MTNs: Arguments rage over new league table

It's the league table, generated by Euromoney and Capital Data, that the whole market is arguing over: the table of MTN trades.

Led by Merrill Lynch, a number of market players question just how valid it is. But for a number of houses it is a vindication of how much they have invested in their MTN desks.

Cases in point are Union Bank of Switzerland and Sumitomo Finance. Two key hires boosted their effort last year. UBS brought Kieran McStay into a senior role in capital markets, from the highly successful Salomon Brothers MTN desk. He has been building the business, and helped the firm towards second place in the league table by volume and, probably more important in the MTN context, by the number of deals done for issuers.

The hiring of Bruce Cairnduff from Lehman Brothers last year seems to be paying dividends for former Japanese laggard Sumitomo Finance. Cairnduff, who left Lehman for what was widely rumoured to be £2.5 million over three years, has boosted Sumitomo to third by volume, and easily top by number of issues.

However, if league tables epitomize all that's worst about lies, damned lies and cut-off points, this particular table has more shortcomings than most. There is reason to believe that, because of the private nature of many MTN transactions, up to two-thirds of trades are not logged.

"Who knows the real picture of the market?" argues Cairnduff. "We've previously relied on a league table based on a firm's number of dealerships. That is incredibly false. It gives no idea of performance on those programmes."

He notes that he would prefer to be top three in a league table that the whole market accepted. But whether an MTN league table will ever be accepted is a point of hot debate. "The dealer community is kind of sceptical," says Scott Church, who heads Merrill's MTN origination group. "I think it's a bad idea," agrees David Marks, head of JP Morgan's MTN desk. This is stinging criticism from two firms in the top five by volume.

One criticism is structural. The league table is deliberately based on non-syndicated transactions, to ensure that standard Eurobonds done off MTN documentation are excluded. The purists call these proper, privately placed MTN's.

In spite of these transactions' private nature, data are available from clearing houses. According to Euroclear, it is "extremely unusual" for a trade not to go into its real-time database. The maturity, the coupon and the issuer are thus known.

But, crucially, the intermediary is not. Some dealers make a point of "claiming" trades, but do this selectively. One MTN trader says there are three attitudes emerging: "There are basically those who actively claim trades; there are those who fall into a category of benign neglect, claiming when they have time; and there are those who actively avoid claiming anything."

A group of high-profile MTN desks fall into the latter category, Goldman Sachs is foremost ­ and 33rd in the table with three trades. These were listed either in London or Luxembourg, and were therefore already in the public domain. However, the bulk of MTN trades are not listed.

Most firms reckon their real trades are three times those in the table. One trader made the point that if it knew Euromoney was printing a table tomorrow it could make 50 "claims" that day.

The reasons for not claiming are simple. The intermediary might want to keep its relationship with a borrower secret, or not reveal a clever new structure.

Another point of attack is the problem of what is and what is not an MTN, and to be strict, a Euro-MTN, as opposed to a US one. The table picks up some 144A placements from global MTN programmes. These amounts inflate the size of the market, and ought instead to appear in US domestic statistics.

A bigger problem is defining when a non-syndicated deal gets too big to be a proper MTN and becomes akin to a privately placed Eurobond. For example, Merrill's position at the top of the table is due to a $1billion MTN it did at the end of February for Sakura Bank. Merrill admits this is not a standard MTN, if only because the issuer held a roadshow ­ a characteristic of the public Eurobond. Yet this is included because Merrill did not form a syndicate as it would have for a public Eurobond. Do you strip it out? If so, Merrill falls to 10th position.

"It's difficult for any league table to differentiate between private and public deals," says a trader. "It's a bit like pornography. What is pornography and what art? Well, you just know it when you see it."

There is also a philosophical objection to any ranking. "I sit with the public market guys," says a top trader, "and I see how the focus on league tables can blight the business." He refers, of course, to buying market share ­ doing silly, loss-making short-dated transactions, for the single purpose of "claiming".

The profitable MTN business could become much less profitable were a definitive league table to lead to such excesses. "If it isn't a profitable market, we can't afford to resource it properly," says a trader.