Jefferies: direct lenders chip away at investment bank franchise

As the first investment bank to report results, Jefferies is often seen as a preview of what is to come for the rest of Wall Street. On that basis, there is good news and bad.

First, the good. The trading boom that began during the pandemic is still going strong. Uncertainty caused by rising interest rates engenders volatility — honey to a bear for risk takers.

At Jefferies, first quarter trading revenues surged by a third from a year earlier to $639mn. Fixed income trading had a particularly strong run with revenue up 63 per cent, as clients raced to place big bets or hedge against risks.

Next, the bad news. Business remains in the doldrums for dealmakers handling mergers, acquisitions and initial public offerings.

In the US, the total value for M&A deals is down about 45 per cent so far this year, according to Refinitiv. IPO deal proceeds are down 18 per cent from a year ago. Overall, investment banking revenue at Jefferies fell 42 per cent to $567mn. 

Within this, one number stands out. Debt underwriting revenues collapsed during the quarter. They plummeted 67 per cent, compared with a 20 per cent decline for equity underwriting. This could be a sign that more companies are getting their loans from private credit funds and other direct lenders.

Recently, struggling US lender Pacific Western Bank turned to investment firm Atlas SP Partner for a $1.4bn financing facility. Elsewhere, alternative asset groups Apollo and Blackstone are among those in talks to provide a $5.5bn loan for the buyout of health technology firm Cotiviti. If successful, it would be the largest buyout financing deal ever arranged by private credit firms.

This does not bode well for Wall Street banks that make lucrative fees from underwriting and syndicating loans. JPMorgan, Bank of America, Citigroup, Goldman and Morgan Stanley were the top five bookrunners last year. This year, new entrants will do their best to chip away at that franchise.