The national investor call that accompanied the inaugural yankee bond by the central bank of the Philippines was nothing if not sexy.
Investors who dialled up on April 10 to hear the central bank governor and ask him questions were left mystified. “Welcome to the world of wet bodies,” began the young male American voice. The recording went on to inform them that this was a “muscle fantasy line where young hunky male bodybuilders know how to train real hard”. Training real hard cost $3.99 a minute, but “you must be over 18”.
Dial-in calls are designed for those investors who cannot make it to roadshow presentations, and several had called in. Only then did lead manager Salomon Brothers realize there had been a hitch – the transposition of two digits in the 1-800 number distributed to the investment community.
The following day the deal was postponed, nearly a week into its US roadshows. The official line from the issuer, Banco Sentral ng Pilipinas, was that a spread of 220 basis points over US treasuries did not reflect “the appropriate credit spread for the Philippines”. The press release continued that the issuer planned to await appropriate market conditions. It was the first debut sovereign deal to be pulled this decade, say the joint lead managers. (The Philippines has issued sovereign bonds overseas before, but always in the name of the Republic of the Philippines and under the control of the department of finance.)
With a whimper, not a bang, out went a deal that had been flagged as a $1 billion landmark. It had fallen victim to internal squabbling, poor syndicate management and inflated egos. At least, that’s what the five members of the syndicate say. Some complain they learned the deal was pulled only when they read it on their Bloomberg screens.
The porno-line story is immensely embarrassing for Salomon, and was promptly denied when Euromoney put it to the US bulge-bracket firm.
Phil Bennett, the New York-based debt head for Salomon’s non-US business, was outraged at the accusations. He says the other members of the syndicate have created a “parallel reality”.
“I wish people in Asia would get back to basic standards,” says Bennett, referring to the amount of bad-mouthing that has accompanied the deal.
The porno-line incident he describes as “amazing”. He insists that another bank in the syndicate must have copied down the wrong number. He faxed Euromoney a copy of a memo dated April 7 on Salomon-headed notepaper which informed the syndicate members of the numbers for the investor call.
Salomon’s denial begins to unravel at this point. The memo said that the call would begin at 3.30pm with the password “Salomon” on the number 1-800-779-2639. When Euromoney rang this number, the voicemail of “Beverley Davis in the relocation department” answered.
Salomon then conceded that the number on the memo was wrong. A conversation between Salomon’s conference organizer and MCI apparently led to it being corrected to 1-800-779-2634, the number of the MCI conference centre. But a member of the Salomon syndicate desk in New York input the number incorrectly into the firm’s internal manifold system, which distributes information to all Salomon salesmen. The number he input was 1-800-799-2639, the number of the wet bodies line.
The porno-line incident was only the culmination of a series of misunderstandings which began as soon as the deal was mandated.
Mandate muddle
The debut 30-year and 100-year two-tranche issue for the Bangko Central ng Pilipinas got off on the wrong foot, because of the way it was mandated by the issuer. Senior roles – how senior is still a point of fierce debate – were given to Morgan Stanley, JP Morgan, Merrill Lynch, ING Barings and Citibank.
When the mandate was awarded on February 10, issuance of long-dated bonds looked like a no-brainer. The tightening of emerging market spreads had almost peaked, and US investors seemed to have an insatiable appetite to buy anything out of Asia – quite happily going out to 100-year maturities. The Philippines’ 20-year Brady-exchangeable bond was trading at 155bp over US treasuries, from a launch spread of 225bp over last autumn.
With anything seeming possible, a syndicate was put together that flouted the normal yankee market practice – where syndicate groups of four prevail – and seemed set to have six lead managers rather than the more normal one or two. The structure appeared to be a big thank-you to all those firms that had done the most to help the Philippines.
Just after Chinese New Year the six were told to bring a decision-maker and a relationship manager to a meeting at the central bank. It was presumed this was for the final cut. At 4.30pm on February 10, the bankers were summoned en masse into a room with 12 chairs, with each bank allocated two. It was clear that Salomon had won the senior role because its people – Trevor Rowe, chairman of Asia, and Hans Sicat, head of Philippines investment banking – had walked in last, with central bank governor Gabriel Singson.
