Advent of the non-deal roadshow

Back in the euphoric days of Latin American issuance the roadshow was a seminal event, taking credits across the world to meet investors who had never dreamt of owning Argentine or Brazilian paper, let alone that of Ecuador or Venezuela. Cross-over investors were being wined and dined and given serious economic data on countries they had never visited and only knew about in cliché terms. Such was the search for yield that the strength of an issuer’s story was sometimes less important than an investor’s belief that he was not acting alone and would not look stupid in a crisis.

But then the crises came – first in October 1997 following the Asian downturn and again in August as Russia collapsed – and Latin America’s new investors turned out to be fair-weather friends. The cross-over investors deserted in droves, as did the hedge funds, apart from those with short positions they couldn’t cover or arbitrages that couldn’t easily be unwound. Once again Latin America was being treated by many as just carnivals and samba rather than as a serious capital-markets prospect. Issuers were appalled that even such structures as 1998’s spread floaters designed to withstand volatility had failed them. They began to reassess who were their true supporters. The final list they came up with seems to have been a short one.

For now, as the market gingerly recovers from the dead months of August and September, capital-raising is hardly a public exercise at all but a private affair between well-known borrowers and their longtime, loyal investors. Sophisticated sovereign credits such as Argentina are much more likely to hold one-on-one briefings with key investors than adopt the scatter-gun approach of a roadshow. Besides, in current volatile markets a roadshow for a specific deal is virtually out of the question. As credits such as Argentina, Argentine oil company YPF and Venezuela inch back into the market, the typical style of deal is a modest, reverse-enquiry-led transaction, with a small pool of investors – Venezuela’s 10-year Dm180 million ($100 million) deal was a private placement – in which book-building, pricing and sales are completed in a couple of days and preferably less time. Markets are tetchy, with “many more bad days than good” as one banker puts it, so even carrying the process overnight adds significantly to the risk. Rather than bring new issues, borrowers are more often reopening existing bonds, as a way of providing liquidity that would otherwise be hard to find.

The old-style banner transaction, whereby a credit went on a three-week roadshow taking in Asia, Europe and the US, and book-building was done over five days, would not work in the current climate. The only roadshow possible is a non-deal one where investors are invited to hear a general story, not knowing when a bond is likely to be issued. With deals few and far between, a banker quips: “There may be a league table in 1999 for the house doing the most non-deal roadshows.”

Alternatively, investors could find themselves attending the roadshow after they have bought the deal, as in the case of a Brazilian five-year €500 million ($430 million) deal in February.”It’s the first time in my life that we did the roadshow after the deal,” says Luc Cardyn, head of emerging-market syndicate at Paribas in London. “We planned to have the roadshow at the end of February and to launch the deal in March. But after the release of the mandate we had so many calls from investors that we decided to go ahead earlier and were able to increase it from €250 million to €500 million. We didn’t want to delay in case sentiment changed.”

Cardyn adds: “The roadshow concept is becoming more and more difficult. Now I say to customers you don’t know what the market will be doing in two to three weeks’ time. It makes sense to separate the deal from the roadshow. Even if the market is not performing now it still may be a good time to do the roadshow so the message is out when conditions are right. Frequent issuers should probably do a roadshow once or twice a year to get their story out to the big investors and keep up the contacts.”

Some of these latest borrowing trends have been developing for some time. This suggests they may have a degree of permanence. Moreover, the volatility that spawned them doesn’t seem about to go away. These developments are mirrored in other capital markets such as syndicated loans where club deals between a handful of banks have replaced large syndications.

The early part of 1998 in the international bond markets was characterized by Latin reopenings and speedy deals. JP Morgan did two reopenings for Argentina, a $500 million reopening of the 2027 global bond in February and a $750 million addition to the 2017 global the following month.

In March a $500 million reopening of the Brazil 2027 was done by JP Morgan and Goldman Sachs. There is of course a link between these reopenings and the Asian-led crisis of the previous October but it may have set something more lasting in train.

“Back in February there had been little issuance since the Asian crisis and the challenge was how to get the ball rolling again,” says Michael Schoen, vice-president of emerging market syndicate at JP Morgan. “We had seen interest in attractive assets such as Argentina but with so much volatility and uncertainty the new-issuance process was problematic. The aim was to shorten the timeframe and go direct to interested investors. A reopening is the ideal way to do this.”

But a reopening is also quicker, cheaper, can be done quietly and creates liquidity, so why would a borrower want to return to slow, more expensive and public deals if and when so-called normality returns? If they do decide there’s no sense to this, more Latin credits will go on non-deal roadshows or simply holdmeetings with individual investors.

