Monday, May 01, 2006


So Barclays has decided to get back into the US high yield market after exiting it a few years ago. Isn't that special. And rumors are afloat that two or three other European banks are looking to get back into the game after walking away during the last high yield bear market. Perfect timing, wouldn't you say. Is there a surer sign of a top in the market? Afterall, these are the same guys who closed shop just at the bottom. So it figures that they have decided to re-enter just when high yield spreads are as tight as they've ever been, as tight as they've been since, well since the last time Euro banks marched headlong into our market.

Barclays went through at least two iterations in its last high yield effort. So what makes these guys think they are going to get it right this time? These banks suffer from the delusion that just because they do some leveraged lending in Europe then bookrunning high yield deals in the US is a slam dunk. Numerous failures by several Euro banks to break into US high yield underwriting has not disabused them of this notion. The only Euro bank to have really penetrated and gained market share is Deutsche Bank. Notwithstanding this "success," many suspect that DB has never really netted much money in US high yield over the past ten years. UBS has also had some measure of success in high yield but has never been able to get over the hump into the big leagues.

What Barclays and these are other Euro banks are good at it is throwing money around. They pay stupid "guarantee" money to fill their capital markets and sales/trading ranks. They have to grossly overpay because everyone suspects that they don't have the legs or stomach to go the distance. If you are a swinging dick at one of the top ten high yield shops, why would you leave your cushy roost and go to Barclays when you suspect that within two or three years Barclays will either once again punt or else be bought? The next downturn in the market and the accompanying big losses and these banks pack up and head back over the pond, licking their wounds. But what chance does any venture have for true success when it grossly overpays? Or when it makes markets that are "loss leaders" just so it can accomodate accounts and prove it is a player? Or when it tries to buy deals at spreads that don't make economic sense? Such an enterprise is doomed from the start.

And what do these Euro wannabe's leave in their wake? Srewed-up pay scales, trading losses, dumb underwriting spreads and a horde of blokes srambling to get back into the game.

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