NEW YORK -- Only a few years after largely abandoning a move into the "junk" bond market that coincided with the 1980s boom and bust in dicey credits, Baltimore-based Alex. Brown quietly re-entered the market last year and has just registered for its first underwriting of new speculative debt.
The deal, a $90 million financing for McGaw Inc., a producer of intravenous fluids, is intended to start a small but lucrative banking effort that will consummate as many as a dozen underwritings annually.
Activity in the market for speculative, or "junk," securities has surged in recent months as lower interest rates have triggered widespread refinancings in every corner of the debt markets.
Investors frightened away from junk because of the wave of bankruptcies emerging in the late 1980s have returned, apparently more willing to bear the risk of speculative-grade debt than certainty of small returns from the low rates offered on certificates of deposits and other safe securities.
From a high of $34.2 billion in 1986, new underwritings in junk dropped to $700,000 in 1990, according to Alex. Brown. In the first two months of this year, more than $2.4 billion in non-investment-grade debt has been issued, and $11.1 billion awaits approval for sale. With the demise of Drexel Burnham Lambert two years ago, no firm dominates the market.
At Alex. Brown's midtown Manhattan office, new furniture has filled what had been a vacant hallway. From a two-person restructuring group hired in spring 1990 to work on the refinancing of bankrupt companies -- a process tightly intertwined with speculative debt -- there are now approximately 23 people in restructuring and 20 more in trading and distribution of high-yield securities. And more people are soon to be added.
Alex. Brown's restructuring group brought in its first fee before issuing its first paycheck and has been profitable ever since, said Barry W. Ridings, a managing director at the firm.
A junk bond trading desk was reconstituted in January 1991 under Anthony May, formerly of L.F. Rothschild, and a team has been assembled with executives from other Wall Street firms. Within months, Mr. May said, the operations became profitable.
Previously, Mr. May said, Alex. Brown "thought it was in the junk bond business. It wasn't. It was in the money-losing business."
With distribution channels for these securities established, underwriting became the natural next step. Potential clients included the 500 companies using Alex. Brown to underwrite equity and other companies in its areas of expertise, such as PTC media and retailing, and clients gained through restructuring work, many of which are too small to issue investment-grade debt.
Ultimately, the bankers in the restructuring area will move full-time to underwriting as the current wave of bankruptcies ebbs.
"Restructuring is a cyclical business, and the cycle is working itself out," Mr. Ridings said.
"If a company made it through last year and can make it through this year, it's probably safe."
"The bad deals were really done between 1986 and 1990. Once they go bust, that's it."