Who’d want to be an arranger?

The role of arranger on a Euro medium-term note (EMTN) programme is something of an oddity in the financial markets: banks which arrange programmes expend a great deal of time and resources, but usually don’t charge a cent for the privilege.

And, despite this, the arranger is often the poor relation in the programme. “If an issuer comes back from lunch and finds four messages waiting for him ­ one from his arranger, two from his dealer group and one about a reverse enquiry deal ­ the arranger will be the last one he contacts,” says one banker.

It is undeniable, though, that arranging a programme properly is essential for its success. “Whichever way you look at it, the role is important,” says Martin Goldberg, executive director of fixed income at Lehman Brothers. “From the issuer’s point of view, it’s efficient and cuts out a great deal of hassle. For the dealers, an experienced arranger generally instils them with confidence because they know that someone with detailed knowledge of the markets is involved.”

Why, then, are so many leading investment banks keen to be arrangers? A key benefit for frequent arrangers is that the process helps them stay up to date with developments in the market. Says Pieter van Dyke, director and product manager of Euro commercial paper (ECP) and EMTNs at SBC Warburg: “Most active players in the MTN market want to arrange programmes: it allows you to expand the scope of the business and the possibilities it affords by incorporating new features.”

The second benefit is that arranging a programme provides other business opportunities. “Arranging an MTN programme allows you to develop a lasting relationship with the issuer and benefit from the business spin-offs,” says Bim Hundal, executive director in Goldman Sachs’s capital markets division.

Most take such spin-offs to mean winning the mandate to lead-manage the first public Eurobond issue off the MTN programme. Issuing public deals off the MTN shelf became a trend in the early 1990s; previously, programmes had been used only for private placements. Today, many arrangers advise the borrower that a bond issue is the best way to announce its entry into the market, set a benchmark for the future and appeal to a broad investor base.

“It’s the best way to raise the profile of both the borrower and their programme on the international capital markets,” says Warburg’s van Dyke. Michael John Lytle, product manager for ECP and EMTNs at Morgan Stanley, prefers inaugural issues because they “cast the net over a wider group of investors” than private placements.

But there are signs that the inaugural public issue is no longer as popular as it once was. More new entrants to the MTN market are returning to private placement deals. “Look at issuers such as Household Finance in the United States,” says Terry Watkins, head of EMTN and private placements at ABN Amro. “They issued a $2 billion EMTN programme in May this year and are meeting their targets by issuing a good deal of private placements, but no Eurobonds.” Other high-profile borrowers, such as Berliner Landesbank and Nynex Capital Funding have done the same this year.

Most of those borrowers that forgo an inaugural public deal off the MTN programme have already issued in the international markets and so don’t need to set a benchmark. But the trend is also a sign of the continuing development of the MTN market. “A lot of new issuers don’t want to do a debut bond issue,” says Julia Cobb, vice-president and head of EMTN marketing at Salomon Brothers. “They’re looking to use the programme for arbitrage opportunities, to term out debt or for strategic match-funding requirements.”

Arrangers still generally prefer inaugural bond issues for issuers new to the capital markets, such as corporates and emerging market borrowers. But, even here, some advise caution. Warburg’s van Dyke suggests that sometimes a stand-alone bond issue (ie, not off an EMTN programme) might be preferable “especially if the borrower wants to test the water first”. And Cobb warns that inaugurals don’t provide instant and sustainable success: “If a borrower makes a publicized commitment to mark the launch of a programme with a public issue, they could find that their bonds are impacted if there is a market downturn ­ not the most auspicious start. There are many facets to the market and borrowers should be made aware of the overall picture before making a decision on an inaugural transaction.”

There is a distinct difference in strategy between the three most prolific EMTN arrangers and the rest. Merrill Lynch, Lehman Brothers and Morgan Stanley all tend to pitch for as many arrangerships as possible. Their reasoning is that the more arrangerships they do, the more experienced they become.

