Bankers that cover financial institutions’ debt capital should be in greater demand than ever given market turmoil surrounding their client base. Banks have always been the largest component of debt new issues but now are forecast to dominate primary flows to an even greater extent because of their pent-up demand for financing. Not only are many of them in desperate need of funds following the closure of structured finance markets, they are also selling bonds that earn underwriters a greater amount of fees than was the case pre-crunch.
However, this select group of originators has endured almost as much turbulence as banks have – with a large number of firms losing senior officials.
One of the most surprising recent departure was the retirement of Gary Abrahams from UBS. Abrahams is only in his early 40s but is a widely respected figure for his success with UK financial institutions in particular. Fortunately for UBS they are able to replace Abrahams with another respected figure – Frank Kennedy – who moves back into FIG origination from fixed income.
One of his competitors says that Abrahams was probably the highest revenue earner in the UK FIG business over the past few years but probably not the highest paid given his success because he didn’t move around enough.
Another recent shock was the retirement of Eamonn Price, head of European financial institutions at Lehman Brothers. Price worked in investment banking over 22 years, of which the last 14 were at Lehman.
Other FIG bankers that have recently lost their positions include David Hiscox at JPMorgan. JPMorgan Cazenove also lost Chris Babington, who was promptly snapped up by Lloyds TSB a few weeks ago.
This much change after several years of stability in the higher ranks of FIG coverage is all the more remarkable because the profitability of the sector is forecast to rise. According to one banker, fees income should increase between 10% and 15% – based on something in the region of $1 billion of revenues from European clients a year.
Banks are no longer willing or able to buy market share through underwriting bank floating-rate notes at mispriced spread levels.
Furthermore, the fees treasurers are willing to spend for execution of new issues are up. Although many FRNs paid no fees or actually cost the underwriters money, dealers would have tried to charge up to 7.5 cents if able. Now such bonds are earning underwriters 10 cents.
As one goes up the yield curve, or down the bank capital structure – it’s a similar story. A five-year senior deal is paying more now, at 17.5 cents, than a bank would have been rewarded for a lower tier 2 capital transaction a year ago. The fee on such a capital deal has risen from 15 cents to between 35 and 40 cents.
As for hybrid tier 1 – the fees on this structure are now back to 1% compared with the 50 to 70 cents paid a year ago.
So while volumes are down, fees are up. Bankers say that additional fees are more than justified by the higher risk from the market volatility. And they say that clients are relatively happy to pay the additional money because of their dire straits.
Also, it will not be long before the wall of money that is being provided by central banks will require refinancing. But senior bankers explain that the pain being felt elsewhere in their institutions has to be shared. It is not possible, or wise, to completely close a structured finance department, so most bankers are trimming all departments, even those that are likely to prosper in the post-crunch environment.