Singson told everyone present that he wanted them to work together – the word “jointly” was used – and said he would give them 30 minutes to hammer out an agreement between themselves. He added that there was a monetary board meeting the next day which would approve the mandate. If they failed to agree, the next board meeting was one week later. Having put the pressure on he left the room.
It is at this point that Salomon’s and everyone else’s versions of events part company. The majority view (that is of everyone except Salomon) goes like this. The word “jointly” was seized on, and someone put it to Salomon’s most powerful man in Asia: “Well Trevor, I guess that means joint economics.” Rowe, who does not have a syndicate background, agreed that it did. Joint economics meant the fees for the deal would be split evenly, in spite of Salomon’s more senior role.
The next point was semantic. Salomon, it was agreed, would be designated lead manager and bookrunner, while everyone else would simply be called a lead manager.
Then the question of the fee structure was tackled. According to those present, the fees Salomon had asked for were almost as low as those a firm would expect to earn on an equivalent deal for an investment-grade US corporate. In one of the few moments of humour during the whole transaction, John McNiven, Merrill’s co-head of Asian capital markets, derided the fees with the remark: “These look like Dean Witter Discover rates” – a reference to the Morgan Stanley merger which had just been announced. There was little laughter from the Morgan Stanley contingent.
Joking aside, the majority in the room fought to bring the fees more into line with an emerging-market credit, and they say they succeeded. The bond was also changed to a global format, implying greater distribution outside the US.
The governor returned to ask whether an agreement had been reached, and was given a resounding “yes”. The next day the five joint lead managers sent a letter to Salomon confirming the agreement. It was not sent to the governor since this was supposed to be an agreement between the underwriters. Salomon did not reply to the letter, the joint lead managers say.
A week later they heard that the central bank wanted to re-cut the deal – at Salomon’s request. The central bank now informed the syndicate that Salomon must be compensated for its more senior position. It gave Salomon 25% of the fees and control of a pot that comprised 40% of the bonds. This meant the other lead managers each lost 2% of the fees, and had less bond retention because of the pot. They would still be designated as joint lead managers, but the bond was to be a yankee once again.
The other lead managers believe that Salomon’s syndicate desk in New York had been mortified to discover what Rowe had agreed to. They guess that Salomon won the senior role for two reasons. Salomon said it could do the 30-year deal at 150bp over treasuries. (The 20-year Brady exchangeable was then trading at 155bp over.) Second, Salomon committed the syndicate to covering all the issuer’s expenses. This is not normal practice.
The U-turn annoyed the group. But more annoying was the fact that Salomon had got the central bank to enforce it. Their understanding was that everyone in the room had been empowered to take a decision on behalf of his firm. The chairman of Salomon Brothers Asia, they assert, evidently didn’t have that power.
Salomon remembers it differently. Rowe and Bennett told Euromoney that nothing had been decided on February 10. “We told them we would give them our recommendations, and that subsequently arrangements would be made by New York syndicate, which is normal practice,” says Bennett. He was not at the meeting.
“The governor received a letter from the co-managers four days later,” continues Bennett, indicating that the contents of the letter bore no resemblance to agreements made – because there were none. “On February 20 the governor summoned all five co-managers back after he received recommendations from Salomon. He looked everyone in the eye and said ‘this is the way it will be’.”
“Misinformation”
On the touchy issue of titles he is equally adamant. “We were running the show. They were co-managers.” It was never agreed that the other five should have the title “joint lead managers”, he says.
Of the first meeting Rowe says: “The discussions weren’t in that level of detail. The governor gave broad directions as to what he wanted. The basis of the problem is that misinformation has been spread around.”
The other lead managers, or co-managers as they turned out to be, disagree. Says Thierry Porte, head of Asian capital markets for Morgan Stanley: “My understanding was that Salomon Brothers committed to joint economics and we would all be called joint lead managers. We went back and changed it at the request of the central bank. Why did it have to be changed if it wasn’t agreed in the first place?”
