Borrowers awards 2002: World's best borrowers

Borrower of the year

Italy

IF YOU WANT to talk to Fabrizio Ghisellini on the phone, be prepared to be quick and to the point. As the head of international funding at the Italian treasury in Rome, Ghisellini is responsible for $15 billion to $20 billion of issuance a year.

And all that debt, plus the country’s vast domestic issuance programme, which has about €1,300 billion ($1,200 billion) outstanding, is managed by a team of just 10 people.

Ghisellini laughs when asked how he copes with the heavy workload. “We are severely understaffed,” he says. “Maybe it’s because you need a high sense of social responsibility to work here. Or maybe no-one else wants to do it.” Either way, it is clear that he loves his job.

Italy stands out not just as a top-quality European sovereign borrower but as a strong international borrowing presence because of its frequent issuance and the wide range of instruments it uses. Marco Figus, a senior investment banker in fixed income at Lehman Brothers who has been covering Italy for 20 years, says: “Whether it is in innovative deals such as ABS from real estate, social security or the lottery, or global bonds in dollars, yen, euros or Swiss francs, it is difficult to find a borrower over a consistent period that can match Italy. It touches so many areas of the business.”

Ghisellini says he tries to be transparent over his choices of banks to lead his international deals. All banks have also to deal in domestic issuance. And for international business, a good top-10 ranking in agency league tables is essential, as dealers must be committed to trade out of agency desks to make it easy for investors to switch between Italy and agencies. This has helped to slash Italy/agency spreads from around 10 basis point a couple of years ago to around 5bp now.

Ghisellini advises banks to avoid paying lip service when pitching for deals. “We are a unique borrower,” he says. “You can’t recycle to us proposals that were created for small countries with issuance problems. We are a costly client. If you want to cover us properly, you have got to have dedicated resources. I always tell the banks not to waste anyone’s time – you can’t go for a half-baked solution. Either you cover us or you don’t.”

And being a bookrunner is a tough job. “We do what the bookrunner tells us,” says Ghisellini. “The bookrunner should be fully responsible for the success of an issue. If something goes wrong, there is no uncertainty why.”

Domestic issuance is run by Maria Cannata, to whom Ghisellini reports. She manages a regular, highly organized issuance schedule. Investors can go to the treasury’s website (www.tesoro.it) and download the issuance calendar, which is released well in advance.

The boundary between domestic and international markets is blurring. In February this year, Italy launched its first ever syndicated BTP. A change in withholding tax that became effective on January 1 suddenly made BTPs more attractive to foreign investors, and Italy was quick to turn that around into a new deal with Citigroup/SSSB, ING and UniCredito Banca Mobiliare. The bond also carried Italy’s first 15-year maturity – a neat trick at a time when long-dated paper continues to find demand from European pension funds.

The international issuance strategy splits into two areas. On the one hand, there is the EuroMTN programme, which Italy

uses for pure arbitrage. “We are the only credit providing specific investors with specific structures tailor-made for them,” says Ghisellini. “They pay a premium for this.”

On the other hand there is the much larger global bond issuance. Italy will only issue internationally if it can raise the funds at roughly the same all-in cost as it could with BTPs. And unlike an agency or domestic issuance, it does not reveal its calendar in advance. “Investors would love for me to say how much we are going to issue in a year, as the agencies do. But we can’t issue when conditions are outrageously out of line with BTPs. I hope they understand – I try to be very humble with investors.”

And he sets himself a difficult task in accessing new funds. “Whenever we do roadshows, I don’t want to meet people who are already buyers of Italian paper,” says Ghisellini. “We want the big, reluctant investors.”

The toughest international deal for Italy recently was the five-year deal launched in October. This transaction, which came shortly after a yen deal, was a $3 billion issue launched in the middle of the month through Lehman Brothers, SSB and UBS Warburg. Wild volatility in swap spreads meant that the deal was particularly difficult to price. As Italy has such a wide range of investors, it needs to price to a wide range of benchmarks. When a deal goes on screen, it is priced to US treasuries but some investors equally look at Libor, agencies or other sovereigns. “In a market that is moving, that was tough,” says Ghisellini.

