Having Strayed From Its FIG Roots, FBR Capital Plans Huge Staff Cuts Amid Poor Market For Fixed Income Trading

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Middle-market investment bank FBR Capital Markets-which may be getting ready to cut as much as 35 percent of its workforce-has suffered from straying from its financial institutions group (FIG) roots and from trying to expand prematurely into fixed income, a recruiter told eFinancialCareers.

"FBR, going back to its beginnings, was very financial services-focused," observes veteran recruiter Richard Lipstein of Boyden Global Executive Search in New York.

But it experimented heavily in different areas including "several healthcare permutations," says the recruiter, and of late, became an example of yet another firm that attempted to expand into fixed income "without the origination success to complement the less profitable, secondary trading business."

Last week, CNBC quoted a person close to the Arlington, Va.-based firm, predicting that when the layoffs are complete, FBR's headcount will be in the "high 200s," down from 425 today. The source said the move was expected to reduce the firm's fixed costs by more than 35 percent to $90 million from $140 million after reporting a $26.1 million loss in the third quarter.

CNBC obtained an internal memo in which FBR CEO Rick Hendrix wrote, "Given our view that market challenges are likely to persist for the foreseeable future, we have concluded that we must further reduce our fixed cost base, which unfortunately includes a reduction in our staffing. "

Bloomberg reported that FBR Capital Markets Corp. had let go of leveraged finance bankers Chris Cunningham and Glenn Medwar, as well as more than half of its credit trading and sales team.

"Cuts included Frank Ferrantelli, head of high-yield debt trading, according to people familiar with the matter who declined to be identified because the moves at the Arlington, Virginia-based firm haven't been publicly announced," Bloomberg said.

Back in May 2009, eFinancialCareers reported that FBR Capital Markets was launching a credit sales and trading unit staffed by a half-dozen pros from institutions such as Morgan Stanley, UBS and Merrill Lynch/Bank of America, which would focus on corporate bonds and bank loans-crossover, high-yield and distressed debt instruments in particular.

FBR joins BTIG LLC, Citadel LLC and Ticonderoga Securities LLC in cutting or shutting fixed-income units after trading and issuance plummeted. It started building a speculative-grade debt business less than three years ago, as about 70 firms entered the bond markets to take advantage of larger competitors retreating from trading.

This year, "The third quarter presented an environment far more challenging than any we have seen since the depths of the financial crisis in 2008," Hendrix said in an earnings call. "We remain at our core, an equity capital markets franchise."

But apparently, FBR was constantly struggling to redefine itself, and in doing so, tried to expand in fixed income to serve its clients and leverage into secondary commissions at a time when fixed income spreads have been disappearing.

Staff has also left the firm voluntarily due to unprofitable operations, Bloomberg suggests, stating that FBR reported $598,000 in third-quarter revenue from helping clients raise capital, compared with $23.1 million in the same period last year, and $4.43 million tied to its advisory business, down from $6.67 million, and that FBR ended the quarter with 426 employees, down from 501 at the start of the year.

"Credit bankers that have left FBR this year include Frank Garibaldi, former co-head of leveraged finance, who departed in February to join Cantor Fitzgerald LP. Paul Deen, a credit salesman, started at R.W. Pressprich & Co. as a managing director in March. Scott Mero joined Credit Agricole SA for high-yield bond sales in August," its latest report states.

Aside from the latest losses, FBR has lost money in the last three years and reported losses in both the first and second quarters of 2011.

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