By Jonathan Stempel
Reuters
Friday, December 29, 2006; 3:19 PM

NEW YORK (Reuters) - Rising stocks, low borrowing costs, plentiful investor capital, and surging merger and acquisition activity fueled a record year in underwriting on Wall Street, and bankers expect continued momentum into 2007.

Securities issuance rose 16 percent from last year to $7.64 trillion, while reported fees rose 8 percent to $14.7 billion, according to data released on Friday by Thomson Financial.

"Interest rates are still in a benign period, and the expansion of global markets has resulted in a surge of issuance even from regions once thought of as relative backwaters," said Richard Peterson, a Thomson senior researcher. "We have growing economies, nearly $3.8 trillion of merger activity, and strong client needs for capital. You need to pay for it somehow."

Citigroup Inc. <C.N> was Wall Street's busiest underwriter for a seventh straight year, handling $666.8 billion of transactions, Thomson said. JPMorgan Chase & Co. <JPM.N> was next with $506.1 billion, while Deutsche Bank AG <DBKGn.DE> was third with $475 billion.

In reported fees, Citigroup retained first place, with $1.63 billion. Goldman Sachs & Co. <GS.N>, the top merger adviser, rose to second from fourth with $1.38 billion, edging Merrill Lynch & Co. <MER.N>, which remained third with $1.37 billion. Morgan Stanley <MS.N>, second last year, fell to fourth.

Banks covet high rankings in Thomson's "league tables," which can mean more prestige and profits, though they publicly downplay the rankings' significance. The underwriting boom may help push Wall Street bonuses to a record $23.9 billion for 2006, New York State officials estimated this month.

PRIVATE EQUITY

A surge in leveraged buyouts (LBOs), topped by a takeover of hospital operator HCA for $21 billion, fueled bond sales.

Syndicated lending, meanwhile, rose 11 percent to $1.67 trillion, according to Reuters Loan Pricing Corp., including $307 billion to fund mergers and $114 billion to fund LBOs.

In bonds, investors demanded increased protection against takeovers, even from investment-grade issuers such as Home Depot Inc. <HD.N> when it sold $5 billion of bonds this month.

"If you said two years ago that mega-cap investment-grade companies would be including change of control provisions in bond covenants, no one would believe you," said Huw Richards, managing director in U.S. debt capital markets at JPMorgan.

Yield-hungry investors nevertheless drove down risk premiums on junk and emerging markets securities, as default rates stayed low. Junk bonds yield 2.83 percentage points more than U.S. Treasuries, down from 3.71 a year ago, and the tightest spread since March 2005, Merrill Lynch & Co. said.

"It is certainly surprising to many, after 17 (Federal Reserve) rate hikes, with Ford <F.N> and General Motors <GM.N> moving into non-investment grade, and a hedge fund evaporating within a week," said Raj Dhanda, head of fixed-income capital markets at Morgan Stanley, referring to Amaranth Advisors LLC.

Dhanda said, though, that with record amounts of debt maturing, "net issuance is not perceived as being out of balance with the supply of capital."

IPOs

U.S. investment-grade and junk bond issuance rose 39 percent from a year earlier to $1.07 trillion, Thomson said.

Hybrid securities, which include bond and stock features, grew in popularity among issuers seeking to preserve their credit ratings, and investors seeking extra yield. Even Ford this month was able to sell $4.5 billion of convertible bonds.

Global equity issuance rose 32 percent to $694.8 billion, while initial public offering volume surged 56 percent to $257.3 billion. Fourth-quarter IPO activity was the busiest in about six years.

Bankers said mergers may help keep debt issuance in 2007 comparable to 2006. Private equity firms may also keep IPO bankers busy.

"A lot of venture capital and private equity helped fund and develop these companies, and in many cases will eventually need an exit," said David Topper, head of equity capital markets for the Americas at JPMorgan.

(Additional reporting by Yung Kim)