Best Financial Borrowers

US: Wells Fargo

Wells Fargo is generally regarded as one of the best banks in the US, if not the world, at executing its mergers. Or rather, that’s the reputation of the old Norwest team that took over the old Wells Fargo in 1998. Over the past 18 months that overall success has filtered down into the bank’s bond market borrowing operations.

There are actually two funding entities, Wells Fargo Corporation and Wells Fargo Financial, which was called Norwest Financial until last year. The former is the bigger issuer, but that’s not to underplay the latter, says Jake Gearhart, a vice-president in debt capital markets for Deutsche Bank in New York. “Norwest Financial was one of the best names in the business, and still is under its new guise.”

Previously an opportunistic borrower of MTNs of no more than $300 million at a time, it has spent the past year moving over to liquid global deals. “We and Salomon lead-managed their $500 million inaugural global in February,” says Gearhart. “There was no roadshow, the book was built very quickly, and 30% was placed abroad. That’s unprecedented.”

The corporation is not a very large borrower, having issued about $6 billion in debt over the past 12 months, not least because it has a large depositor base it can draw on. But it is certainly a savvy borrower, and much of its paper trades through its peers: Wells Fargo debt is 7 basis points tighter than Citigroup, and roughly 20bp tighter than Bank of America.

And investors love the paper. In January Wells Fargo Corporation issued $1 billion in subordinated debt. “It priced through our outstanding subordinated paper, was the tightest sub debt priced in nine months, and we got the deal done in two hours,” explains Nino Fanlo, Wells Fargo’s treasurer, and formerly a sell-side banker with Goldman Sachs. What’s more, the deal only tightened in by 2bp – enough to offer some upside to investors without knocking Wells Fargo’s funding goals out of whack.

The bank’s borrowing philosophy, says Fanlo, “is to try to tap as broad a section of the market as possible. So we are very timing-focused, by which we mean that we look to issue when the market wants us to provide funds, not when we suddenly see an opportunity. As a result we aim to be transparent and consistent in our funding.” So the bank has issued short-term debt, as well as deals of two-, three-, five- and 10-year maturities. And the bank aims to provide deals large enough to provide liquidity. “Earlier this year we launched a $1.5 billion deal in what we call EXL – extendable liquid security,” says Fanlo. “It was a five-year deal which had only a modest increase on our 12-month deposit cost of funds.”

But the bank isn’t looking to issue super-jumbo deals. “While we want to give investors liquidity, too big a deal can leave you open to investors shorting your paper, whether because of a view of your company or of the sector as a whole. That can make for more volatile trading spreads, which we want to avoid,” Fanlo says.

The bank’s success at integrating other firms, its growth strategy, which favours low operating volatility, and the openness of its senior management have each contributed to the success of the bank’s funding programme. “We have spent a lot of time over the last year explaining our strategy to both debt and equity investors,” says Fanlo. “And that’s not just myself and the CFO, but also Dick Kovacevich, our CEO, who is often on the road with us.”

European investors are a core part of that pitch, he says. Over half of the bank’s deals since last summer have been global deals – a three-year $1 billion, both a $500 million and a $1 billion five-year deal, and a 10-year $1 billion issue. “We generally place 25% to 30% of the paper outside the US,” explains Fanlo. “That’s an appropriate amount for now, although it may well increase as we recognize that Europe especially will become a core base for investors. There’s a fair chance we may issue our first euro deal before the end of the year.”

Asia: Development Bank of Singapore

The Development Bank of Singapore (DBS) attracted much publicity this March when it became the first Asian bank (excluding Japan and Australia) to raise hybrid tier one capital in the internationally markets. Many banks in Asia are in dire need of recapitalization, and this deal may pave the way for others.







Michael Dee

Hybrid tier one – equity-like paper senior to common shares and subordinated to senior creditors – is a very attractive way for banks to raise capital. Compared with equity it is relatively cheap since interest payments are tax-deductible, and it also does not dilute ordinary shareholders. Investors, in turn, like the structure because their risk-taking is rewarded with a generous yield pick-up over senior debt. But the knack of issuing hybrid core capital lies in pleasing fixed-income investors and regulators alike. Unlike investors, regulators prefer core capital to be as deeply subordinated as possible.

DBS and bookrunners Goldman Sachs and Morgan Stanley did indeed spend over one year in structuring the deal. They had many meetings with the Monetary Authority of Singapore (MAS) to ensure that the securities would both count as tier one and be tax-deductible. MAS is one of the most prudent regulators worldwide, and it also wanted to approve of a safe structure that could be copied for future tier one issuance.

