting was down by 72% from a year prior, and for context also down from the same period in 2019. Stock offerings were also sharply down from 2021—but still above the same period in 2019.

These offsetting performances are good for stability in revenue, but not necessarily as much for firms’ profitability. Trading tends to be far more capital intensive. Investment bankers’ compensation also tends to be sticky, taking longer to drop from boom-time levels than revenues. Overall net earnings at Jefferies were down nearly 60% in its fourth quarter from a year earlier, a much steeper drop than its 18% overall revenue drop.

One longer-term worry about debt underwriting is that more activity has shifted to direct lending and private credit. That is a particular challenge for investment banks that traditionally don’t do a lot of lending to their clients. But Jefferies is aiming to tap into that business: It has a strategic alliance with Japanese banking giant Sumitomo Mitsui Financial Group, which can do a range of lending. Through Jefferies Finance, a joint venture with MassMutual, it is also expanding its raising and managing of third-party capital in private credit. Goldman Sachs Group and Morgan Stanley have also sought to grow their alternative asset-management platforms.

Should these efforts generate more fees and activity over time, that could go some way to restoring balance in investment banks’ overall business. Jefferies shares responded positively to the quarter, rising over 4% on Tuesday, as investors looked ahead. Bond trading may also remain elevated for quite some time, with the long period of activity-suppressing zero interest rates now over. Though there will be rough quarters, Wall Street can still ultimately emerge with a better business.

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