But Ghisellini also says this was his best deal of the year. It was increased at launch by $1 billion to $3 billion because of a sudden surge in demand from the US. It was later reopened and increased to $5 billion, making it a large, highly liquid issue.

Italy’s ABS issuance is another area that other European sovereigns have emulated. Building on the success of, among others, the securitizations of late social security payments, in October the treasury launched a transaction based on residential property owned by state entities. Other assets that may be pooled into ABS deals include roads, prisons and army barracks.

Ghisellini intends to continue creating new ABS deals: “I wouldn’t deny that the cash aspect is important here,” he says. He adds that the deals have had perhaps unexpected benefits. As a result of the social security ABS deals, the process of collecting this debt has become more efficient. This was crucial to securing a AAA rating from S&P to the transactions but it also has positive social side effects.

Ghisellini refuses to release any secrets of his issuance plans.

“I wouldn’t tell you that,” he laughs. “I would love to do a super-long issue, but the economics are outrageous at the moment. If the levels were to improve, we could become the only issuer, including treasuries and agencies, to provide a big liquid benchmark at 30 years.”

Katie Astbury

Best agency borrower

KfW

When Kreditanstalt für Wiederaufbau started its new euro benchmark programme in the first quarter of 2001, it established itself as a weighty and impressive borrower. Its challenge this year was to maintain that momentum.

For the programme’s launch, the German development agency managed to get its credit story over to the market impressively. It established itself as a rock-solid credit, guaranteed by the German government, zero risk-weighted, with a spread over Bunds. Liquidity was helped by large issuance volumes, EuroMTS listing and determined market making. By committing itself to issue two benchmarks a year, of at least e5 billion ($4.6 billion) each, KfW gave investors a new degree of certainty. It was rewarded by extremely tight spreads, which continued to come in over the programme’s first-year issues.

By the end of 2001 it had already surpassed its goals for the programme, with three e5 billion bonds outstanding, over a range of maturities.

Now in its second year, the programme is again on track to reach at least e15 billion by the end of 2002. Frank Czichowski, the agency’s head of capital markets, says that recent development has been steady, if not as spectacular as last year: “This year has been characterized by very stable spreads, so last year’s spread developments have not been repeated,” he says. “But there has been a significant increase in the correlation between KfW paper and Bunds, which is in line with our goal of gaining acceptance as a Bund surrogate.” KfW’s bonds trade at similar levels to smaller European sovereign issuers such as Austria, Belgium and Spain; its November 2004 issue is around 15 basis points over Bunds, while the July 2012 is about 22bp over. Its bonds now sometimes trade through those of its small sovereign rivals.

The year’s biggest innovation was the launch of a corresponding dollar benchmark programme. Taking on US agencies such as Freddie Mac in Europe was one thing; trying to compete with them in their own territory was much riskier. Attracting US investors has been a lot of work, admits Czichowski. In a market dominated by domestic agencies, investor relations efforts have been crucial to explain the safety, liquidity and diversification benefits offered by KfW paper, and the certainty of its issuing commitments.

He says: “We have intensified our dialogue with investors, in terms of explaining how we will approach the capital markets. In particular we have concentrated a great deal of effort on developing our presence in the US. As a result of this, the dollar programme has surpassed our expectations.”

From the German agency’s viewpoint, the venture has paid off extremely well; the pricing on both dollar deals was extremely tight to US agencies. It has committed itself to issuing at least two $3 billion deals this year, and has already done so with a five-year issue in January and a three-year deal in April. Traditionally it has been able to sell about 20% of its issues to US accounts; the dollar benchmark programme has let it increase that to around 50%.

Taking into account the much bigger deals involved, that equates to an absolute increase in investor participation of more than threefold.

Czichowski admits that work is still needed here. But he hopes that KfW’s commitment to increasing liquidity will improve things still more. He says: “There’s an ongoing process to improve liquidity by issuing regularly and in larger volumes, by using the pot system of allocation, by ensuring the bonds trade well in the repo market, and by demanding that syndicate banks commit to quoting narrow bid-offer spreads.

“We are always trying to broaden the investor base and convince more people that our paper has potential for outperformance. The most important thing now is to get it ever closer to Bunds.”

There is probably a limit to how close KfW paper can get to Bunds, because it is not eligible for delivery into the Eurex Bund future contract but the agency is confident there is plenty of room for improvement yet.

