Junk bond issuers no longer need to sell their souls to underwriters to get a deal done. Indeed, the average fee that issuers of below-investment grade debt must pay to investment bankers has fallen to its lowest level since Michael Milken invented the junk bond 20 years ago, according to Bloomberg.
Currently, issuers are shelling out an average of about 1.5 percent of the value of the bonds offered, the wire service noted. That compares with about 1.8 percent in 2005, 2.1 percent in 2003, and roughly 4 percent back when the Drexel investment banker ruled this particular world of corporate finance, according to the wire service’s data. Issuers of investment-grade debt have a still better deal, ponying up less than half of what junk issuers are paying.
As an example of the falling fees, Bloomberg noted that Ball Corp. paid underwriters led by Lehman Brothers Holdings Inc. a 1.25 percent fee, or about $5.6 million, to underwrite $450 million worth of junk bonds in March. Ball paid Lehman twice as much for a similar deal four years ago.
One reason for the big decline in fees: the underwriting market now consists of a larger number of underwriters, none of whom dominate. The five biggest high-yield underwriters are Citigroup, JPMorgan, Credit Suisse Group, Deutsche Bank AG, and Bank of America Corp., according to Bloomberg.
For the investment banks, the decline in fees will be somewhat made up by volume. Thanks to a boom in leveraged buyouts, U.S. junk-bond sales this year may break the record $135.8 billion set in 2004, Bloomberg predicts. Even so, underwriting revenue would drop by 16 percent, according to the news service.