Merrill Lynch Gives Up on Southland Junk Bond Unit : Securities: The firm had wanted to compete with Drexel Burnham Lambert. But a downturn in the junk bond market has changed its plans.

Merrill Lynch & Co., the nation’s largest brokerage firm, has abandoned plans to establish a major junk bond trading and sales operation in the Los Angeles area.

Merrill officials as recently as mid-September had confirmed that the brokerage was looking for office space in or near Beverly Hills to house a staff of junk bond traders and salespeople, as well as investment bankers who advise companies that want to issue junk bonds. The total professional staff was to have been at least 20.

The planned move was widely seen as an effort by Merrill to step up its competition with Drexel Burnham Lambert Inc., the leading junk bond firm whose high-yield, high-risk bond operations are based in Beverly Hills.

But sources said that, for a variety of reasons, including the recent sharp downturn in the junk bond market, Merrill in the last few weeks has abandoned plans to establish any junk bond trading or sales operations on the West Coast. Two junk bond salesmen hired away from Drexel, John Toland and Jay Jablenau, have been transferred to New York.

Merrill Lynch still plans to maintain a Los Angeles staff of investment bankers to advise companies that may want to issue junk bonds. Sources said these investment bankers will remain in existing Merrill offices in Westwood.

Fred Yeager, a Merrill Lynch spokesman in the firm’s New York headquarters, earlier this week denied that Merrill had pulled back in any way from its plans for Los Angeles. But on Thursday he confirmed that Merrill has decided to “consolidate” its junk bond sales and trading operations, basing all junk bond sales and trading staffs in New York.

“All we’re doing is changing the location,” Yeager said, noting that the firm had never formally announced plans to open a Beverly Hills office. He added that Merrill intends to continue efforts to win a larger share of the junk bond underwriting and trading business. Yeager asserted that it isn’t important where traders and salespeople are based. “They feel they can do it just as well over the phone from anywhere,” he said.

Sources some months ago said one reason Merrill wanted to set up shop in Beverly Hills was that it hoped to lure away some of Drexel’s experienced junk bond staff. Drexel recently pleaded guilty to six counts of securities fraud, and Michael Milken, the founder of Drexel’s junk bond department, resigned from the firm and is awaiting trial on racketeering charges.

One Drexel source asserted that Merrill had been less successful than expected in coaxing Drexel staffers to defect. In addition, with the recent drop in demand for junk bonds because of concerns over defaults by several big companies that have issued them, there is the risk of overcapacity in the junk bond industry.

Yeager, however, refused to discuss Merrill’s recruiting efforts or its reasons for dropping the Beverly Hills plan. Senior Merrill officials, including Raymond Minella, who is in charge of the firm’s junk bond operations, declined to be interviewed. Steve Koffler, a Merrill managing director who was to have headed the new Beverly Hills office if the plans had gone through, failed to return repeated phone calls this week.

Yeager emphasized, however, that Merrill currently has a staff of eight “merchant bankers” in Los Angeles, advising companies that want to issue junk bonds, and he said the firm plans to increase that number over the next year.

Merrill and Drexel, for the most part, maintain cordial relations. Over the last three years, the two firms have worked together as co-managers of many new junk bond issues. A Drexel spokesman declined to comment on Merrill’s change of plans.