One senior banker in high-grade credit says: “KfW’s euro benchmark programme has been extremely successful. But the challenge lies ahead; simply because of that success it’s going to be tough to maintain the programme’s momentum. They want to be a surrogate for sovereign issuers. To do that you need to be able to sell bonds with no real noise, just in the normal course of business. They also need to tighten their spreads still further. I’ll be interested to see how they get on over the next year.”

KfW has managed to stir up demand around the world, in Europe, the US and Asia. Czichowski says the trick is to offer one product that everyone wants, rather than mounting small, opportunistic market raids whenever the opportunity presents itself.

While KfW still makes smaller issues and private placements, its benchmark programmes are clearly the way forward for its huge funding needs – around €40 billion in 2002. Czichowski says: “We have to offer a truly global product rather than appealing to just one investor base – that’s the beauty and the challenge in these markets. The recipe for success has to be more than just targeting specific investor types, because they may fear they will not be able to get a good bid from a different time zone.”

Tom Marshall

Best high-yield borrower

Messer Griesheim

It has been an especially tough 12 months for high-yield bonds in Europe. The quantity of new issuance has plummeted but at least there have been some quality issues.

Messer Griesheim’s €550 million ($507 million) bond, lead managed by Goldman Sachs and launched in May 2001, was used to finance Goldman Sachs and Allianz’s acquisition of 66% of the German industrial gas company.

The plan was to raise the funding using a combination of a senior loan and a high-yield bond. However, in December 2000, when the acquisition was agreed, the high-yield bond market was more or less closed to new issues. The catastrophic fall of telecom credits had spoilt investors’ appetite for any new deals.

Luckily for Messer and Goldman, the acquisition took four months to close. By May 2001, demand in the high-yield bond market, for industrial credits at least, was very strong. As a result of this demand, lead manager Goldman Sachs was able to increase the deal size by e150 million to reach €550 million. Messer’s treasurer, Winfrid Schmidt, says: “The bond came in with a lower interest rate than we had expected, as a result of the timing of its launch. We originally expected 1% more interest on the bond at least. We also got a decrease on the loan’s interest rate, because the loan was smaller than we had originally planned, so we got a 0.25% downward flex on one tranche of the loan as well.”

The bond was priced with a 10.375% coupon, at par. Except for a brief period in November when the price fell into the 90s, it has kept fairly stable at around 107.

The pre-launch roadshow covered Europe and the US in some detail, thanks to which 25% of the deal was sold to US investors – a surprisingly big figure according to Schmidt. Demand was reportedly also strong among managers of collateralized debt obligations, who were hungry for any industrial high-yield debt to diversify their portfolios away from telecoms.

Schmidt is modest about the cause of the deal’s success: “On the roadshow it was obvious there was a lot of demand for the deal. The main advantage was the industry we are in – it’s different to what else was in the high-yield market. The gas industry has huge opportunities and relatively few risks.” The company plans to divest non-core businesses in Africa, Latin America and Asia, deleveraging by e400 million, and concentrating on core businesses in the US and Europe. This process has generally gone well.

An investor agrees that this asset sell-off was an important factor in the success of the deal: “The size of the planned asset sale considerably altered the credit profile of the deal. We also liked the diversity of the earnings stream for the company, and the management at Messer was and is good.”

Jules Evans

Best high-grade corporate borrower

GMAC

The corporate bond market has been littered with fallen angels, formerly high-grade companies that lurched drastically downwards, often not stopping in the junk area before hitting default. Many others have kept their investment-grade rating but have been downgraded enough to be shut out of the commercial paper market, forcing them to term out loans in greater numbers, and at higher costs, than has been seen for a decade.

The winner in this category, therefore, had to be able to show a variety of characteristics: diversity of funding sources is one, whether by investor base, fixed- and floating-rate paper, straight and securitized, differing maturities, and various currencies. Another is a knack of prescient funding in ever deteriorating markets; and let’s not forget the most crucial ingredient: a healthy dose of luck.

GMAC stands out in all these areas. In the first week of September last year it was pricing $6 billion of securities – $2.5 billion of five-year and $3.5 billion of 10-year debt. The deal closed on September 12. “It was very fortuitous timing to get most of the deal completed before the terrorist attacks,” says Paul Bull, vice-president of global borrowing for GMAC.