Porte’s remarks are backed up by the others who all signed a letter dated March 20 reiterating their concerns. It was addressed to Salomon’s New York syndicate chief Arthur Hyde. This was in response to a short letter from Hyde, which they received on February 28, asking them to address any questions in future to his staff in New York, not Hong Kong. The six-paragraph letter of March 20 was also copied to Salomon chief executive Deryck Maughan. The letter insisted: “Please note that in accordance with the agreement reached between Bangko Sentral ng Pilipinas and all of the syndicate members, we are all (including Salomon) designated as joint leads, not as ‘co-managers’.”
The letter continued: “As you may be aware from your Hong Kong office, it was the expressed wish of governor Singson that each participating member be ‘joint leads’, with Salomon holding the designation ‘joint lead and bookrunner’, conventions in the yankee market notwithstanding. This is not just a matter of semantics or terminology. The purpose of designating ‘joint leads’ was to recognize both past and future contributions of each firm for this important offering.”
Philippine central bankers, approached by Euromoney, were clearly bewildered by the subtleties of syndicate politics. Teddy Montecillo, the central bank official who runs the yankee bond committee which mandated the six banks, says of the February 10 meeting: “You have as many versions [of what happened] as people who are talking to you.”
He continues uncertainly: “I have never heard the term ‘joint-lead’. I do not know the meaning of such terminology. I cannot confirm exactly what was confirmed at the February 10 meeting. At the second meeting the governor gave the structure to everybody present. Everybody said ‘yes’. The details of the process you can get from the lead manager.”
But communications between Salomon and the other managers broke down to the point that they assert telephone calls were not returned. “The communication channels could have been a lot better,” says Andy Alcid, Citi’s head of Philippine capital markets.
A week before the roadshow, syndicate members admit they did get a phone call, but it was not what they had in mind. All were told by Salomon’s New York syndicate that they would no longer have any bonds of their own. There would be a 100% pot, controlled by Salomon.
Race to the roadshow
Salomon insists this was in line with what was said at the February 20 meeting: that other managers would be informed how Salomon’s New York syndicate wanted to structure the deal, when it was ready to tell them. Says Bennett: “A 100% pot is standard in the US market when there is a problematic situation – such as a tenuous market.”
This change (if change it was) was clearly to Salomon’s advantage. Only Salomon would know where all the bonds were placed, putting it in the best position to trade them. Other managers suggest this was a way for Salomon to recoup money from a deal in which it had already given away most of the fees.
The roadshow was a similarly exasperating experience, say the managers. They claim they were shut out of the one-on-one meetings between governor Singson and individual fund managers. But they were less concerned by this (fairly common) practice than by the large public presentations. They claim they were not given enough time to get their investors along.
On the final day of the due diligence in Manila, one of the managers asked for a copy of the roadshow schedule. The four Salomon representatives claimed not to possess a hard copy but promised to get the Hong Kong office to fax it. Two days later the fax arrived. Just three days later the roadshow began – on Thursday April 10.
Bennett claims it wasn’t possible to release information on the roadshow’s location until the SEC approved the registration B statement filed by the issuer. On Friday April 4 at 5.30pm Salomon filed the public document for the Philippines. On Monday at 7am everyone was eligible to talk about the roadshow, he says. Lists of times and dates were then sent out.
But one of the syndicate managers says notice of roadshow dates is often given “weeks” rather than days in advance. The SEC appears relaxed on the issue too. “The commission has no articulated policy on this matter,” says John Heine, the SEC’s head of public affairs. He adds that the matter is left to the discretion of the lead underwriter. These comments suggest it was purely Salomon’s judgement – or perhaps that of its lawyers – that governed the release of the timetable, rather than the strictures of SEC regulations.
Things then went from bad to worse. Robert Denham, chairman of Salomon Brothers, commented just before the roadshow: “We expect the Republic of the Philippines to be very well received in the international capital markets. I do believe that the very strong fiscal policy that has been followed by the Philippines government is recognized by global investors.” But roadshow attendances were patchy. The issuer was taken to Chicago, Boston and New York. The numbers in Boston were good, but the New York turnout was poor, says one source, who estimates that only 30 people were there and half of those were from the Philippines embassy or Salomon.
