Capital Markets

Bankruptcies No Bother for Underwriters

Many have earned large fees by helping sell bonds for companies that later failed.
Stephen TaubApril 20, 2004

Since 2000, the world’s 10 largest investment banks have earned at least $1.28 billion in fees by underwriting securities for companies that later filed for bankruptcy, according to a Bloomberg study.

Citigroup, Credit Suisse Group, and Morgan Stanley were the most active sellers of $76 billion in stocks and bonds issued between 2000 and 2002 for companies that later collapsed, reported the financial information firm.

Citigroup helped underwrite $10 billion of WorldCom bonds and $1.75 billion of Enron bonds not long before those companies entered the two biggest bankruptcies in history, noted Bloomberg. Citigroup earned $348 million all told, more than any other firm, for helping sell $22.7 billion in securities for WorldCom and Enron as well as for Adelphia Communications Corp. and Parmalat Finanziaria SpA.

Credit Suisse First Boston ranked second with $282 million in fees earned by helping to sell $12.6 billion in securities, 40 percent of which were high-yield, high-risk junk bonds for companies including Adelphia and WinStar Communications Inc.

Morgan Stanley followed with $270 million in fees for underwriting $11.7 billion in securities. The eventual failures included three initial public offerings made within six months after the bull market peaked in 2000: Mirant Corp., Genuity Inc., and Ibeam Broadcasting Corp.

In response, CSFB spokesman John Gallagher told the wire service that buyers of junk bonds underwritten by his firm — even including the bonds of companies that went bankrupt — have an average return 20 percent higher than the overall junk-bond market.