Then on March 15 2001, DBS issued 10-year perpetual non-call preference shares in two tranches – US$725 million and S$100 million (US$55.5 million). A step-up and call feature creates a synthetic maturity of 10 years by penalizing DBS if it holds on to the paper after 2011. The dividend rate for the dollar tranche will then increase from 280 basis points over treasuries to 320bp over Libor.

The dollar tranche with a 7.6575% coupon was priced at 280bp over treasuries, which was 5bp over initial expectation. “This was in line with widening spreads across the board,” says Michael Dee, managing director and CEO of Morgan Stanley Singapore. “The Dow Jones dropped 300p on the day of pricing and Asia Pulp and Paper, one of the largest corporate borrowers from Asia, defaulted two days earlier.”

Yet, despite unfavourable market conditions the deal was well oversubscribed at US$2.7 billion for the US dollar tranche and S$300 million for the Singapore dollar tranche.

Critics say that they are not surprised by the fact that DBS got such a deal done. After all DBS is the largest bank and biggest issuer in non-Japan Asia and the best-rated bank in Asia at double-A. Moreover, it also enjoys implicit government support. DBS is 37.2% government-owned, and investors buy it as quasi-government paper, which is in scarce supply.

But DBS certainly deserves credit for having established its name since its debut in August 1999, when funding was not immediately needed. “The bank has a perfect track record,” says Dee. “DBS has issued the largest, most diverse and most innovative transactions.

Ever since its debut all its deals have worked smoothly, and have left investors very satisfied. The DBS name has tremendous credibility in the international markets and that’s why it was not a problem to sell the first hybrid tier one issue from Asia.”

In the past three months alone the bank came to the market with three successful deals. After the hybrid tier one, DBS issued US$850 million of 10-year upper tier two debt bringing the total issued to US$2.1 billion within the last two years. DBS had made a name with investors back in 1999 when it became Singapore’s first bank to raise subordinated debt internationally.

Yet another first-ever came in May in form of a tier one perpetual share in the domestic market. The issue is callable after 10 years with no step-up and is considered core tier one capital for regulatory purposes. “While not tax-deductible the 6% fixed rate for the first 10 years is a substantial lower cost of capital than equity,” says Dee. “With such an attractive coupon in Singapore’s low interest rate environment demand was overwhelming, allowing DBS to increase the size from S$700 to S$1.1 billion.”

All of it deals are part of a well-planned capital management programme set up to optimize its capital structure and to fund its expansion strategy – the latest acquisition was that of Dao Heng, Hong Kong’s fourth-largest bank, in April 2001. Proceeds from the hybrid tier one were used to increase DBS’s tier one capital ratio. DBS is in fact the bank considered the most pro-active, and sophisticated in Asia. “No bank comes close to DBS’ reputation as a quality issuer,” says Dee.

But it remains to be seen whether DBS can also claim credit for inducing other banks to follow its lead. Not only are many banks in the region much less concerned about their capital ratios, most of them are also not sufficiently highly rated to access the international capital markets.

In any case most banks in Asia cannot go ahead even if they want to. After the Bank for International Settlements set up guidelines in 1998 to include hybrids in the definition of tier one capital, the only Asian regulators that followed the BIS were Hong Kong, Japan and Singapore.

The DBS transaction can serve as a blueprint for Singaporean banks to issue tier one, which they should do for the sake of higher returns on equity. However, Singapore’s banks are among the best capitalized in Asia and in the world, their minimum capital ratios being 12% as required by the MAS. In fact, apart from DBS none of the banks in Singapore have even issued tier two capital, which is the first step for a bank wishing to increase its capital. It’s therefore more likely that further hybrid tier one issues will only come along with acquisitions.

Commended: Bank of East Asia

In January 2000 Hong Kong-based Bank of East Asia (BEA) established a new benchmark for Asian tier two bank debt. The $550 million deal was the first bank debt issue by a Hong Kong bank in the international markets after the Asian crisis, as well as the largest issue of lower tier two from ex-Japan Asia.







Hong Kong’s banks raise tier two capital

What is even more striking is that this deal was BEA’s debut on the international markets. The triple-B, family-owned bank had to overcome many more hurdles than, say, a well-established bank such as DBS. And BEA even managed to raise an amount of tier two that was the largest ever relative to a bank’s asset base. BEA’s assets are a modest US$23 billion.

