| Mark Watson | ||||||
When Citi/SSSB snatched Punch’s £1.5 billion bridge refinancing mandate away from Morgan Stanley Dean Witter the securitization market jumped.
Mark Watson, head of syndicate at Citibank, has no doubt about the impact it made. “It was a monumental transaction for us and for the market,” he says. “It was a tremendous piece of business for us and one of the most exciting and interesting deals I have ever done.”
Watson’s enthusiasm for the deal stems from the fact that Citibank took the business from right under Morgan Stanley’s nose. The saga started with Punch Group’s takeover of Allied Domecq’s pub estate in 1999. Morgan Stanley backed the original deal, providing Punch with a £1.5 billion bridge debt. At this point it was expected, as usual, that Morgan Stanley would go on to organize the refinancing. Citibank had other ideas.
Though it was not in with Punch at the very start of the Allied Domecq deal, Citibank became involved in the latter stages. Watson takes up the story: “When the pub estate was put up for sale by Allied Domecq they were talking to various buyers and we belatedly got involved in talking to Punch although they had already put together a financing package led by Morgan Stanley,” he says. “But we had some different ideas from the ones they had already been talking about.”
After the Punch bid won, Citibank stepped up a gear. “We started putting some ideas in front of them about doing a whole securitization which were different from the term financings that Morgan Stanley was discussing,” says Watson.
Punch’s chairman, Hugh Osmond, had no qualms over using a different bank to refinance his deal. He saw the transfer to long-term finance as separate from the acquisition process and on that basis went after the most competitive terms.
“Citibank felt they could refinance the whole thing in one go, at no more than 190 basis points over Libor, which was attractive,” he explained. “By paying off the whole bridge, we will save about £20 million in interest on an annualized basis.”
As Morgan Stanley was not prepared to match Citibank’s offer, as Punch’s adviser, as well as being an equity investor, it had to step aside and let the business go – a move that flummoxed Watson and his team.
“We were very surprised that Morgan Stanley let us do it because if we had been in their shoes we would have done everything possible to prevent that from happening,” he says.
Watson thinks it unlikely that such a coup will become commonplace. “I think it will be very rare that one bank goes in and buys a bridge off another bank,” he says. “Usually when you’re in a situation of providing the bridge, you’re the one with all the information and you’re in a far superior position.”
Watson says the competition did not think Citibank could pull the deal off. “Maybe they didn’t believe that we could get it done so they didn’t even want to chase it,” he says.
In the wake of its triumph, Citibank positioned itself as a player in the market. Watson says it showed a new player was on the block following the succession of mergers that Citibank had been through.
“We inherited a securitization expertise in Citibank which had been focused on niche real estate and conduit-type business which we put together with our execution and distribution capabilities, plus an ability to do lending that was never there before,” he says. “You put those three things together and we’ve created a securitization business which we believe is the best on the street now.”
However, Watson denies that Citibank was prepared to reduce its fees in order to buy the business and win it at all costs.
“We were trying to build a franchise and make money and it was the most profitable piece of business we did last year,” he says. “We weren’t going in trying to buy business so we could go up the league tables. There was an awful lot of risk involved in buying somebody’s bridge. You have to price that bridge correctly and I think we did.”
