Lead-managers for emerging-market borrowers: How many cooks?

Radovanic is obviously a puzzled borrower. As assistant to Croatia's finance minister he was instrumental in bringing the former Yugoslav state to the Euromarket. But he can't be particularly happy with the result. The republic's $300 million debut issue in February performed poorly and quickly widened from a launch spread of 80 basis points over treasuries to 135bp over.

Croatia is one of many new issuers recently attracted to the bond market. But for a first-time emerging market borrower it can be a brutal experience. A bad first issue, like Croatia's, sullies its profile and makes future issuance tougher and more expensive.

Croatia's mistake was possibly to award its debut issue to two lead-managers. On a deal of this size it was an unusual step. Two leads are not necessarily better than one. There is less accountability and, when things go badly, joint leads can discredit one other.

Some market participants argue a better strategy is for the debut borrower to build up a relationship of trust with just one house. This is the way Poland, Slovenia, Kazakhstan and other reforming states came to market. Since the beginning of 1996, 87% of first-time borrowers from the emerging markets have mandated just one lead-manager.

After participating in the Croatia deal, one US fund manager told Euromoney he was so upset he would never buy a joint-led emerging market deal again.

"Clearly the sole lead is the way to go," says Bill Battey, head of CSFB's New York syndicate. He remembers bringing to market in 1994 a $500 million issue for Korea Development Bank (not a debut) at a bad time. "When we launched KDB there was an atomic bomb over Seoul on the cover of Time magazine," he says. "We worked for them. We were directly responsible. There was one place to go to buy or sell bonds ­ us. Both the issuer and the buyer got the benefit of that accountability."

It's not just accountability they gain. Brian Mooyaart, a former banker who runs Mooyaart Consult and spends his life analyzing after-market performance using a proprietary model called Quits, thinks pricing is worse in joint-led deals too. "Joint leads tend to be more mispriced," says Mooyaart. "This problem is exacerbated in emerging markets."

In contrast with Croatia's experience ­ where the joint leads were Merrill Lynch and UBS ­ the Sultanate of Oman's $225 million debut, sole-led by JP Morgan only days after Croatia's deal, was a great success. Although the borrower was rated the same as Croatia, BBB minus, Oman's issue was priced at 73bp over treasuries and, by mid-March, was still trading inside its launch spread at 70bp over.

The deal was well placed and supported in the after-market; spreads on most emerging market bonds widened over the same period after comments that Federal Reserve chairman Alan Greenspan made to Congress. He noted that emerging market spreads were too tight, and hinted at a rise in interest rates.

An official in Oman's treasury comments: "Our main concern is it does not go beyond 73bp over. There is no formal commitment from the lead but I'm sure, JP Morgan being a good institution and because Oman is a good name, it should perform well and be supported in the after-market."

The performance of the lead-manager in the weeks immediately following a deal is important. A first-time borrower's market profile is there to be created or destroyed by the inaugural deal's reception. A new sovereign issuer often has many goals. For example, the exercise may be designed to open the market for the country's corporates to issue in the international markets. A badly executed deal will fail to create the necessary goodwill.

Commenting on the deal in Euroweek, JP Morgan noted: "What helped this deal to defy the bearish mood in the market was the fact that it was placed with quality accounts who weren't interested in turning a quick buck, as happened in the Croatia deal." That was why it had not matched "the poor performance of the similarly rated Croatia deal".

In the cut-throat world of beauty parades, every lead-manager lives by its track-record. When Lithuania recently mandated JP Morgan to launch its forthcoming dollar Eurobond, some observers noted that the performance of Croatia must have counted against Merrill. As one banker puts it: "It's not difficult to show the Lithuanians a Bloomberg printout of Croatia's performance vis-à-vis Oman's. It's pretty black and white."

That the Croatia deal did not work is clear. But would it have worked better with just one lead-manager? When this question is put to Radovanic, he briefly chuckles. "Do I have to answer that question?" he asks, before adding, "No, I think it was a good strategy to have."

Not obvious partners

The history of the deal does not suggest the two houses were anxious to work together. Merrill muscled in on a deal that looked set to be a UBS mandate. The Swiss house could be forgiven for its confidence that it would win the lead-manager position ­ it had kept credit lines open during the war in the former Yugoslavia when everyone else closed the door. Early on, it received the nod to organize a Eurobond of probably $200 million.

But Merrill's relationship officer for Croatia, Pasquale Najadi, had different ideas. A former UBS man, he made clear he was hungry for this mandate. He even began pitching for the deal in the middle of the war. At one point in 1995 he spent two hours chatting with Croatia's finance minister, Bozo Prka, about opportunities in international capital markets.