NEW YORK (Reuters) – For investment bankers who arrange the sale of stocks and bonds, 2008 was a year to forget, and the new year may not bring instant relief.
JPMorgan Chase & Co (JPM.N) was the world’s largest underwriter in 2008 as measured by issuance volume, helped by its acquisition of Bear Stearns Cos, according to Thomson Reuters data released on Wednesday.
That ended an eight-year run at the top for Citigroup Inc (C.N), but Citigroup still edged out JPMorgan for the top spot in reported fees.
As mounting asset writedowns and loan losses morphed into a worldwide credit crisis, total securities underwriting slid 38 percent to $4.71 trillion, a six-year low, from $7.6 trillion in 2007. The number of new issues fell 41 percent. Reported fees dropped 17 percent to $13.4 billion.
Problems worsened as the year droned on; volume in the fourth quarter totaled $678.8 billion, down 52 percent from a year earlier and 15 percent from the third quarter.
“There was clearly an avoidance of risk,” said Bruce Thompson, head of global capital markets at Bank of America Corp (BAC.N), who will keep that job after the bank finishes buying Merrill Lynch & Co Inc (MER.N), expected Thursday. “In the fourth quarter, there was an evolution from what had been concern about markets to concern about the overall economy.”
Some asset classes fared particularly poorly in the fourth quarter. In the United States, issuance volume slid 95 percent in mortgage-backed securities, 96 percent in junk bonds, and 97 percent in asset-backed securities, Thomson Reuters said. U.S. commercial mortgage securities issuance fell to zero.
Overall issuance would have been even lower but for tens of billions of dollars of debt issued by financial companies with the backing of the Federal Deposit Insurance Corp.
“There were a whole lot of issuers who could not get money out of the investment-grade corporate bond market at any price, specifically issuers whose businesses were deemed to be very cyclical,” said Nigel Cree, head of syndication for North America at Deutsche Bank AG (DBKGn.DE).
JPMorgan handled $455.1 billion of new issue volume for the year. Barclays Plc (BARC.L) was next with $401.3 billion, reflecting its purchase of much of Lehman Brothers Holdings Inc (LEHMQ.PK), followed by Citigroup with $309 billion. In the fourth quarter, JPMorgan also ranked first, followed by Goldman Sachs Group Inc (GS.N) and Citigroup.
In fees, Citigroup reported $1.67 billion in 2008, followed by JPMorgan and Merrill. Bank of America, Goldman and JPMorgan led in the fourth quarter, when overall fees fell 52 percent.
Issuance sputtered in the worst financial crisis since at least World War II, with even the most optimistic forecasters saying economies aren’t likely to recover before mid-2009.
Carnage such as the Lehman bankruptcy, government takeovers of mortgage financiers Fannie Mae (FNM.N) and Freddie Mac (FRE.N), a $152 billion bailout of insurer American International Group Inc (AIG.N), and the sales of Merrill and Wachovia Corp (WB.N) led nervous investors to reduce debt and shun securities they perceived to carry credit risk.
Investors flocked to the relative safety of U.S. Treasuries amid a flood of redemptions from mutual funds and hedge funds. Demand for some riskier securities such as collateralized debt obligations all but vanished.
Major U.S. stock indexes lost two-fifths of their value during the year, and losses even piled up in fixed income. Through Tuesday, total returns in 2008 were minus 27 percent on junk bonds and minus 21 percent on asset-backed debt, and even safer corporate bonds and municipal bonds left investors in the red, according to Merrill data. Treasuries, in contrast, were up 14.9 percent.
More problems could lie ahead as investors stay wary about risk. “Sales could still be tough in the first half of the year,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.
Major credit rating agencies have said the U.S. junk bond default rate could reach double digits in 2009. Consumers are spending less, and tight credit markets are making it hard for companies to refinance existing debt or fund day-to-day needs.
Meanwhile, low stock prices and high market volatility may leave many companies loathe to issue shares or go public.
Bank of America’s Thompson expects issuance in 2009 to rise from the fourth quarter. “Companies have pent-up demand for issuance because of their inability to raise capital,” he said. “Investors, meanwhile, are trying to get a handle about companies’ performance over the next six to 12 months.”
(Reporting by Jonathan Stempel; additional reporting by Dena Aubin, Walden Siew and Phil Wahba; editing by Jeffrey Benkoe and John Wallace)