Putting a commercial bank with some of the best corporate relationships around the world together with an investment bank whose principal strength was in the bond markets always had the makings of a dominant franchise in credit. That was already showing through last year, when Citigroup won the comparable award of best corporate bond house.
But over the past year the bank has consolidated its position. “People are getting much more comfortable with our capabilities,” says Anne Clarke, managing director in Salomon Smith Barney’s corporate bond division in New York. “As they start to question their historical bond market relationships, they are turming to us more and more often.” US corporates such as American Home Products and Kellogg had never previously mandated Salomon to lead manage their bond deals but both have done in the past year.
Much has to do with the way the bank operates its coverage of corporates. “We have relationship managers who know all the products we can offer, from leasing through to structured finance,” says Marwan Marshi, head of US investment grade debt. “They bring in the product specialists as needed.”
And it has also been at the forefront of underwriting the superjumbo corporate deals such as WorldCom’s $12 billion deal, or France Telecom’s $16.4 billion multi-tranche offering.
Its success has come at the expense of those more traditional bond underwriters, especially Goldman Sachs and Morgan Stanley, which have gradually dropped from top three to fifth or sixth place, and to a lesser extent Merrill Lynch. Recent mergers have also taken out competitors, leaving Citigroup as the bank with the broadest coverage and most integrated platform from loans through commercial paper, bonds, structured products and risk management on a global basis. “Very few institutions can provide clients with all their capital needs globally as well as having the product knowledge and expertise.” says Randy Barker, managing director and co-head of Salomon’s global credit markets with Geoff Coley.
And those that do have similar operations on paper either have massive internal political issues springing up all over the place, such as at CSFB, or are still in the process of merging, such as at JPMorgan Chase.
As a result Salomon has a dominant position in the credit markets. “We’ve had an 8% or 9% lead for six months in industrials and utilities deals,” says Clarke, who states that the bank has been involved in 75% of all credit business so far this year. “And we’ve been at the forefront of reopening sectors, such as mining, where we’ve done deals for Phelpps Dodge, Newmont and Alcoa.”
Salomon’s high-yield business has taken off this year as well. It finished fourth in the US league tables last year, although it looked very much like a telecoms boutique in doing so. This year it is battling it out for the top spot with decade-long dominators – CSFB (via the acquisition of DLJ) with a broader range of issuers – such as the $1.25 billion deal it underwrote for Calpine. There are rumours that it has done so by buying deals, a notion that the firm denies. “We have not lost money on a deal all year,” says Carl Meyer, managing director in high-yield capital markets.
Its structured products teams have had a good year as well. In fact, it’s the first year since the merger that asset-backed commercial paper and term-debt securitizations have worked together. And the two feed off each other. “Having an ABS commercial paper presence is much more important to my business than having a balance sheet at my disposal,” says William Brady, managing director in asset-backed term debt. “Many issuers use it as an incubator before going into the term debt market, such as BMW.” The German car firm had used conduits first, before using Salomon to underwrite its longer-term asset backed deals in 1999 and 2000. The firm is a dominant player in the Australian mortgage market, structured two of the more innovative deals in Europe (for Welsh Water and Punch Taverns) and had worked with its counterparts in the credit card division over the past three years to structure the new benchmark for credit card securitizations in the US.
Over the past year Citi has tweaked its organisational structure. Capital markets is responsible for the four divisions of high grade, high yield, emerging markets and loans. Then there is a separate unit set up at the start of the year: loan portfolio management. It’s run by a capital markets professional, Steve Jones, who was previously head of high-yield debt. It is a joint venture involving both the capital markets team and the global relationship bank from the Citibank side. The unit’s brief is to make sure that Citigroup’s balance sheet is put to best use.
That immediately raises the spectre of tying investment-banking business to loan relationships, which in the US at least can appear to stretch the bounds of the law (explicitly tying extension of credit lines to more profitable business is illegal in the US). But Citigroup is the one universal bank in the US that can claim to have both a strong loans business and a top-class bond franchise. “It’s very rare that we win business because we have loans outstanding,” says Clarke. “We’re actually very conservative on using the balance sheet, and the fact that we have avoided the loan blow-ups that have hit other banks proves that.” That in part stems from the fact that Citibank had been scaling back its loans business in the years before the merger; since the merger it has expanded it again, but selectively.
