Issuer: Abbey National
Amount: Dm100 million
Maturity: 2 years
Arranged: March 25 1997
It was one of the most hotly contested trades in the MTN market, for one of its most valuable issuers. And it was also a milestone for the Euro-MTN market when a borrower finally executed its 1,000th deal, the first time this has ever happened.
The trade was executed at the end of March, with all of Abbey National’s dealer group aware that the “millennium” trade was about to be done, but none being quiet sure who would get it, or where exactly the deal they were offering ranked in Abbey’s countdown to 1,000. At Euromoney’s inaugural MTN conference in mid-March, Abbey’s borrowing supremo Alex Braun gave a hint that the millennium was approaching, at which point some of its dealer group started to get more creative. Braun’s deputy, Alisdair McDougall, just back from two weeks of skiing in the US and nicely tanned took charge of the eventual deal.
Abbey, which does between 120 and 150 private MTN trades a year, did trade number 997 with Sumitomo Finance. It was a structured Italian lira private placement with coupon step-ups and embedded call options.
“Abbey National has been one of the most active and prestigious borrowers in the MTN market for many years, and there was a certain amount of competition between dealers to do the 1,000th trade,” says Bruce Cairnduff, Sumitomo’s head of MTNs. “Sumitomo Finance did their 997th trade, which is like being nominated for an Oscar. We made it to the last four, but lost out to someone else on the day.” Cairnduff, who joined last year from Lehman Brothers, is not in Abbey’s dealer group. Nikko did trade number 998, but most galling of all was JP Morgan’s coming so near and yet so far with 999, a simple 10-year $10 million callable. David Marks, Morgan’s MTN chief, was distressed to find out later that he had come so close.
The eventual winner was Goldman Sachs, which approached Abbey at around 10am on Tuesday March 25 with a trade based on Italy’s chances of entering the first round of European monetary union. Nor was it an isolated trade the investor was reversing a position it had taken through another Abbey MTN in December.
The original trade was a Dm100 million divergence structure, in which the investor was taking the view that Italian government bond spreads had tightened as far as they could against German Bunds and would widen. The investor took its position when the spread was at 120 basis points. By the end of February the spread was trading at 210bp and Abbey allowed the investor to strip the option from the bond and take a profit. Goldman says the investor a large European fund was using this play to cover a long position it had in Italian government bonds.
It was the investor’s renewed optimism on the direction of Italian spreads which gave Abbey the opportunity to execute its 1,000th deal. The investor wanted to buy Dm100 million of bonds which bet on the future convergence of Italian and German spreads ultimately a bet on how likely the market thinks it is that Italy will join the first round of Emu.
“The investor was happy to buy the Abbey name again,” says Jonathan Gittos, the Goldman MTN trader who executed the trade with his colleague Carolyn Coombs. “It was important that a borrower was selected that can make a quick response. One of the reasons why Abbey is up to 1,000 issues is that it responds very quickly and prices structured note issues reasonably.” The trade was executed at a spread of 200bp and has a knockout option: the investor can lose the entire coupon if the spread ever widens above 252bp. However things get interesting should the spread tighten: that increases the coupon. If Italian government bonds were ever to trade flat to German Bunds, for example, the coupon would reach 17.64%.
According to the term-sheet the spread is calculated on the difference between the Italian lira mid-market 10-year swap rate minus the Deutschmark mid-market 10-year swap rate with reference to Reuters pages ICAS and ICAR. The spread is calculated between 8am and 6pm London time on any London business day from March 25 1997 until two days before April 8 1999. The formula for calculating the coupon is:
7.0 x (2.52% spreadF) x notional
The bonds will mature in April 1999, after the planned start of Emu.
Abbey’s only exposure in the trade is an interest-rate swap with Goldman Sachs as counterparty. (Should Goldman default, Abbey would have to pay the coupons itself.) A delighted Gittos found out only afterwards that the trade was the all-important 1,000th, although he had known for a week that it was upcoming. “We knew it was an important anniversary for Abbey,” says Gittos. “But we were lucky that, when it got to 1,000, we had an investor who wanted to do something. It was a happy coincidence.”
Abbey, which set up its programme in 1990 and does an average $15 million a trade, has 13 dealers in its group, and raised $4 billion from Euro-MTNs last year.
David Marks concedes that his former Morgan colleague Gittos executed a worthy trade but jokes: “If we had known our trade was 999 we would have put a floater on our books.” Marks can take solace that at least Morgan still holds the record for arranging Abbey’s biggest ever MTN to date a $1 billion issue that was sold to a single investor.
“They are the benchmark of professionalism,” adds Marks. “And they probably see more flows than any other issuer.” The other house that came close to victory in this MTN equivalent of a penalty shoot-out was UBS, which executed trade number 1,001.
For Abbey’s Braun, who has worked on the programme since its inception, it is a moment of triumph. “The MTN is the backbone of our funding programme,” he says. “And we are delighted we’ve been so successful.”
The thing which is more remarkable about Abbey’s reaching the milestone first is that the 1,000 does not include public Eurobonds which it launches off a separate programme.
It’s rivals have a way to go to catch up too. It’s nearest competitors Beta and GECC have done half as many as it has.
He plans to celebrate, but not in his usual way by challenging his intermediaries to an afternoon of go-kart racing. “We’re going to have a party for the whole dealer group and Bruce,” he says, referring to Cairnduff of Sumitomo, which is currently not a dealer.