Last year GMAC raised $65 billion, more than double what it had ever raised before, and most of it was unsecured debt. One reason for the increase is that GMAC got ahead of the curve in using long-term debt markets to replace some of its commercial paper outstandings. And it did so efficiently, not waiting until its access to the CP market was being called into question.

Another reason was that funding requirements in the fourth quarter of last year were up significantly. Along with other auto companies, General Motors was a heavy user of incentive programmes to entice consumers to buy cars – zero-interest loans being a popular one – and the funding arm had to find the cash to cover them.

It also has the most diversified funding programme. Last year GMAC issued bonds in 12 different currencies. “Part of our debt capital raising strategy was helped by our use of international markets,” says Cynthia Ranzilla, vice-president of US funding and global markets at GMAC. “One of our largest single tranches in 2001, for example, was the €4 billion [$3.7 billion] deal early in the year.”

“Our use of these other currencies is very opportunistic,” says Bull. “But they are done as viable funding alternatives.” Altogether, leaving out euros and US dollars, Bull reckons that about $2 billion was raised last year in other currencies. “We can provide product to investors in the currency they’re looking for and then swap it into dollars,” says Ranzilla.

As for the yen market, that, says Bull, has largely been left “to private placement deals using our EMTN programme”.

Another source of diversity in GMAC’s programme is the increasing interest of the retail market. In 1998 GMAC launched what it calls its Smart Note programme, aimed at selling $1,000 blocks of debt securities to retail investors. “We sell them through between 300 and 400 retail brokers in the US,” says Ranzilla. “Last year we sold about $8.5 billion of securities through this channel, and more than $3 billion so far this year.”

What GMAC doesn’t do, though, is to publish a funding calendar. Fannie Mae started that trend, with Freddie Mac following suit. Ford Motor Credit has been following their lead. GMAC has no plans to do so. “We like to think that we’re reasonably transparent with investors,” says Hunt. “But our strategy revolves around letting the market determine what we do. We never want to force our securities on the market.”

That approach paid off in its first major dollar financing of this year, when it issued $2 billion in February split equally between five- and 10-year paper. “It was the first time in a couple of years that we saw a five to 10 basis point tightening during the marketing stage,” says Ranzilla, who puts the tightening down to a desire not to increase the deal. In 2001 it was common for large, liquid deals to start at $3 billion, for example, and then to be increased by $1 billion or $2 billion. “We specifically stated during the marketing that we would not reopen the deal,” says Ranzilla. “That was taken as a sign that our funding requirements for 2002 would be lower than for 2001, and also that the outlook for the auto sector was more optimistic.”

Antony Currie

Best securitization borrower

SBAB

In around 18 months, SBAB has transformed itself from a traditional corporate borrower into one of the most innovative securitizers. And in so doing it has led the long overdue development of the Scandinavian asset-backed securities market.

The Swedish bank has long been innovative in its banking techniques. For example, 60% of its mortgage origination is done online. When it first came to securitize its residential mortgage portfolio in November 2000, the processing from mortgage origination to securitization was in large part automatic.

The state-owned bank also has a history of innovation in its ABS structuring. The €1 billion ($930 million) SRM 1, launched in January 2001, had a ¥18 billion ($145 million) tranche, the first time a foreign issuer had ever issued in the Japanese MBS market.

This made it no surprise when the €1 billion SRM 2, launched into the turbulent market of November 2001, was another first. In fact, it was two firsts – the first Swedish bond to secure 144A registration, and the first deal ever to securitize tenant-owner leases.

These leases are a peculiarity of the Swedish housing market, where Swedes are unable to buy individual flats. Instead, they hire the right to live in a flat in a cooperative block. SBAB’s deal securitized these leases.

The bond, like its predecessor SRM 1, was an e-bond – investors could order online. In the end, few of them did but the internet aspect at least enabled SBAB to see the book being built during pricing. The bank also provides a website, www.srminv.com, where investors can see how the portfolio of their deal is performing, and find the latest regular reports from SBAB.