Hence all three set great store by the league tables of arrangers. “They’re absolutely important,” says John Tuke, managing director of global client products at Merrill Lynch, which since 1985 has arranged 121 programmes ­ nearly twice that of anyone else. “It shows we have the expertise and experience necessary to arrange a programme successfully. You learn a lot more about the product by arranging 20 programmes a year than if you just do six.”

Lehman’s Goldberg points to the setting up of dedicated MTN desks at these banks as one of the reasons why a handful of firms dominates arranging. “To be able to do a lot of arrangerships, you need to dedicate significant resources to the project, and only a few banks have done this,” he says.

Banks lower down the arrangers’ league tables readily admit that they would need more resources to compete with the prolific Merrill Lynch in terms of the number of deals arranged. They argue, however, that this does not necessarily affect their competence.

Matt Carter, vice-president and head of MTNs at CS First Boston, says he sees little relation between league tables and performance. “Yes, they do show that some houses have done a lot of arranging and are without doubt very good at it, but it doesn’t mean that the rest of us aren’t as qualified,” he says. “It’s not the number done which is important, but more the quality of the work.”

Van Dyke at SBC Warburg goes even further: “We take the view that top-quality service can be hindered by high-volume arranging ­ it can lead to overstretching oneself, especially when the updates need to be done.”

In-depth knowledge

Most investment banks are choosy about which arrangerships they pitch for. Says Hundal of Goldman Sachs: “Unlike some banks, we don’t try to get every arrangership, but neither are we half-hearted about it. We simply target what we think are the best issues to act as arranger on: prestigious programmes such as the EIB or Marks and Spencer ­ clients with whom we already have a good business relationship ­ and those with an inaugural Eurobond.”

What makes a good arranger? The key advantage of MTNs is their inherent flexibility. David Dunnigan, a partner at Clifford Chance, one of the three main law firms handling EMTN documentation, likes to cite this analogy: “Having an MTN programme should be like going into your favourite restaurant and being given the menu: everything you like is in there and you can choose to have whatever you want at that particular time.”

This is where the arranger’s role is key. The arranger has to have an in-depth knowledge of the borrower’s business and funding requirements, and advise accordingly. “The first role of the arranger ­ especially if the issuer is a new borrower ­ is to act as an adviser on the capital markets as a whole,” says ABN AMRO’s Watkins. “I liken it to constructing a skeleton, which is then fleshed out at the documentation stage.”

Most of the advice will deal with specifics, such as whether to list in London, Luxembourg or both, and which currencies to include. Adding the ability to issue in Deutschmarks or French francs, for example, introduces complications, because issues in these currencies require locally based arrangers.

The work also entails advising on the choice of dealers, and explaining what dealers, investors and the market in general will or won’t like about a particular programme. “It is our job to foresee the documentation problems which might cause problems for the dealers, and to advise the issuers accordingly,” says Kate Walker, associate director of transaction management at Deutsche Morgan Grenfell.

Drawing up the documentation has become easier over the years. “When we started back in 1983, the documentation process was really quite a difficult one because no-one knew the ground rules,” says a legal adviser at a leading MTN house. “Now, after a very exciting time in the early 1990s, when new currencies were put in at a swift pace, things have cooled down and most of the arrangers know what to look out for.”

Much of the documentation is now standardized. “There are definitely standard items to be included, such as indemnities, and representations and warranties,” says Tracy Kingsley-Daniells, vice-president and head of the transaction group at CS First Boston. “But there’s no such thing as a truly standard form. Every programme is negotiable to some extent or other, so there will always be variations ­ but it’s almost always a question of style and degree rather than absolute content.”