Bookrunner JP Morgan and joint lead Barclays Capital had no doubts about going ahead with the size, because BEA is a well-run bank and has an excellent track record. For example, it was one of the few banks that did not make losses during the Asian crisis.

BEA also offers good growth prospects. “It is one of the banks best positioned to enter the Chinese market, which promises strong growth potential following China’s entry into WTO. The Bank of East Asia has a very well established business in China,” says Mark Follett, head of financial institutions debt capital markets at JP Morgan in Hong Kong.

With this deal BEA has confirmed its reputation as a forward-looking bank. Although part of the proceeds was used for the acquisition of Hong Kong based First Pacific Bank – a move to strengthen BEA’s position at home – a large portion of the deal went into rebalancing the bank’s capital structure. The bank is realigning its capital structure to that of EU and US banks, which have proportionally more tier two capital and hybrids than Asian banks.

Banks prefer tier two and hybrid tier one because those are far cheaper forms of capital than pure equity, and therefore improve return on equity. By issuing tier two, BEA was able to bring down its equity – or tier one – component of capital to 13% while maintaining a strong total capital ratio at 19%.

The success of the deal encouraged a much smaller Hong Kong bank, Dah Sing, to raise $150 million lower-tier two in the international markets in February, and at the time of writing, Citic Ka Wah, which is about the same size as Dah Sing, was about to issue $200 million.

“The Bank of East Asia deal really opened the market for Hong Kong banks,” says Follett. “This deal sent a message to other banks that they should raise tier two to improve the efficiency of their capital structures and that there is, indeed, a strong market for them out there.”

In fact the bank managed to attract many first-time buyers of Hong Kong bank credit let alone of subordinated debt – a great achievement given that the structure needed some explaining in Asia. To ensure the most efficient structure BEA boldly decided on a step-up feature. Although common in Europe, it was used for the first time in Hong Kong. The step-up and call option after five year keeps the cost of capital down by inducing BEA to call the 10-year paper after five years, when it will loose 20% of its value as tier two capital because of regulatory amortization.

So while regulators consider it 10-year capital, it is sold to investors as five-year notes – which also means that bonds were priced on the five-year treasury notes. “Getting the structure right is one of the most important things when raising capital because it will affect the pricing and thus the return on capital,” says Follett.

The sub-debt was sold to many emerging-market investors moving up the credit curve and to dedicated banks moving down to triple-B, and has attracted particular support from Asia. “The deal was significant in that it marked the return of strong demand from Asia,” says Follett. “Last year’s major subordinated debt issue for Hanvit Bank in February was mainly bought by US investors. The credit appetite in Asia is only now coming back. And it’s great news for issuers as Asian investors do not require as high a credit premium.”

Many investors expected the deal to sell at 300 basis points over treasuries, but because of the good marketing of BEA and Asian demand it was reduced to 281bp over, or 187bp over Libor. It has since performed well, currently trading at an equivalent spread of approximately 155bp over Libor, which is in line with BEA’s as well as investors’ expectations.

For BEA the next logical step would be to issue upper tier two debt, and the bank is said to be looking at its options.

Latin America: Banco de Crédito del Peru

For any Latin financial borrower to come to market so far in 2001 is quite an achievement. For an Andean borrower to do so is even more impressive. Banco de Crédito del Peru (BCP) not only issued $100 million of bonds, it did so at seven years.







Peru: great countryside, but political turmoil made borrowers wish they weren’t there

BCP’s problem was not in its balance sheet. It is the largest bank in Peru, with more than enough liquidity to service $100 million in debt. The problem was country risk: Peru is rated at BB-, and is going through political turmoil at the moment in the wake of the forced resignation of president Alberto Fujimori. When BCP came to market in January, former president Alan Garcia was riding up the polls. This is the man who defaulted on Peru’s sovereign debt, and implemented exchange controls, in the 1980s.

“The challenge in a deal like this is good bank, bad address,” says Gordon Kingsley, head of the debt products group for Latin America at ING Barings in New York, who structured the BCP deal. “What we did was look for a way to exploit an asset which they had which could help arbitrage the country risk away.”

Ultimately, Kingsley was looking to sell the deal to European asset-backed investors. But in order to do that, ING first had to set up a securitization structure which could be granted an investment-grade credit rating. Once it had that, it could take the structure to MBIA Insurance Corp for a wrap which would bring the final bonds up to triple-A.

The key turned out to be the remittances which Peruvians send back home from abroad. As Peru’s largest bank, BCP naturally receives the largest share of these payments, and five correspondent banks agreed to divert all such payments over the course of the deal into a trust account.