The website was part of a strong marketing effort by SBAB, together with lead managers Merrill Lynch and SSSB, to meet investors in Europe and the US, some of whom were lending to SBAB for the first time. Ashley Kibblewhite, director of syndication at Merrill Lynch, says: “Investors liked the story a lot. They liked the low LTV [loan to value] on the mortgages – it is around 50%, which is very low for European MBS. They also liked the quality of reporting on the deal, which can be easily accessed via SBAB’s websites.”

It was because of efforts such as this that the deal was able to price at the tight end of the scale, even though it was launched in the weeks after September 11. The four tranches, all floating-rate notes, included a $550 million tranche rated triple-A, which priced at 22 basis points over Libor, and three euro tranches – a €355 million triple-A tranche priced at 24bp, a €30 million single-A tranche priced at 60bp and a €7.5 million triple-B tranche priced at 130bp. All tranches of the deal were about two times oversubscribed.

Joran Lauren, CFO of SBAB, says: “Once we had done our homework to present it properly it went down very well and tightened a couple of basis points after launch.” In fact, the deal was marketed so well that despite being a completely new asset class it priced tighter than SRM 1, which was a more traditional residential mortgage bond.

Another element of SBAB’s securitization programme that investors appreciate is that the company has always been clear what its strategy is – to securitize all the different types of asset in its portfolio. This means the next deal, which Lauren says is likely to be launched towards the end of this year, will probably securitize the commercial mortgages on the cooperative housing blocks.

It could also well be in yet another currency – possibly sterling. Only one of its ABS deals has been in Swedish kronor – the Morfun securitization of multi-family accommodation in 2000. Swedish investor demand for ABS is slim, as investors are more used to traditional mortgage bonds. But securitization allows SBAB to issue in different currencies. Lauren says: “SBAB wants 50% of its funding to come from outside Sweden. The securitization programme is designed to reach international investors, while also freeing up our lending capacities.”

SBAB is also slowly helping to develop a domestic ABS market. Other financial institutions are now following its example – Spintab, for example, issued an ABS deal earlier this year.

Best financial sector borrower

OCBC

In 2001 the Singapore banking sector changed dramatically. The Monetary Authority of Singapore, which was beginning to sound like a record stuck in the groove as it attempted to persuade the country’s banks to merge and consolidate, finally got its wish in July. OCBC successfully acquired the smaller Keppel Capital Holdings and UOB snatched OUB out of DBS’s grasp. The speed of change surprised many observers.

For OCBC, it meant entering uncharted territory. The bank deserves recognition for its courageous strategy of financing its expansion plans through a triple-currency S$3.9 billion (US$2.2 billion) bond.

The issue, lead managed by UBS Warburg, was a deal of firsts and required strong nerves. It was the bank’s first-ever foray into the international capital markets, the first fixed-price reoffer deal done in Singapore and the first debt roadshow done by a Singapore borrower. It was also the first multi-currency issue by a bank in non-Japan Asia. And until OCBC took over Keppel there had never been a large-scale all-debt acquisition in Singapore.

OCBC needed to raise approximately US$1.75 billion of upper-tier-two debt. With insurance, that meant going slightly over US$2 billion. In order to maximize demand, the bank decided that it was necessary to offer the deal in multi-currency tranches so as to tap the European and US investor base since the Singapore market was thought to be too shallow. “People say with hindsight that the bank should have known it could have raised a billion in sing dollars,” says a banker close to the deal. “Perhaps they are right but before this transaction the biggest issue in bank capital was US$100 million.”

The deal was executed quickly. With its now former CEO Alex Au and the soon to be former CFO Christopher Matten driving the process, the bank’s board was given the confidence to act. Matten is described by one banker acting for another Singaporean bank as being highly sophisticated. “He has probably done more bank deals than most bankers,” he says.

OCBC announced its intention to take Keppel Capital Holdings on June 12 and a global roadshow was launched on June 20. Both Matten and Au were in attendance. Matten receives praise for his handling of one meeting at which he explained the bank’s strategy and how he was able to put investors’ minds at ease about the confusion surrounding the activity in Singapore.

On the same day that Matten and Au hit the road, DBS put in a hostile bid for OUB. Nobody outside Singapore could really claim to understand what was happening in the island’s banking sector. By July 29, though, 17 days after OCBC’s intention was announced, the US dollar and Singapore dollar tranches were priced, with the euro following on July 4.