The difference between the various arrangers and legal firms is also largely a matter of style. Morgan Stanley, for example, prefers to use the term “programme for the issuance of debt instruments (DIP)”. In practice, a DIP is identical to an MTN programme, just more accurately descriptive. One or two other houses use the term “debt issuance programme”, but most still prefer the term MTN to DIP. But again flexibility is important. “KfW wanted to call theirs a DIP,” says Anne Mackay, head of Merrill Lynch’s transaction management group. “And we were happy to oblige.” Michael Voisin, partner at law firm Linklaters and Paines, agrees: “If a client wants a debt issuance programme, almost all that I have to do is change the title of their MTN programme.”

Even though documentation has become simpler, disputes can still arise. There are those who argue that some arrangers allow the issuer to get away with too much: one house mentioned that dealers were now frequently being asked to provide indemnities, thereby making them ­ not the issuer ­ responsible for regulatory matters. Others complain that the small but growing trend for lawyers to act for both borrower and dealer group represents a conflict of interests and is unacceptable.

Scott Church, director of global client products at Merrill Lynch, takes a more benign view of his fellow bankers: “We all depend on each other much more than we’ll admit. We empathize with each other because we know that it is circumstances beyond our control which will cause 95% of the problems.” Kingsley-Daniells at CSFB further argues that it is not in the arrangers’ interests to pull the wool over the dealers’ eyes because the roles can be reversed within a few weeks.

Increasing complexity

Some dealers complain that they are often given insufficient time ­ as little as a day or two ­ to review documentation and decide whether to join the programme as an official dealer. Kingsley-Daniells says, though, that this is rarely the fault of the arranger. “If, as dealers, we do only get a couple of days to review documentation, it’s invariably not the arranger driving the accelerated timetable,” she says. “On the contrary, the arranger is usually helpful ­ apologetic even ­ phoning us up and explaining the situation to us.”

Both Elizabeth Pilcher, an associate in the transaction management group at Morgan Stanley, and Mackay from Merrill Lynch ­ the two banks most often mentioned as the main culprits ­ suggest that at least a week should be given to review the documents.

In future, arrangers will need to pay more attention to the important job of updating programmes. As documentation and the securities issued off MTN programmes become more complex, more mistakes will be made.

Lawyers are especially aware of this problem. “A popular misconception is that an EMTN programme is a panacea for everything,” says Voisin of Linklaters. Adds Mark Welling, partner in the international capital markets section at law firm Allen & Overy: “These are sophisticated legal documents with sophisticated financings off the programmes, and occasionally you get people working on them who overestimate the standardization of the documentation and underestimate its sophistication, especially when the programme is already active.” As a result, says Kingsley-Daniells of CS First Boston, “you sometimes get issuers trying to do unusual transactions off programmes which simply don’t provide for them”.

Such problems are being addressed by the new MTN committee of the International Primary Markets Association. The committee, set up six months ago, is drafting recommendations on the legal and documentation aspects of setting up an MTN programme. “The advantage of the guidelines,” says one arranger, “will be that we shall have recourse to something concrete if anything goes wrong. That said, I would estimate that, whatever they suggest, you’ll find that between 80% and 90% of arrangers already do it.”

Now that most European sovereigns, banks and corporates already have EMTN programmes, arrangers are looking to expand business into other areas, particularly emerging markets such as Latin America (where EMTNs are already common), Asia and South Africa. They also see possibilities in the US, where corporates are beginning to understand the benefits of adding an EMTN programme to a US domestic one.

Morgan Stanley’s Lytle also sees opportunities in deepening the reach of EMTNs in markets that have already been tapped. “The main focus should be what EMTNs can do for the borrower,” he says. “The EMTN product can offer attractive funding opportunities to smaller banks and corporate issuers. It is not just for issuing behemoths.”

One thing is certain, though. Despite what some sceptics say, big investment banks regard the role of the arranger as an integral part of their business and vital to the success of the EMTN market. And as that market becomes ever more complex and the number of programmes increases, the role of the arranger will become even more important.

MTN arrangers league table from the outset,
January 1 1985-July 23 1996

MTN arrangers’ league table,
January 1 1995-July 23 1996