On the face of it, it’s dangerous to securitize the full amount of such payments: after all, they belong not to the bank but to the people to whom they’re being sent. But the fact is that BCP is so large that it can easily pay those people out of its own funds in Peru.

“You can only do this with one of the top two or three banks in the country,” says Kingsley. “A money transfer business couldn’t do this, because they need the money to make the payment locally. But this is the biggest bank, it’s liquid, it can independently make the payment in-country. You have a bulletproof structure, because even if something crazy happens in Peru, all of these dollars are being generated offshore, outside the reach of the Peruvian banking system or the Peruvian government.”

Since BCP’s debt-service costs on the deal are only a fraction of its total foreign remittances, that was enough for S&P and Moody’s to give the structure an investment-grade BBB-/Baa3 rating.

ING Barings then got a financial insurance policy, or wrap, from MBIA, bringing the final structure up to triple-A. “In the asset-backed world there are a variety of European floating-rate buyers who will take big pieces in triple-A deals,” says Kingsley. “The pool of emerging markets Peruvian bank investors is very small. The pool of triple-A asset-backed buyers is very large.”

In the end, ING sold the whole deal to itself, in the guise of Rembrandt ER, which is managed by ING’s global securitization team in London. Rembrandt funds itself through a variety of markets, but did receive a $100 million liquidity facility as a backstop for the deal from ING Bank Dublin. $30 million of that facility was then syndicated to Hypo-Vereinsbank.

Kingsley is adamant, however, that ING could have sold the deal in the open market. “This could have been done as a 144a and sold to insurance companies and pension funds. It was just convenient to sell it to a single buyer.” He says that selling the whole deal to one investor is a smart move, as it removes roadshows and price discovery from the bond issuance process.

Either way, BCP got $100 million in seven-year funds at a level Kingsley calls “hundreds of basis points through where the sovereign would have been funding”. If one investor was willing to put up $100 million, then one investor was all that it needed.

Eastern Europe: Kredyt Bank

In March Polish bank Kredyt Bank made its first appearance in the international markets with a three-year floating-rate issue. The e150 million ($128.5 million) deal was too small to make it headline news, but it wins our award for being one of the few successful fund-raising exercises from financial institutions over the past year.

Kredyt Bank had already proved it is one of the best-run banks in Poland. With the support of majority owners, KBC and Banco Espirito Santo, it has grown from being the twentieth largest bank in 1995 to being the eighth largest, with assets of Z17 billion ($4.25 billion) at the end of 2000. Now on its way to become Poland’s fifth-largest banking group it picked up valuable acquisitions including PBI Bank and Prosper Bank. The two banks greatly contributed to Kredyt Bank’s funding capabilities by enlarging the retail customer base. But that was in 1997. Since then Kredyt Bank’s interbank liabilities have increased five-fold, and it was time to look out for new and more competitive sources of funding. The bank’s debut in the international markets was designed to establish a name, so further issuance can come forward.

“We are very proud of this deal because it confirmed our credibility on the international market,” says Izabela Sewerynik, deputy CEO at Kredyt Bank. “The proceeds were used for improving our liquidity position and for expanding our lending activities.”

However, Kredyt Bank was not very lucky with the timing of its debut. Spreads on the Polish government benchmark had widened from 25 basis points over swaps to the low 40s in the run-up to the deal.

Being limited to the sovereign rating at Baa1/BBB, Kredyt Bank issued at 43bp over Libor. Nevertheless the lead-managers, Commerzbank and Merrill Lynch, were pleased about the pricing. “We have managed to get the deal done where we had expected, which is flat to the sovereign,” says Tim Streeter, head of syndicate at Commerzbank.

The leads put a lot of work into the deal to make sure of its success. “There was good demand because short-dated paper from the region is scarce,” says Streeter. “But we had to look out for it.” These deals are mainly bought by banks and money managers who can be widely dispersed. Accordingly, the book-building process took one week to ensure that the critical investor base was reached. The roadshow had also been extended to meet late enquiries from Austria.

And the effort paid off. The notes were well placed, being sold to buy-and-hold investors who supported the deal well in the aftermarket. As expected with Polish paper a great chunk of it went into Germany (33%), but there was also good participation from the UK (21%), Ireland (15%) and Austria (21%). “The distribution nicely reflects our roadshow stops – Frankfurt, London, Dublin and Vienna,” says Streeter. “We were pleased with such a good hit rate.”

best borrowers of 2001