This is not surprising given the timing. The New York roadshow came on the back of a terrible producer-prices figure on Friday April 11. This signalled the first whiff of inflation in the US economy and created speculation that the Federal Reserve’s one interest rate increase might not be sufficient. Treasury yields rose by 15 basis points.
“The market said forget about credit,” says Bennett. “Let’s just stay out. Let’s get into cash. Let’s shorten our duration.” Nevertheless 155 accounts were spoken to in total. “Only three said they had a problem with the credit,” says Bennett, “the other 152 had a problem with the market.” However, Salomon gave the other managers little idea how bad things were, they claim. At the bring-down due diligence conference call – the process whereby the issuer is asked to confirm finally that the information in the prospectus is still valid – which took place on Tuesday at 8.45am New York time, one of the managers says he came off the phone with no idea that Salomon, just over six hours later, would pull the deal. But later that day the managers began to realize all was not well when Salomon called to ask what their thoughts were on pricing – one of the few calls they received from the bookrunner.
The market conditions on that Tuesday – the day before the planned launch – were good. Fresh data indicated that inflationary pressures had been exaggerated by Friday’s bleak number. The US bond market posted its biggest rally in two months, and pushed the 30-year yield down 8bp to 7.09%.
Against this backdrop the deal was pulled. According to the managers, Salomon had collected only $150 million of demand by Tuesday afternoon. Normally at least $600 million of demand would be expected at this stage for such a large deal – still rumoured at between $750 million and $1.25 billion. Salomon’s Bennett says only two of the managers indicated they had any demand. The borrower was told that ING Barings had made a particularly good effort.
The flow of information between lead manager and group was not considered good. A New York syndicate desk official notes that Salomon was pretty good at hinting about price talk, but was not so good at conveying where the book stood.
When it became clear that demand was poor, Salomon says it offered the borrower an alternative structure. The 100-year bond would be cancelled, the 30-year downsized to $400 million, and the price talk moved from 212bp-225bp to around 232bp-250bp. Salomon says it did not recommend proceeding at these levels – it only offered the borrower the choice.
That afternoon the deal was postponed. The managers give various accounts of how they heard. Some say they read it on a Bloomberg screen, others that the central bank tipped them off. Salomon’s version of the story is different. It says it called all the New York syndicate desks and sought their advice, asking what sort of interest they were seeing. All came back and said it was a tenuous market. Over the next two hours Salomon spoke to the syndicate group three times, on the last occasion reading over the phone a copy of the press release which said the deal was about to be postponed.
Postmortem
In the aftermath of the deal’s postponement, the managers began to ask what had gone wrong. One key question they had: why was the issue delayed until April when the mandate was won on February 10? Salomon responds that the due diligence for the SEC registration B statement was time-consuming.
But even if due diligence had been carried out as hastily as possible and even if the deal had simply run foul of bad markets, the other managers suggest Salomon showed poor judgement in not cancelling the roadshow altogether. The biggest embarrassment was subjecting the issuer to a roadshow and then pulling the issue at the eleventh hour. “We were advised to go on a roadshow,” says governor Singson. “Salomon Brothers decided. The lead underwriter prepared the schedule.”
Says Alcid of Citi: “It was surprising the roadshow went ahead, because at that point investors were beginning to pull out of emerging market issues in favour of higher-quality deals.”
One of those attending the roadshow was Peter Favila, chairman and president of Philippine National Bank. He was there ostensibly to see how a roadshow worked. It must have been an enlightening experience.
“The Philippines was not embarrassed,” says Salomon’s Rowe. “It is not embarrassing to talk to investors. We’ve done it many times. It is not pulling a deal. We went out to the market, talked to investors and, as a result of talking to investors and a tenuous market, the deal was deferred.”
Salomon says the Philippine deal was not alone in being postponed. The Asian Development Bank deferred a 10-year global bond, as did the National Bank of Hungary. Ecuador and Turkey also deferred.
