Emerging Europe: Special focus

Emerging Europe: Special focus

Exploring the banking and capital-market landscape

Downfall of a dynasty

Downfall of a dynasty

The last days of Ricardo Salgado and Banco Espírito Santo

May 2014

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Macaskill on markets: Jumbo bonds may reopen allocation questions

Apple has reopened the market for jumbo bonds as it steps up its share buyback plans and other borrowers are likely to follow suit as mergers and acquisition activity revives.


 apple jumbo bond
 Rich fruit for bond investors
Apple opened its new debt push with a $12 billion bond that was smaller than its $17 billion issue of April last year, but debt capital markets bankers are already wondering whether they can talk another borrower into a much bigger deal – perhaps one to exceed the Verizon $49 billion bond that set a new record for corporate debt issuance last September.

Depending on how new deals are priced, they could prompt further scrutiny of the interaction between dealers and big investors when plum corporate bond allocations are determined.

The Verizon bond dwarfed last year’s Apple deal that held the record for the biggest corporate debt issue outstanding for just over four months. Verizon placed its deal, which helped to pay for the $130 billion acquisition of Verizon Wireless stock it did not already own, with ease, in part because it took a starkly different approach to pricing than Apple.

The Apple bond was priced keenly, after lead managers Goldman Sachs and Deutsche Bank reported back on investor demand to the corporate. The multi-tranche deal was comfortably over-subscribed and sold with no demand problems, but soon after issuance the price of the debt fell on an absolute basis and spreads to Treasuries widened sharply from launch levels. A year after the bond priced, its key long tranches are still trading well below par, though Apple did not have any trouble returning to the market with a $12 billion deal within 12 months.

Verizon, by contrast, offered a big new issue concession to investors that ensured a frenzy of demand and delivered over $2 billion of instant paper profit to investors. With more of a curve of existing debt than Apple, Verizon was able to gauge how much of a new issue premium it wanted to give to investors and it decided to err on the side of generosity, with a long end tranche pricing at a hefty 90bp premium to outstanding debt.

There was a rationale for this give-away: Verizon had increased the total size of the deal from its initially mooted level after hearing about potential demand from underwriters led by JPMorgan and Morgan Stanley. The firm wanted the bond issue to succeed without causing any distraction from its key objective of concluding the purchase of Verizon Wireless stock and seemed to feel so giddy about the launch process that it even agreed to pay higher fees to its bond lead managers than it might have done, for a total of over $250 million.

Everyone seemed to be a winner, especially the big asset managers who managed to land large portions of a deal that is still trading roughly 100bp tighter than its launch spreads for key tranches. But an instant gain of well over 30% in spread terms for big investors (the 30-year tranche of the Verizon deal priced at 265bp over the comparable Treasury) can be viewed as a suspiciously easy profit.

The deal seems to have raised some regulatory antennae, as this year it emerged that US banks have been questioned by supervisors about their fixed income allocation policies.

The relationship between dealers and the biggest buyers of bonds is likely to be the focus of this investigation. The Verizon deal, with its massive size and sharp price appreciation, highlights how much can be at stake for buyers that secure a large portion of a new deal.

There were unconfirmed reports at the time of the Verizon deal that Pimco was allocated $8 billion of the new bonds, or roughly 16% of the total issue, while BlackRock got $5 billion, or around 10%. The strong performance of the deal delivered roughly $2.5 billion of paper profit to investors, so if the allocation numbers are correct, Pimco might have been able to book a gain of $375 million or so and BlackRock a profit of $250 million. That’s a nice return for a glance at a screen to confirm that a new issue premium of almost 1% to existing debt was on offer for select tranches and a few calls to remind lead managers who ultimately ensure they can collect their fees, and later their bonuses.

The fees (and bonuses) are the main motive for banks, which creates potential grey areas surrounding allocation policies when a borrower is found that is willing to offer a big concession to ensure the success of a bond.

Verizon was happy to pay up last year and other borrowers may soon be persuaded to follow suit, especially if a debt issue is ancillary to a goal such as a transformational merger – or the current vogue for a restructuring that shields global revenues for a US company from the corporate tax rate levied back in the US.

Corporate treasurers are generally thrifty individuals who take pride in pushing down borrowing costs, but chief executives and many CFOs take a more expansive view and some of the firms considering jumbo debt issuance operate in sectors that now function on a much bigger scale than investment banking.

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Final days of Ricardo Salgado and Banco Espírito Santo

Euromoney Pulse Survey: Renminbi’s internationalization continues apace
When BES collapsed earlier this year, markets briefly feared a return of the crisis to Portugal and to Europe. Even after the bank's bailout, investigators still pore over bank documents, transfers and deals, trying to make sense of Salgado’s last days battling to keep his empire afloat. The backstory is of an extraordinary decades-long rivalry between the country's two pre-eminent business families.