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June 2001

The great league table debate


With banks increasingly consolidating or at least cross-linking their debt-arranger activities, Euromoney has concluded that its annual bond, loan and MTN rankings should appear as a single table. In this introduction to the results, Jennifer Morris looks at the ways in which boundaries between different areas of debt are becoming blurred and assesses the challenge to investment banks’ core business from commercial banks




Bankers can't make up their minds about league tables. Sometimes they don't seem to count for very much. It's common knowledge that lead arranger data can be sliced and diced in myriad ways depending on which version of the truth a particular sales pitch demands. In fact, manipulating the figures has become so widespread that those involved no longer bother to deny it. "There are ways around every league table rule," says the head of debt capital markets at one US bank.
But try changing the ground rules - as Euromoney has this month by combining bond, loan and MTN tables into one all-encompassing debt-arranger ranking - and suddenly the league tables matter - and matter a lot. Bankers who have hitherto adopted a breezy disregard abruptly become fiercely possessive of their own position in the international bond table, or the European MTN table or whatever their specialist area happens to be. The suggestion that there might be another way to look at things provokes some heated responses, such as that of Manfred Schepers, global head of debt capital markets at UBS Warburg. "These tables are complete nonsense and I want my name in the magazine saying so," he fumes. Sure thing, Manfred.
Forget the novelty value though, the real motivation for Euromoney's decision to publish its first overall debt tables is not to stir up controversy but to recognize the fact that the debt markets have undergone, and continue to undergo, fundamental change. Not least is the growing recognition among banks and their clients that the boundaries between the different areas of debt have become blurred. From presenting a single sales pitch to a client to providing a loan in lieu of bond financing when the markets get sticky, the lending and securities businesses of most major institutions are no longer separate and distinct divisions. Debt bankers work in cross-product teams and use such catch phrases as "product neutral", "solution driven" and "aggressive indifference" to describe their approach to client financing issues, preferring the title "debt corporate finance" to "debt capital markets".
However, when it comes to the crunch, what leads customers to prefer one bank to another is, at least partly, its ability to put its money where its mouth is and come up with the cash. No amount of strategic advice can fund an acquisition bid, nor has a single 3G licence been won on the basis of great negotiation skills.
       

View graph.
The results printed here are, we admit, somewhat predictable. Balance sheet begets market share, particularly in scale businesses such as lending. Our critics contend that this is an unfair advantage. Amalgamating loans and bonds skews the data, they say, because the institutions that do well in the loans table have a head start in the overall rankings as loans is the bigger business.
Surely, though, this is the whole point. Claiming that loan data make the tables unfair is really rather a lame argument. So too is the complaint by some banks that the tables are weighted against them because they don't play a part in the US agency bond business, or they don't do Pfandbriefe. It's a bit like saying that it isn't fair for whoever comes first in the race to be declared the winner.
The fact is that the institutions that top the table - JP Morgan, Citigroup, Bank of America and Deutsche Bank - have arranged the most debt for their clients over the past year - end of story. That much is incontestable. These institutions dominate virtually everywhere. The exception is Asia, where an ambitious merger between Dai-Ichi Kangyo, Fuji Bank and IBJ knocked Citigroup off the top spot.
Whether they have retained a significant proportion of that debt on their balance sheets is a separate issue. Ditto whether they have captured the highest proportion of fees. That's not what we're trying to measure. These tables show which institutions have gone out there and garnered the most support for their clients' debt-raising efforts. "When you need $30 billion, we can get it for you, just like that - the others can't," says the head of debt capital markets at a major US bank.
Competitors retort that there is a world of difference between providing revolving credits and extending proper loans to clients.
They point out that such banks as JP Morgan and Citigroup have stables of large, highly creditworthy companies with 364-day facilities - usually as back-up lines to commercial paper - for which they act as lead arranger when the loan comes up for renewal each year.
Such loans form a sizeable proportion of these - and presumably other banks' - lending commitments. In the US, for example, an estimated 70% to 75% of loans made every year are simply rollovers of existing investment-grade, 364-day facilities. "The tables do overstate the situation because a lot of the loans we make are refinancing," admits one head of syndicating lending. But, so long as a company's access to the CP market depends on the quality of its back-up financing, CFOs and treasurers are unlikely to share the view of some investment bankers that these facilities don't amount to real credits. Furthermore, market participants calculate that at least 60% of last year's loan volume in Europe was acquisition finance related. That is, new money sourced by the banks.
As banks continue to scale back their lending commitments, credit - whether revolving or term - is going to become more scarce and the ability to provide it more valuable to clients. The main driver of the growing reluctance to lend is burgeoning consolidation in the financial services industry. "Within five years, Wall Street will not be as fragmented as it is now," predicts Marwan Marshi, head of US investment grade debt at Salomon Smith Barney. And as banks pair off, they will inevitably cut back on commitments to mutual clients.
Two institutions that extend facilities to the same company will not lend on the same scale post-merger. "You have to believe that there will be significant client rationalization at JP Morgan over the next year or so," says one observer.
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