European banks have taken a long time to stock up their leveraged finance armoury but this year they have made a determined grab for market share. At stake is a rapidly growing market for funding Europe's surging mergers and acquisitions business, especially where it concerns leveraged buy-outs involving private equity firms.

It is a market on which the US commercial and investment banks have a head start and have a strong claim even in Europe.

UBS Warburg, the investment banking division of UBS, the Swiss banking group, has been extending its interest in leveraged finance over the past year. It has hired about 60 new people around the world, of which about half are senior professionals.

The most senior person it has hired is Art Penn, who joined from Bankers Trust following its takeover by Deutsche Bank last year. He is now global head of leveraged finance for UBS Warburg.

Mr Penn recruited Jeff Lubin from BT/Deutsche to breathe new life into the bank's European high yield business. He also hired Ian Hardington from SG Cowen in New York to be co-head of European leveraged finance alongside Michael Grayer.

Deutsche, too, has been building its leveraged finance business after the Bankers Trust acquisition was announced. It suffered a number of defections after that deal, including losing such senior figures as Matthew Collins to Merrill Lynch. Since then it has hired almost 20 senior bankers in high yield or leveraged finance, including David Fass, who recently joined from Chase Manhattan to be co-head of European leveraged finance alongside Sekhar Bahadur.

Another European bank which has continued to invest heavily in leveraged finance is the UK's Barclays Capital, the debt-focused investment banking arm of Barclays Bank. Earlier this year it announced plans to double the size of its leveraged finance team in London over the next two years by taking on more than 70 bankers.

Although different banks mean different things when they talk leveraged finance, it generally includes two main products - leveraged loans and high-yield bonds.

Leveraged loans, which are often defined as credits priced 125 basis points or more over the London interbank offered rate, are essentially loans with a high rate of interest to reflect a higher risk posed by the borrower.

In the early 1980s, commercial banks sometimes made leveraged loans and only Drexel Burnham had a fully-fledged high-yield business. These days, all the big investment banks are in the loan business and all the leading commercial banks are in the high-yield business.

However, the commercial banks continue to dominate the leveraged loan market. According to Thomson Financial, the highest ranking investment bank in European leveraged loans was Morgan Stanley Dean Witter, which ranked 10th in the third quarter league table.

At the top was Chase Manhattan, which also came top in the US table, ahead of BankAmerican. In the first nine months of 2000 in Europe there was little to separate those in the chasing pack including Citibank/Schroder Salomon Smith Barney, Royal Bank of Scotland, HSBC, Barclays and Deutsche Bank. In the US, the chasers are Fleet Boston and Deutsche.

Despite efforts by the Europeans to build their high-yield businesses, this area remains dominated by the US houses. In the US, Donaldson, Lufkin & Jenrette, Chase and Merrill have the upper hand. In Europe, Goldman Sachs, Morgan Stanley Dean Witter and DLJ dominate.

However, the European firms believe that there is plenty of room for them at the leveraged finance table.

John Kelting, head of UK leveraged finance at Barclays Capital, says: "The key issue for private equity is delivery and certainty because if, when you are getting down to the wire, you don't have the products you were after or the terms are changed at the last minute [of a bidding process] it's a disaster."

The result is that private equity firms looking for financing tend to go to houses or individuals they know well.

According to a survey by Euroweek of private equity firms earlier this year, Barclays was one of those houses. When asked which banks can offer the most seamless product, combining senior debt, high yield bonds, mezzanine and private equity and other products, Barclays was ranked second behind Chase Manhattan, with Deutsche in third place.

When asked which banks come up with the most innovative financing structures, private equity firms put Chase and Barclays in first and second place again with Merrill Lynch in third place.

Ian Gilday, a director of debt markets in European leveraged finance at Merrill Lynch, says: "The ability to have all the products and support these with your balance sheet is important because without them you can't be creative."

Being able to offer the full range of funding products is important at any time but never more so than at the moment, when the high yield bond market is in turmoil and one of the financing options is therefore limited.

Many banks also place great importance on having a busy mergers and acquisitions department for originating ideas which can then lead to financing mandates. The private equity firms asked by Euroweek said the banks that were best at bringing them acquisition opportunities were Morgan Stanley Dean Witter, Citibank/Schroder Salomon Smith Barney and Merrill.

Deutsche acknowledges that building an M&A franchise is a priority for its investment banking division. But Barclays, which resolutely refuses to build one, believes it has enough expertise elsewhere and strong enough long-standing relationships to avoid the expense of building an M&A department.

According to the poll, Citibank/Schroder Salomon Smith Barney and Goldman Sachs were most highly rated at integrating the advisory and financing functions.