Goldman Sachs, for example, put on a roadshow for Colombia in September just after the elections to introduce new finance minister Juan Restrepo. Goldman did three deals for Colombia in 1998 including a 10-year $500 million, run jointly with Salomon Brothers in March, a $500 million seven-year spread floater in July with Merrill and a $150 million dual-currency private placement in June. The 10-year was done in the typical swift fashion of 1998, at short notice and with the whole deal completed within 24 hours of pricing.

“If we had done a traditional roadshow and bookbuilding, it might have been great when we started out but it might not have been possible to do the deal done later on,” says John McIntire, a managing director at Goldman Sachs, in explaining how the firm has adapted to market conditions. He says that “Bloomberg roadshows” (in which slides and audio presentations were put on investors’ screens) were done for the Colombia 10-year and a $1 billion spread floater for Mexican state oil company Pemex in July. “We haven’t done a traditional Latin American roadshow for the whole year,” adds McIntire.

Lavish expense

A roadshow cost tens of thousands of dollars to put on but the price varies enormously depending on how many places it visits and the degree of luxury lavished on participants. If the finance minister and his team travel by private jet, costs escalate. Yet if this is done in the interests of expediency and succeeds in getting the deal out faster, and before the next market downturn, it’s worth the outlay. Normally the bookrunner pays for the roadshow and recoups the cost from the underwriting fees but bankers say things may change with the advent of the non-deal roadshow.

“There could be several different solutions as a result of negotiations between the borrower and the bookrunner,” says Nick Hanbury-Williams, group head of new issues with ABN Amro, which has had a busy year in the Latin markets. Among the house’s most notable deals were a 10-year €750 million deal for Argentina in April, done jointly with Merrill Lynch and Paribas, which was the first global € bond for an emerging-market sovereign, and a 30-year €750 million bond, again for Argentina, launched in May in which the five-yearly coupons were sold as zero-coupon strips, so creating a strip curve for Argentina in one go.

“If we had done several deals for a borrower we might well pay for the cost of a roadshow,” says Hanbury-Williams, “but if a borrower just rang up and said it wanted to do some marketing we might want to negotiate a fee for that.” Clearly what bankers are wary of is paying for a non-deal roadshow only to see the next deal go to a competitor.

Not all bankers think the conventional roadshow has disappeared. Says Paul Tregidgo, head of the Latin American debt capital markets group at Credit Suisse First Boston: “Non-deal roadshows are useful but nothing succeeds in getting attention like a transaction. They are going to be very practically focused and very targeted in future.” Most bankers agree that a roadshow is essential for first-time borrowers and for most private credits. Two of CSFB’s notable deals of 1998 provide examples of this – a $200 milion five-year deal for Cost Rica in April which had a full roadshow just after a national election and involved both incoming and outgoing finance ministers, and a yankee bond for Bestel, a start-up Mexican telecoms company, in May, again with a full roadshow mounted to explain to investors how a high-yield structure – a zero coupon for the first three years, cash interest of 12.75% for the remaining four and equity warrants – was being applied to an unrated emerging market corporate. NationsBank Montgomery Securities was joint bookrunner on the Bestel deal.

Speed of execution is a key feature of the new environment and again this has been in evidence all year. Morgan Stanley, which stormed to the top of this year’s bookrunner league table from ninth last year on the back of a vastly improved sovereign performance, has been pulling out the stops in this area. It led a $1 billion 10-year global for Mexico in March seizing a market opportunity and stealing a march on a number of other sovereigns with issuance plans. The idea for the deal was taken by Morgan Stanley to the Mexican government, which gave an answer within a week. The whole deal was then wrapped up in 36 hours.

For smaller deals even faster times are possible. The Dm500 million step-down 10-year (puttable at five years) deal done by Morgan Stanley for Argentina in late October was done in European trading hours with the book-building in the morning and the pricing and selling in the afternoon. “In these hostile conditions it’s best to avoid overnight risk if possible,” says Francisco Pujol, head of Latin American sovereign debt origination at Morgan Stanley in New York.

The initial 14% coupon for the deal was high and launch spreads of 762 basis points over Bunds made the cost to Argentina almost double what it paid to issue seven-year Deutschmark paper in July. However, it was the first new issue of the five forays into the market by Argentina since the Russia crisis, so market observers congratulate Morgan Stanley for getting it done at all. “The deal was based on a reverse enquiry but not a typical one where a $50 million or $70 million reverse enquiry forms the bulk of a total $100 million trade,” says Pujol. “We found that we could onsell to numerous accounts and we started with 65 boosting that to 350 tickets after the flowback.”

Such an achievement wasn’t easy, says Pujol. “In the past you would have an Italian retail bank, for example, buying $30 million of a deal and then onselling to customers. Now managers won’t take any risk. They won’t buy unless they have concrete orders.”

In mid-November Argentina came back to the market in full force to lauch a $1 billion seven-year with warrants giving investors the opportunity to buy 30-year Argentina bonds in 12 months’ time. The deal, led by JP Morgan and Deutsche Bank, was the largest emerging-markets bond since the Russia crisis.

