Wsw/26″/mike1st/mark2nd
Participating fully in Wall Street’s current sound and fury is West Los Angeles-based Jefferies Group Inc., the brokerage and investment banking shop known for trading large blocks of stock and underwriting and trading junk bonds.
Jefferies, itself publicly held, saw its stock soar to near $60 a share on the strength of the bull market during the first half of the year and on rumors that a takeover was in the works. But with Jefferies’ marriage plans evidently scuttled, and with the junk-bond market in a deep freeze, the company’s stock recently sank as low as $16.56 a share, off 72 percent from its high.
It probably doesn’t help that Jefferies also is known for its work with oil companies and real estate investment trusts, two sectors that have been depressed for months. But perhaps the worst is over. With Wall Street’s latest rally, Jefferies was trading at nearly $26 a share last week, up 57 percent from its low. One would expect Chairman and CEO Frank Baxter, a 24-year Jefferies veteran, to show some ruffled feathers, but he seemed cool as a cucumber last week.
“I try to focus completely on how to service our clients,” he said. “The stock price is like the weather: There is not too much I can do about it. I try to worry about things I can do something about.”
Baxter was similarly even-toned when asked when the junk bond market would come back. “There are two kinds of people: Those who don’t know, and those who don’t know they don’t know,” he said.
Baxter has been through some rough spots before he assumed his current mantles in 1987, after founder Boyd Jefferies pleaded guilty to securities law violations in connection with the Drexel Burnham Lambert scandals. Starting out in those awkward circumstances, Baxter has led Jefferies from a large-block trading firm to a nearly full-service investment bank and brokerage.
Last January he took a seat on the board of governors of the National Association of Securities Dealers, with an eye toward developing policies that address the changes taking place in the trading of stocks and bonds.
The Internet and other off-exchange forms of trading stock are gathering steam, Baxter said, but he warned against what he calls the “fallacy of displacement.” Just as television didn’t kill radio or movie theaters, the Internet will not kill the securities exchanges. Nonetheless, he added, the exchanges will have to become something other than “mere intermediaries” to survive.
“And there’s going to be even less exchanges,” he predicted.
Baxter, 61, a marathoner who likes to take the stairs between Jefferies’ 11 floors of offices, must be acutely sensitive to the firm’s stock price in at least one regard: He personally owns 8.6 percent of the company, or 1.79 million shares. His stake reached a value of $70.9 million at its apex, before falling to a low of $29.6 million, and then ratcheting up again to $46 million as of last week.
Baxter’s response to the roller coaster? “It’s just paper.”
Looking toward Europe
Downtown Los Angeles-based Payden & Rygel, already the sixth-largest global bond manager in the United States with $30 billion under management, announced last week it has formed a joint venture with Metzler, the German private bank. The resulting entity, Metzler/Payden, with 20 professionals based in Los Angeles, will help direct U.S. private investments into European bonds, and European investors to U.S. corporate IOUs. It already has $100 million under management.
Payden said Europe has been generally overlooked in Los Angeles during the past 20 years, due to Asia’s explosive growth. Moreover, the pallid performance of other money managers who emphasized offshore investing downtown-based Trust Co. of the West comes to mind has perhaps warned off other investors from seeking returns outside the United States.
“You have to distinguish between emerging markets and developed nations,” said Payden. “What we concentrate on is the sovereign debt of developed nations, such as the United Kingdom, Germany, France, Japan, Canada and Australia. There is no real connection between these nations and emerging markets.”
Payden, with more than 30 years in the bond business, said she has never seen such “illiquidity” as now exists in the bond market. The only paper that investors seem to want is U.S. Treasuries, although she also noted that the near-panic flight to quality has directed lots of cash into the IOUs of the United Kingdom and Germany as well.
Time for junk again?
Where Payden & Rygel is known for investing in sovereign debt or other bonds with very high credit ratings, Larry Post of Westside-based Post Advisory is a junk-bond manager with several hundred million dollars under his belt. He is looking at the eye-popping spreads between non-investment-grade bonds and Treasuries.
“Anything with a story, you can’t give away,” said Post, referring to companies that require financing to achieve a growth plan.
A case in point is San Jose-based Globalstar Telecommunications Ltd., which is partway through an ambitious, debt- and equity-backed plan to launch 48 satellites by year-end 1999. Those satellites would offer voice and data to parts of the globe currently undeserved by existing wire and cellular services.
In September, a rocket carrying 12 Globalstar satellites failed, although most losses resulting from that failure were covered by insurance. Globalstar stock has been hammered down by two-thirds in the Wall Street slump, but the company still has a market cap of $2.1 billion a long way from bankruptcy. Yet, “the yield to maturity in 2004 on Globalstar bonds is 27.75 percent,” said Post. “This is not my favorite. I am just saying the yields are out there. Bonds are trading inexplicably, or at levels not reflecting intrinsic values.”
Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
