| Leading bookrunners of bond issues by German borrowers 1998 | ||||
| Rank | Amount ($m) | No. of. issues | (%) | |
| 1 | Deutsche Bank |
35,570 |
268 |
8.7 |
2 |
Landesbank Baden-Württemberg |
35,064 |
307 |
8.5 |
3 |
Dresdner Bank |
30,309 |
225 |
7.4 |
4 |
Westdeutsche Landesbank |
29,840 |
176 |
7.3 |
5 |
HypoVereinsbank |
26,487 |
424 |
6.4 |
6 |
Commerzbank |
24,331 |
244 |
5.9 |
7 |
DG Bank |
20,642 |
235 |
5.0 |
8 |
Norddeutsche Landesbank |
12,820 |
138 |
3.1 |
9 |
ABN Amro |
11,434 |
90 |
2.8 |
10 |
Goldman Sachs |
9,047 |
38 |
2.2 |
11 |
Morgan Stanley |
8,723 |
92 |
2.1 |
12 |
Bayerische Landesbank |
8,478 |
80 |
2.1 |
13 |
Bankgesellschaft Berlin |
8,328 |
145 |
2.0 |
14 |
Hamburgische Landesbank |
8,074 |
54 |
2.0 |
15 |
Deutsche Girozentrale-Deutsche Kommunalbank |
7,794 |
47 |
1.9 |
16 |
Barclays Capital |
7,171 |
26 |
1.7 |
17 |
Warburg Dillon Read |
7,095 |
38 |
1.7 |
18 |
Landesbank Hessen-Thüringen |
5,827 |
59 |
1.4 |
19 |
Credit Suisse First Boston |
5,733 |
39 |
1.4 |
20 |
Merrill Lynch |
5,671 |
35 |
1.4 |
21 |
HSBC |
5,081 |
54 |
1.2 |
22 |
WGZ-Bank |
5,078 |
55 |
1.2 |
23 |
SGZ Bank |
4,955 |
46 |
1.2 |
24 |
CDC Marchés |
4,899 |
50 |
1.2 |
25 |
Landesbank Sachsen |
4,626 |
59 |
1.1 |
Total |
410,700 |
2,900 |
100.0 |
|
| Source: Capital Data Bondware | ||||
When the French won benchmark status for their sovereign debt – though for shorter maturities rather than the more prestigious long end of the yield curve – many expected the Germans to be up in arms. Not so.
The Bundesbank is unperturbed to see the French get a foot in the door. “It’s hard for the German sovereign debtor to dominate every maturity and quite normal for other issuers to be important,” says Helmut Schieber, the Bundesbank directorate member responsible for capital and money markets. Translation: the French are welcome to it. The Bundesbank has always tried to dissuade the German finance ministry from issuing short-term paper, which the bank regards as beneath a triple-A-rated sovereign borrower.
Outside of the Bundesbank, the German banking sector seems similarly unconcerned about the new status of France’s sovereign debt. German paper may no longer monopolize the sovereign benchmark, but it is more dominant than ever in the mortgage-bond business. The German Pfandbrief – which can be backed either with mortgages or with public-sector assets – already adds up to greater volume than the Bund and issuers have a registered trademark that, as yet, no foreign rival has successfully imitated. Apart from Crédit Foncier de France, the German Pfandbrief banks have no serious competitors in euroland in terms of volume.
While finance minister Oskar Lafontaine is announcing a reduction in government borrowing, there’s no stopping the Pfandbrief issuers. Like backgammon players sensing victory, they marked the start of Emu by doubling: borrowing the same volumes in euros as they had previously borrowed in Deutschmarks. Nowadays a €500 million ($579 million) issue is considered to be on the small side.
The major German banks dominate: around two-thirds of all Pfandbrief issues are led by Deutsche Bank, Dresdner Bank, Commerzbank or DG Bank. It helps, of course, that several big Pfandbrief issuers are owned by the big German banks – for example, Rheinische Hypothekenbank by Commerzbank and Frankfurter Hypothekenbank by Deutsche.
Pfandbrief banks are also well placed in the Eurobond market as a whole. Between 1995 – when the jumbo market began – and January 1999, Hypothekenbank in Essen, DePfa and Allgemeine Hypothekenbank, were the world’s fourth, fifth and sixth largest private-sector Eurobond issuers respectively, after the European Investment Bank, Fannie Mae and the EBRD.
Many put this down to the fact that innovations seem to reach the Pfandbrief market first nowadays. Currently, Pfandbrief issuers are heading away from bookbuilding – except for globals – and now favour issuing structures where the syndicate banks start trading the new issue first, and then offer investors the paper through the secondary market.
Switch to credit
It’s a different story in the corporate bond market. Just $19 billion is outstanding in bonds issued by German corporates – a quarter of the total in France. Since the beginning of the year, when it became evident that investors would switch into credit instruments, international banks have been looking to increase their stake in this business. For once, there is no automatic advantage for the German banks.
Before Emu, the theory was that the international investment banks would be able to wrest away debt issuance business from the German banks. With a lot of new international investors buying Pfandbriefe, they argued, distribution would be decisive.
To date non-German banks are finding it harder than they thought to snatch that business away. “People thought that international houses would dominate because of their distribution capabilities,” says Jens Hoffmann, head of German debt capital markets at Goldman Sachs. “But so far, relationships [between German banks and their clients] have proved stronger.”
The real losers are the medium-size European banks, which used to be given syndicate positions because of their distribution capacity in domestic markets. Now all the big banks are talking directly to those domestic investors and syndicates are getting smaller.