Apart from these two deals the other three Argentine deals have been reopenings – a $250 million add-on to 2017s led by Goldman Sachs which kicked things off in mid-October, followed by a $300 million reopening of the 06s by Chase and Sfr100 million ($72 million) of the 03 by CSFB. These reopenings have not been without controversy. Critics say they were bought by traders short in the repo market rather than new customers. Since the bonds were sometimes issued slightly below the prevailing price they offer a cheap exit for traders betting against a country’s bonds. “It’s not terribly attractive to a sovereign to be assisting the short traders of its bonds,” says a banker. Adds another: “We need to go through this phase before we can get onto genuine new issuance.”

Goldman’s McIntire says of his firm’s reopening for Argentina: “The competitors couldn’t believe it was a real deal. They thought it was a hedge-fund deal or that we had bought it all ourselves, but I can tell you they were real investors.”

One of the difficulties of reopenings is making the new bonds fungible with the existing bonds. Under US tax rules the add-on can be priced at a discount to par of not more than 25bp times the years to maturity, otherwise tax has to be paid on the discount. For a 20-year deal this means the bond has to be trading at 95 and above. Only a limited number of Latin bonds are trading at levels that make reopenings possible. An even greater difficulty is that if add-on bonds don’t meet these requirements they get assigned a different registration number and are not fungible with the original bonds.

The other problem is that only sovereigns with autonomous debt-management teams can move fast enough to take advantage of these market opportunities. Argentina as the most sophisticated borrower in the region is the most nimble, followed by Mexico. Other governments impose restrictions designed to ensure a level playing field in the awarding of mandates and a transparent process. Brazil insists on public tenders for mandates which makes it less easy for them to take up new ideas requiring quick decisions and execution, although there are signs of increasing flexibility for some sub-sovereign borrowers such as Petrobrás. Venezuela has even more onerous conditions, following a political row about the terms of the Brady exchange. With Venezuelan bonds the money is allocated to particular projects and it is difficult to renegotiate mandates to reflect changed market conditions. A US dollar mandate was given to JP Morgan earlier this year and a Deutschmark one to ABN Amro. The $500 million 10-year was brought in late July and proved to be one of the last deals before the market closed down because of Russia’s troubles. A hurried roadshow was conducted before the bond was placed with a coupon of 13.625%, a record for a Latin sovereign issue at the time but now surpassed by Argentina’s recent 14%. “We thought that not to do a roadshow would be unviable for Venezuela because there were so many questions that needed answering such as as the price of oil and the forthcoming elections that could bring [Hugo] Chávez to power,” says Schoen of JP Morgan. “The market was very choppy so we did a very fast roadshow – a meeting in London, a breakfast in New York and we invited the investors in Boston up to New York for a lunch.”

Then, in August and September the market fell apart and the Deutschmark deal was put on hold only to be revived in October as a private placement for Dm180 million with a step-down coupon of 10% for two years and 7.375% thereafter. Since these coupons are way off market levels the view among bankers is that the issue price must have been below par and that this was probably done to avoid having to take the deal back to the congress, especially just near to an election, to get the terms changed. ABN Amro confirms the deal took place but refuses to comment on the price.

Pockets of demand

With all these recent deals – new issues, reopenings or private placements – the banks have had to work hard to find pockets of demand. Merrill Lynch brought a $100 million three-year issue for the triple-A rated multilateral Corporación Andina de Fomento in late September, paving the way for others to get back into the market.

“CAF was the first Latin American issuer to be selling a deal in what has been the worst environment anyone can remember for emerging markets,” says Keith Horn, head of Latin American capital markets at Merrill Lynch. Talking generally about current conditions, he says: “You have to move very carefully in this environment. You can’t just throw a deal out there and assume it’s going to be well received. You have to do more reconnaissance work and understand where the buying potential is.”

“There is also a psychological barrier for issuers to overcome in getting used to the new conditions and the concessions they will have to make. Sophisticated issuers recognize this more quickly than others.”

One way to get deals done is through structures and guarantees. In October Banco Santander Chile became the first private-sector Latin America issuer to tap the market since the Russia crisis by offering a $200 million seven-year deal using a wrap from monoline insurer MBIA to give it a triple-A rating. A wrap is a guarantee that provides credit enhancement. Also benefiting the deal was the status of parent Banco Santander as a Spanish, non-emerging market bank. Even so, the deal, led by JP Morgan, was priced at 210bp over treasuries when comparable deals were trading at between 52bp and 110bp over, showing how tough conditions are.

Says Richard Luddington, global head of emerging-market debt syndicate for JP Morgan: “More of my time at present is spent looking at structured transactions as opposed to benchmarks in an effort to find the right fit to attract investors.”