But Salomon had launched a 10-year $600 million yankee for another south-east Asian sovereign only the week before – Thailand. Surely market intelligence gained on the Thai deal ought to have told it that the Philippines deal would stumble.
There is every indication that Thailand’s lead managers, Lehman Brothers and Salomon, tried to issue at 30 years as well as 10 years. The red-herring prospectus, a public document, has two spaces, suggesting that the leads went into the market with the intention of launching two tranches. One space is marked “note”, the other “bond”. The convention is that the note indicates an issue of 10 years or less, and the bond a considerably longer one. Only a 10-year note was issued.
If Thailand could not do a 30-year deal – and largely the same investors were being spoken to – Salomon should have been attuned to the dangers of exposing the Philippines to a 100-year and a 30-year. Then why go ahead? Critics of the Thai deal have a ready answer. For Thailand, spread expectations were widened considerably by the lead managers. The eventual price at 90bp over US treasuries was 10bp wider than China, tempting market participants to describe the deal as generously priced. (To be fair, Thailand was downgraded during the roadshow.)
A few members of the syndicate say Salomon wanted to widen spread expectation on the Philippines deal in a similar way. It wouldn’t do for the issuer to go home from a roadshow empty-handed. But Singson stood firm on the price. Unlike the Thais, who required the money for an infrastructure project, the Philippines’ central bank didn’t need the cash. The deal had to be a sell-out or not happen at all. Anything half-baked wouldn’t fit the bill.
Salomon denies all of the above interpretations and says the Thai deal was well priced, which is supported by the fact that it tightened to 88bp over US treasuries and stayed there. Furthermore, Salomon says it warned the Philippine central bank against doing a smaller deal, and advised it to postpone. The central bank’s motives for launching the deal are almost as fraught with politics as the syndicate itself.
Usually when a deal goes wrong and gets slammed by the competition, it is because it is mispriced. But at least in those instances the borrower gets its money. In this case the issuer did not need to the raise the money; what it cared about was scoring a success in the market.
Salomon says it cannot reveal details of price, because it is at the discretion of the borrower and is private information. Bennett finds the accusations and sniping “absolutely outrageous” and says: “We take exception at this nonsense. It’s unfair to us and the issuer. This is true disinformation.” But what of the mud-slinging by squawking competitors? There is an element of paranoia about this. Bennett says he suspects Euromoney was getting all its information from John McNiven of Merrill Lynch and added that he had been spotted talking to Euromoney on a cellular phone in Sydney airport.
Euromoney did talk to McNiven. However, Bennett has misinterpreted this incident. The conversation in question – which took place on Anzac day – was under way when McNiven spotted Salomon’s head of Asian debt capital markets, Stephen Roberts, walking around the airport. Roberts was not an easy man to contact at the time.
McNiven shouted over to his fellow Australian, “Heh, Steve, there’s a journalist here that wants to talk to you.” McNiven handed Roberts his mobile phone – not exactly a cloak-and-dagger gesture. Roberts, who referred to the deal fleetingly before having to depart, said with what must have been irony, “I’m sure we’ll say exactly the same as what John says.”
To close the conversation Roberts mentioned that he was scheduled to participate in a conference call with Euromoney the next day with Rowe and Bennett to discuss the deal. In the end Roberts didn’t make that call.
Changes are under way at Salomon. The former head of the global natural resources group in New York, Robert Morse, has just arrived in Hong Kong to be chief executive of Salomon Asia. Before his arrival this role was first shared by William Phillips and Rowe. But when Phillips, a former Barings’ banker, returned to London late last year, Salomon combined the roles of chairman and chief executive. Morse’s arrival signals a shift in the balance of power.
The Philippines deal and the mud-slinging and bad-mouthing it occasioned signals something else – a worrying level of testosterone pumping through the Asian capital markets. The battle to prove who is the biggest and best in the world’s highest growth region is not for the faint-hearted.
The debut Philippines yankee could still be issued any day, since the SEC shelf-registration remains valid. But will Salomon lead the sequel? Experience suggests it will take more than successfully alienating five of its fiercest competitors to keep the firm out.