But even so, it may only be a matter of time before the big German banks also begin feel the pain. The Deutschmark has vanished almost entirely as an issuing currency – more quickly than most syndicate heads had expected. One exception was Turkey’s Deutschmark issue in late January, which has been explained away as a freak case linked to the retail demand from Germany’s two million strong Turkish population. Unless the German banks can get the upper hand in the euro quickly, their natural domination of debt capital markets could disappear.
German banks could learn a lesson from the money markets, where they have moved with cunning swiftness. Helmut Schieber of the Bundesbank notes how German banks have played a “pivotal role” in channelling money-market transactions. At the end of last year they ran an advertising campaign for Euribor, although it is difficult to establish whether this was effective. Then, in a coordinated action in early January, the big German banks transacted massive money-market volumes, establishing the supremacy of Euribor and its overnight equivalent Eonia (euro overnight index average) within a week.
Since 1990, German intermediaries have learned a thing or two about establishing a favoured product. Fibor, the overnight index they tried to introduce then, never had a chance against Libor because there was no swap. This time, the swap market was established immediately.
Leading bookrunners of bond issues for German borrowers 1999 (to February 22) Amount ($m) No. of issues (%) 1 Commerzbank 11,388
69
11.9
2
Deutsche Bank
10,487
61
11.0
3
Dresdner Bank
8,623
38
9.0
4
HypoVereinsbank
7,232
47
7.6
5
Landesbank Baden-Württemberg
5,284
32
5.5
6
Westdeutsche Landesbank
5,054
26
5.3
7
ABN Amro
4,636
30
4.9
8
Morgan Stanley
3,889
14
4.1
9
DG Bank
3,674
28
3.9
10
Deutsche Girozentrale-Deutsche Kommunalbank
3,462
10
3.6
11
Goldman Sachs
2,331
6
2.4
12
Bayerische Landesbank
1,837
15
1.9
13
Salomon Smith Barney
1,541
7
1.6
14
Norddeutsche Landesbank
1,484
15
1.6
15
Lehman Brothers
1,422
6
1.5
16
SGZ
1,379
15
1.4
17
Warburg Dillon Read
1,369
5
1.4
18
Nomura Securities
1,233
7
1.3
19
Credit Suisse First Boston
1,179
4
1.2
20
CDC Marchés
1,098
12
1.2
21
HSBC
913
8
1.0
22
Bankgesellschaft Berlin
886
9
0.9
23
WGZ-Bank
850
11
0.9
24
Landesbank Sachsen
836
9
0.9
25
Royal Bank of Canada Dominion Securities
815
13
0.9
Total
95,425
356
100.0
Source: Capital Data Bondware The Eonia swap has already drawn level with forward-rate agreements, accounting for 40% of short-term products of up to two years, according to Achim Krämer, managing director in money markets at Deutsche Bank. Forward-rate agreements, overnight swaps and interest-rate swaps saw some 60% higher volume in January. The price for these instruments is quoted from Frankfurt. “Investors are shifting their focus from currency management to detailed interest-rate management, and are looking for yield pick-ups,” Krämer says.
The spread of German law
But for German banks to become the major intermediaries in euroland, certain German standards will have to gain broader acceptance. Although the country’s opaque accounting system is discredited, German law is quickly becoming more prominent in the capital markets. Once again, this has quite a lot to do with the power of the banks and the fact that Deutsche Bank’s in-house legal department is Germany’s biggest law firm.
“The German banks are increasingly pushing for [the use of] German law,” says Ian Jackson, partner at Clifford Chance in Frankfurt. “There’s a strong feeling out there that it doesn’t have to be English law for everything. Many big international deals are now transacted in German law.”
Jackson doubts whether two or more dominant legal systems will be able to co-exist in the capital markets indefinitely. “One of the barriers to the single marketplace is the different legal systems. Ultimately to have a single marketplace you should have just one system.” In the foreseeable future, he imagines “a middle way – English, German, French or Italian law for most transactions”.
With hindsight, the German capital market was built on four pillars: the issuers, the products, the intermediaries and – perhaps in the shakiest corner – Finanzplatz Frankfurt. As headquarters of Deutschmark business, Frankfurt has been vulnerable to frequent – and often justified – attacks on its local expertise, its tax problems, its regulators and more. Some of those faults are still there, but Frankfurt is nevertheless being viewed with new eyes by foreign banks looking for a base for their euroland business.
The potential is there for Frankfurt to become a major location for euro clearing. Chase, for instance, is setting up Frankfurt operations for euro clearing throughout Europe, rather than relying on alliances outside home markets, like some other banks. Bankers Trust, too, has chosen Frankfurt rather than London as its clearing headquarters, ostensibly this is because the UK is outside euroland. But it must also suit Bankers Trust’s intended merger partner, Deutsche Bank.
The euro gives European banks a genuine choice of systems to transact their bulk payments. The EAF 2 payments settlement system used in Frankfurt could help to draw market share in bulk payments – and indirectly the money market and repo business too – to the city. Ultimately such payment systems are likely to play a major role in determining where corporates locate their central cash management, although most European corporations have not yet made that leap.
Clearly, decisions have to be made. Goldman Sachs, for instance, trades Deutschmark products in Frankfurt – bonds, equities and derivatives. That may still make sense for Pfandbriefe, German corporate bonds and the sovereign benchmarks, but it is already meaningless to classify euro securities by nationality.
Most banks are waiting to see whether Frankfurt continues to attract enough new business to persuade them to shift their operations to the city. Some of this business could, theoretically, come from Luxembourg. Now that the Grand Duchy has been obliged to introduce a minimum reserve, banks there can no longer afford to pay better interest on deposits, and major businesses are likely to move out of the country. Frankfurt is a likely destination for many.
Full of optimism, the city of Frankfurt recently launched a plan for 15 new skyscrapers, which allow plenty of space for trading rooms. What better sign of a bright future could there be?
