Its junk business is thriving--with the help of ex-Drexelites
JEFFERIES PICKS UP WHERE MILKEN LEFT OFF
Business Week 11/10/97
Its junk business is thriving--with the help of ex-Drexelites
Few companies wear their nefarious pasts on their front doors. Such is the case, however, at Los Angeles-based Jefferies Group Inc., whose founder and longtime chairman, Boyd L. Jefferies, pleaded guilty to parking stock for Ivan F. Boesky in 1987. At the time, Jefferies' client list included such corporate raiders as T. Boone Pickens Jr. and Irwin Jacobs, who would use the after-hours trading specialist to assemble large blocks of their prey's stock before going for the kill with junk-bond financing from Michael R. Milken's Drexel Burnham Lambert Inc.
A decade later, Boyd Jefferies is long gone, but the House That Boyd Built is on the rise again. And, with a twist of irony that Milken could best appreciate, Jefferies has emerged as one of the most aggressive underwriters in a fully revived, white-hot junk-bond market. In the past five years, the company has underwritten $17.1 billion in junk deals, including a $1.6 billion offering this spring for Houston oil company TransAmerican Energy Corp., the biggest junk issue this decade. Moreover, Jefferies' junk-bond engine has been built by a core of Milken proteges.
``Jefferies gave us the chance to take all the things we learned at Drexel and build a business from scratch,'' says Richard B. Handler, head of high-yield trading. Jefferies still gets 55% of its revenue from equity trading. But high-yield offerings are a high-margin and rapidly growing business. This year, it should contribute a third of roughly $700 million in revenues and at least that proportion of $60 million in net earnings.
Despite its risk-loving image, Jefferies is guided by the disarmingly calm Frank E. Baxter, who was named CEO when Jefferies was barred from the securities business. A 60-year-old marathon runner who meditates, Baxter restored Jefferies' image in the late 1980s, retaining clients and adding electronic trading and convertible bond trading. Then Baxter did the near-unthinkable: He hired 60 Drexel traders and bankers after the onetime junk power collapsed under the weight of government probes. ``People thought I was stupid or crazy,'' says Baxter. ``Three years after our scandal, I was bringing in all these scandalous traders.''
Baxter didn't object to the controversial clients they attracted. Jefferies' biggest is Houston oilman John R. Stanley, who bankrupted his company twice and has a long list of people who have sued him for fraud--among them his former chief financial officer and his own son, Billy. But Stanley, who owns an unfinished refinery and oil and gas fields, has been pure gold for Jefferies. In the past four years, the firm has done more than $3 billion in business for him.
NEW ENTRANTS. Jefferies uses creative dealmaking to become the home of credit-needy entrepreneurs--raising junk for them and then branching out into initial public offerings, mergers-and-acquisition work, and other businesses. But the junk market, on a roll for the past two years, is bound to slow with the equity market. At the same time, competition is accelerating with consolidation. Eager new entrants such as Montgomery Securities and Alex. Brown & Sons can bring money from well-heeled new parents, promising support in a shakier market by directly investing in offerings or by buying the entire issue and then selling it down the road. As more players compete for fewer deals, Jefferies could be pushed way out on the risk curve.
That puts a higher premium on Jefferies' Drexel alums to value junk with the kind of sharp eye that would make Milken proud. So far, they've proved they were taught well, with the lowest default rate of the big junk underwriters: 1% vs. 10.8% for Donaldson, Lufkin & Jenrette Inc. ``If there is one thing Milken emphasized, it was protecting the bondholder,'' says Handler.
The question is what Jefferies will do in the name of protecting its own stockholders. Even after the 100% rise in its stock this year, Jefferies would probably be compelling to a company that wants a choice piece of the junk-bond market--and a romantic taste of the Greed Decade.
Jousting With Big Guys...
SINGLE B ISSUES, 1997 YEAR TO DATE
LEAD MANAGER AMOUNT MILLIONS
DONALDSON, LUFKIN
& JENRETTE $6,085
CHASE MANHATTAN 4,350
MERRILL LYNCH 3,853
MORGAN STANLEY 3,700
JEFFERIES 2,855
J.P. MORGAN 2,850
DATA: SECURITIES DATA CO.
Copyright © 1997 The McGraw-Hill Companies, Inc. |
