Wall Street saddled with unsold bonds

New York : Sales of a record $4.2 trillion in bonds last year generated $18.8 billion in fees for Wall Street, including $1.69 billion for Citigroup, the top bond underwriter in the Bloomberg 20 for the fourth straight year.

Unfortunately, banks and brokerages began 2008 with a backlog of high-yield bonds they agreed to sell to fund last year's leveraged buyouts - and few willing investors.

The market for riskier debt investments dried up in the second half of 2007, as losses related to subprime mortgages soared.

"The record issuance of the first half culminated in a wipeout in late June," says John Purcell, head of global fixed- income syndication at Citigroup.

Wall Street was left with about $110 billion in LBO junk bonds to sell as of June and still had $65 billion to go in mid-January, Purcell estimates. "The market has worked through a significant amount, but this number is still too big for the market to see a light at the end of the tunnel," he said.

Unsold junk bonds include $11.3 billion for the acquisition of BCE, Canada's biggest phone company, by Madison Dearborn Partners, Ontario Teachers' Pension Plan, Providence Equity Partners and Merrill Lynch.

"We don't expect the market for non-investment-grade companies to snap back to pre-July levels simply because we have started a new year,'' said Raj Dhanda, global head of fixed-income capital markets at Morgan Stanley.

The slowdown in sales of LBO bonds hurts because high yield is the most luc-rative part of the fixed-income business. Junk bond issuers in 2007 paid an average fee of 1.447 per cent of the face value of each sale, more than double the average of 0.618 per cent for investment-grade-debt sales.