Issuer: Capital One Bank
Amount: $1 billion
Launched: October 1997
Arranger: Morgan Stanley Dean Witter
“Our strategy doesn’t lend itself to sound bites,” claims Nigel Morris, president and chief operating officer of Capital One Financial Corporation. But this flamboyant ex-strategy consultant goes on to characterize his company’s approach as “attempting to reconcile the unreconcilable”.
The Virginia-based financial services company is now bringing its paradoxical style to the Euro-MTN market, signing a $1 billion programme arranged by Morgan Stanley Dean Witter for Capital One Bank. Nothing particularly remarkable in that, you may think. And Capital One could easily be dismissed as just one in the long line of US financial institutions entering the MTN market. But it stands out for two reasons: its low (triple B minus) credit rating and its brief history.
The company has been publicly listed for little more than three years – during which time its share price has tripled – and its roots go back less than a decade. It is the brainchild of Morris, and chief executive officer and chairman Richard Fairbank. As strategy consultants specializing in banking in the late 1980s, the pair saw the credit-card business as a sector ripe for innovation. According to Morris, they felt that banks were involved in credit cards “through some accident of nature”, and that the real crux of the business was “amassing enormous amounts of information on existing and prospective customers”. The idea was that products could then be tailored to meet individual needs – much like dealer-placed MTNs.
Their proprietary information-based strategy was eventually taken up by a small regional bank called Signet, based in Richmond, Virginia. After three years spent building the largest Oracle database in the world and exhaustively testing new products, the company pioneered the concept of balance-transfer credit cards in 1991.
Now a market standard in the US, balance transfer was for a year or so a virtual monopoly business for Capital One. By the time the rest of the market caught up, it had moved on to what it calls its “second-generation products”. By 1994, Capital One had outgrown Signet, and, in what Morris says was “a brave move”, it was spun off as a separate company by ex-CEO Bob Freeman.
The Signet portfolio’s original 1 million accounts have now grown to almost 11 million, and assets have increased from $1 billion to more than $13 billion. Capital One is now one of the top 10 issuers of Visa and MasterCard credit cards in the US. It’s an impressive story. But is it relevant to the MTN market?
“Our competitive advantage is that we test, learn and innovate,” says Morris. “And you have to innovate on both sides of your balance sheet, or else it gets lopsided, and you can’t achieve your destiny.”
On the funding side of the balance sheet, the Euro-MTN programme is the latest step in that process of innovation. But with several of Capital One’s credit-card rivals having already signed Euro-MTN or global MTN programmes, is the company in danger of becoming a follower rather than an innovator? That would run counter to Capital One’s philosophy summed up by David Willey, senior vice-president and treasurer of Capital One Bank, with another pithy aphorism: “The second people through the door miss a lot of opportunities.”
There may be similar names in the market, but there are no similar credits. To date, a single-A rating from either Moody’s or Standard & Poor’s has been seen as almost an unofficial entry requirement for any borrower seeking to be a frequent MTN issuer. The number of single A rated US banks in the market has doubled since the start of 1996. It’s a statistic that many see as evidence of a growing credit market in Europe.
Capital One will provide a test of how far this Euro-credit market has progressed. Carrying a rating of Baa3/BBB minus from the two major agencies – although IBCA’s rating of A minus is significantly higher – investors will need to do some work in order to understand the credit.
Willey is confident that Capital One can crack the European investor base, despite lacking the name-recognition it enjoys in the US. “European investors are interesting to us because they take the time to understand the company and the strategy, and want to know its people,” he argues. “They look beyond the superficial.”
Some dealers are less convinced. “There is a question whether the market is ready for Capital One,” says one. He points out that Household Finance Corporation, a smaller card issuer but a better credit than Capital One, enjoyed a great first year in the market, but has found the going much tougher since then. “It would seem that European investors have had their fill of Household already,” he says, adding: “I wonder whether there is that much room in the market for Capital One?”
Testing products before committing to a market is one of Capital One’s basic strategies, and Willey argues it has been applied to the MTN programme. Capital One first looked towards Europe when it established a global securitized debt programme in 1993, backed by its credit-card receivables. “Right away we began to focus on the European market, even though we were a little bit ahead of our time, as asset-backed securities were only just starting to penetrate into Europe,” he says.
In November 1993, both Morris and Willey visited European investors, and immediately began to see demand for Capital One’s asset-backed securities from European accounts. In 1995, it did its first asset-backed deal targeted specifically at European investors, and a year later began its diversification away from dollars, with a first repackaged cross-currency transaction, for Dm1 billion ($562 million). The Salomon Brothers deal won widespread acclaim for its innovative swap structure. This year it has done similar first-time deals in Swiss francs and Italian lire, and the securitization programme is now approaching $9 billion in outstandings.
But Morris and Willey also discovered that investors were interested in buying straightforward Capital One debt. Although they placed around $500 million of the company’s US bank debt into European accounts, there were many more investors eager for the product, but unable to buy off the US programme.
“We started looking at the possibility of a Euro-MTN programme in the spring of 1996,” says Susanna Tisa, director of capital markets at Capital One. “We started going to conferences, talking to investors, assessing anecdotally whether the interest was there to make it worthwhile. We found that it was.”
The company is well aware that coming to the market with such a low rating is venturing into the unknown. “As a triple B minus credit I think that we’re in front of the curve,” agrees Willey. “But with monetary union, currency plays are, to some extent, going to have to be replaced with credit work. The more forward-thinking of investors are already engaging in that with gusto.”
The credit spectrum in the Euromarket has certainly widened in the last year or so, with single A names now widely accepted. But dealers point out that European investors still lag far behind their US counterparts in terms of credit research.
Tiina Lee, director and head of EMTNs at Deutsche Morgan Grenfell, sees the Capital One programme as a testing ground. “The market is not officially open to all triple B credit-card issuers,” she says. “But if they’re able to sell themselves in the right way, then I think it will work.”
If it comes down to selling, Capital One should not be found wanting. Strategic marketing is in its blood, and according to DMG’s Lee, Morris is the perfect salesman: “You need someone who can convey the philosophy of the company, because that is what this market is all about.” And in Morris, she adds, Capital One has “a real evangelist”.