Retreat of the hedge funds

Investors, report most bankers, are thin on the ground and able to dictate terms. “The cross-over buyer has been scared away and the hedge funds have retreated from many arbitrage plays. In these conditions borrowers can’t afford not to consider puttable bonds simply because of the repayment uncertainties, they have to adapt to the market,” says Luddington.

Yet in the course of 1998 it is a certain type of structured deal – the spread floater transactions – that have produced the greatest disappointment. These bonds have coupons that are resettable according to a formula or an auction enabling coupons to rise in a deteriorating market. The idea was that if the coupon could adjust, capital values would be protected. But in the turmoil of August and September when investors became concerned about whether a credit would default or not the bonds tumbled in price along with standard global bonds. Argentina, Brazilian development bank BNDES, Pemex and Colombia were the Latin issuers of such bonds.

“Investors have been quite vocal in their disappointment at the performance of these bonds,” says Luddington of JP Morgan, which was not one of the houses arranging this kind of deal. “They were affected by the extreme movement in the market and then there was only one place to go to get out – back to the sole lead manager. The underlying assumption that these bonds had inherent capital protection has been shown to be false.”

Merrill Lynch put together a spread-adjusted note for Argentina – the first in the spread floater series – in late December 1997. Horn of Merrill says of the deal: “They haven’t traded particularly well but they were designed to protect the investor in the event of credit deterioration, which is exactly what they have done. Investors have benefited although issuers are understandably not delighted about the coupons they are paying.”

Morgan Stanley did a floating-rate accrual note for $1 billion for Argentina in April. Morgan’s Pujol says: “When you have that level of hysteria the concept doesn’t hold. Investors were marking down every emerging-market bond because of default fears.”

The difficulties in the bond market are also reflected in the syndicated loan market, where club deals – involving a handful of major banks – have replaced syndications. Christopher Beale, global head of project finance at Citibank, estimates that the number of banks involved in large syndications has fallen from 200 a year-and-a-half ago to just 40 now. “Rather than one or two banks at the top selling to smaller banks, you are now left with the big banks with relationships with the sponsors,” he says. “The retail element has gone.”

The situation may become more difficult as bridge loans taken out to finance the purchase of privatization assets such as Telebrás in Brazil, which were to have been taken out in the bond markets, need to be refinanced. Yet for the most part large projects, which are of course long-term ventures, are not being held up by the financing situation although political-risk insurance and multilateral involvement have once again become prevalent. One recent club deal was the raising of $635 million in debt by a Citibank-led group for a $1.05 billion nitrogen-injection plant to supply Pemex in Mexico. “Strong projects like this are still getting finance,” says Beale. “Pemex is one of the best credits in Mexico, the project is strategic and all the output will go to Pemex.”

Says Murilo Kammer, executive director of Brazilian bank Unibanco: “With projects, if you have the concession for a limited period you have to go ahead or you will lose it. If the cost of capital is higher it just means you will get a lower return.”

With Brazilian interest rates still too high to make bonds attractive to issuers and with the equity market moribund, Kammer thinks that convertibles could be one way forward. “This would be an ideal structure because with an equity kicker interest rates could be lower but the problem is that funds tend to be either fixed income or equity with neither investing in convertibles. We are exploring with investors the idea of establishing a convertible fund,” says Kammer.

Encouraging signs

The good news in the current depressed capital market environment is that direct investment flows have not dried up. “It’s very encouraging to see that strategic investors are continuing to look at Latin America in a positive light notwithstanding the volatility in the market,” says Carlos Guimarães, managing director at Lehman Brothers, which has advised on a number of key strategic sales and privatizations. In the Telebrás deal, Lehman, together with Dresdner Kleinwort Benson, advised the Brazilian communications ministry on the structure of the sale, and then following the awarding of the underwriting mandate to Morgan Stanley, acted for Telefónica of Spain in the purchase of assets. It is also jointly advising BNDES on the sale structure of electricity generators CHESF and Eletronorte (which account for almost all the generation capacity of the Brazilian north-east) and is leading an effort to structure the sale of ComGas, the gas-distribution monopoly in the state of São Paulo. Lehman advised the owners of Banco Excel Económico on the sale of the bank to Banco Bilbao Vizcaya of Spain.

Says Guimarães: “We represent some important international strategic investors looking at several sectors across Latin America. This has not stopped in the current crisis, only the valuations have changed. In fact the number of buyers has picked up but sellers are more cautious.”

Valuation is a thorny problem in a volatile market. “You always run into discussions over the valuation of assets in terms of defining the price against the backdrop of a volatile market. One thing is the volatile market, the other thing is can [a major international player] afford not to be in Latin America.” The same may also hold true of portfolio investors once the shock waves of the current crisis have passed. ABN Amro reports that some European institutional players are setting up international investment operations, encompassing emerging markets, in preparation for the euro’s arrival. For some the old argument about diversification still holds good.