Issuer: Republic of Finland
Amount: €525 million
Launched: 15 December
Lead manager: HSBC Markets,Merrill Lynch, Paribas
Christmas activity in the Eurobond markets is a rarity in itself. To have a minor war break out between the lead managers and the syndicate is especially unseasonal. The ill-will generated by the Finland deal shows how keen banks are, at the start of the euro bond market, to preserve any proprietary distribution strength in their home markets from foreign competition.
To add a twist of irony, the conflict was the direct result of the lead managers and the issuer trying to manufacture a water-tight deal to avoid orders doubling up and creating a false impression of demand in a tricky market on the eve of the euro launch
Together the leads and the issuer – led by director of funding Satu Huber – decided to run a two-tier issue: HSBC, Merrill Lynch and Paribas would jointly underwrite €375 million, and be paid 25 basis points in fees. The remaining €150 million was to be sold through a pot system. “We announced our intention to launch on the Friday evening [the 11th],” says Satu Huber Finland’s director of finance. “We wanted each of our relationship banks to have a fair chance to participate, but also wanted the deal to be a success for us and the investors. Because the banks only had eight hours on the Monday to gauge investor demand we decided to have a pot system. The last thing we wanted was a deal inflated in size by doubling up orders.” And as there was no underwriting risk involved in this portion, the fees were lowered to 15 basis points.
The logic behind the move seems sound enough. Here was one of Europe’s smaller sovereign issuers willing to add a third fungible tranche to an issue – the other two elements were Finland’s Dm1 billion and €500 million launched the previous month – which had been designed to provide a large liquid benchmark and to broaden its investor base. What’s more, the proceeds count towards the 1999 budget requirements (the approval was passed just five days before the bond was launched). But it was doing so at one of the worst possible times: year-long market volatility, investors winding down for Christmas in any case, but also shutting down early to concentrate on preparing their systems for the changeover to the euro. Any deal launched at this stage of the year would have to be very carefully marketed and placed to avoid either the issuer or the investor suffering from volatility in thin markets. Hence the pot system. “Given that things had slowed down dramatically we realized that we needed to ensure that we had maximum control of the issue,” says Paul Richards, syndicate head at Merrill Lynch. “The pot system was the way to do it.” It was also meant to serve as a way of preparing for when Finland starts to sell its bonds through auction rather than a syndicate, which could happen later this year.
The plan didn’t go down so well with the banks invited to join the syndicate – 29 in all. On Monday 14th, the day before launch, all 29 were sent a fax by the lead managers asking them to return the lists of investors who would be buying the bonds. This had many of the syndicate heads fuming. For a start, many European institutional investors are still uncomfortable with name give-up. But more importantly from the selling group’s point of view is that the request was seen as a ruse by the lead managers to extend their own list of European investors. The response of the leads was simple: “The pot system works very well in the US,” says Richards. “Banks regularly submit investor names to each other without complaint. We wondered whether those who voiced a reluctance to submit simply couldn’t find any accounts to buy the bonds.”
And there seems to be an assumption from all three leads that the 14 banks which did participate were happy with the system. Not so, unfortunately. “The pot system is something you rarely find in the Euromarkets, and for good reason,” says the syndicate head at one of the European houses which did get some bonds. “In the US every big house knows the same accounts, and the forms are registered and in the public domain. Over here the local players have more extensive relationships, and all have clients the others don’t have. There’s no way we’re going to give that up.”
This is the crux of the matter: for many of the small to medium-size European banks their local relationships could prove to be one of their main advantages in the eurozone. Paribas and Merrill have both put a huge effort into marketing themselves as the eurozone banks, but it is questionable whether they have a particularly broad distribution capability beyond their home turf (or in Merrill’s case, its adoptive home turf, the UK) or beyond the large accounts abroad. And HSBC, despite having lead several euro issues, is regarded primarily as a sterling bond house. None has good access to the second tier of investors around Europe, yet the selling group of Dutch, French, German Finnish, Swiss, Italian, British, and even Japanese banks did.
Of course, as a syndicate official at HSBC puts it: “the bulk of investors in this type of deal are the same as those that buy dollar globals or yankees and have been well exposed to the name give up process.” But the strong negative reaction from virtually every bank in the selling group proves that it is a very sensitive issue – one the leads must have been aware of, leading some syndicate members to view the request as a blatant attempt to pull a fast one.
In the event, most of the banks seem to have devised ways around it. “There was no way we were going to give up the names,” says one bank syndicate head. “Why should we give competitors information to help them build up a distribution network in another country.” One scheme was to use the issuer as a go-between. “Some of the banks rang us up and said they wouldn’t tell the leads who their investors were, but had no problem in telling us,” says Huber. “So they’d convince us about the investors, and we’d convince the lead managers.” Others chose a different route, preferring to mask the real end investors by stating that their own asset-management arms were the sole ticket buyers.
One other aspect of the deal annoyed the selling group – the fees. The leads took 5 of the 15 basis points from the selling group as a fee for arranging and distributing the bonds to the other houses. “It’s not a Euromarket practice,” says one member of the selling group “The leads should be paid the same as the rest of us.”
But no one is suggesting that this should be the model for future. “I’m not recommending this structure for all deals,” explains Richards at Merrill. “It was used for the unique set of circumstances prevailing at the time of the launch.”
As for the deal, it at least turned out to be a success, with Richards pointing to the lack of any trading of the paper in the inter-dealer market as proof of how the structure had worked. But be warned, this could be the first skirmish in a much wider European battle between banks to protect their home turf.