OCBC’s team won over a diverse investor base. Of the US dollar tranche, 49% was taken up by investors outside Asia, and 82% of the euro tranche stayed in European investor’s hands.

The strategy of going to market before OCBC knew with absolute certainty that it needed the cash was criticized. And it did have to pay to assuage doubts. There was a potentially expensive make-whole provision giving the bank an option to call the bonds should its takeover plans fail. If it were exercised it would have cost the bank US$30 million. But the fact that the management returned to Singapore with evidence that it could raise enough capital to buy one of the available banks provided an important catalyst to Singapore’s consolidation and this outweighs the concerns raised. As one banker says: “Its action showed that they were pretty god-damn serious.”

Chris Cockerill

Western Europe

Best corporate borrower

Gallaher

The bond markets have turned sour for several of Europe’s top corporate names recently. France Telecom is still easily way ahead in terms of volume over the past 12 months but uncertainty has hit its spreads. It has issued very little since the beginning of 2002 and has no pressing need to issue any more until the end of the year. Deutsche Telekom has struggled to get large bond issues away amid scepticism about its ability to execute deleveraging plans.

In this context, defensive sectors have come to the fore, especially tobacco. Within that sector, Gallaher, one of the big three UK cigarette manufacturers, stands out as a small and infrequent borrower but one that has made an impact over the past 12 months. It has brought to market one of the year’s biggest BBB deals, issuing in a new currency, attracting new investors, creating a new euro benchmark and using the bond markets to finance a significant acquisition, rather than as an opportunistic funding raid. And it did all of that in late September, helping to bring back a degree of confidence to a highly nervous market.

“It was our clear objective to get a benchmark euro issue,” says Peter Whent, treasurer at the Gallaher Group. This made sense – the September issue came shortly after Gallaher had bought Austria Tabak in a deal that may boost Gallaher’s revenues to over £7 billion ($10.2 billion) in 2002.

The September bond was a €750 million transaction with an October 2006 maturity, brought to market by BNP Paribas, Dresdner Kleinwort Wasserstein and JPMorgan. It refinanced bank facilities that the company was using. It was followed by another €750 million deal towards the end of January 2002, this time through ABN Amro, Barclays Capital and HSBC. Both deals were oversubscribed.

Whent is pleased with the deals, particularly with the reception given to the September issue. “I totally endorse the fact that the euro market has grown as successfully as it has,” he says. “With the reduction of bank finance, this has been of increasing importance for corporates. We would not have had this opportunity before.”

The next big splash in the European tobacco sector will not be a new issue from Gallaher, however. Unless Gallaher makes more acquisitions, it is not planning to issue more bonds until further bank facilities come up for refinancing in 2005.

But the success of the Gallaher issues bodes well for Imperial Tobacco, the second-largest UK cigarette manufacturer. Both companies benefit from not facing the litigation risk of US tobacco firms or number one UK manufacturer BAT. Imperial Tobacco is planning to issue as much as €2.1 billion through sterling and euro issues at five- and 10-year maturities. Part of the funds will be used to pay for Imperial’s acquisition of German tobacco company Reemtsma. That will probably make Imperial the largest issuer in its sector this year.

Best financial sector borrower

Royal Bank of Scotland

The past couple of years have brought dramatic change for Royal Bank of Scotland. The 2000 acquisition of NatWest launched it onto the big stage of global finance, in competition with such rivals as HSBC and Barclays. But the same acquisition meant an unprecedented amount of issuance and a new funding strategy.

While many other banks have struggled with volatile markets and credit concerns, RBOS has used its excellent credit, strong balance sheet growth and solid fundamentals to bring a series of highly successful and often innovative deals to market.

Ron Huggett, capital-raising director at the bank, says his team have put a lot of their efforts into explaining the changes to investors. “We’re certainly regular borrowers, though perhaps you wouldn’t call us frequent,” he says. “We have changed so much in the last two years; the old RBOS was very different from what you see today. The challenge is to get that message across – to get people to realize that we are now the fifth-biggest bank in the world by market capitalization. We’ve been doing a lot of investor relations work, talking to investors in both the US and Europe, and we’ll continue to do that.”

Perhaps the most notable fruit of these efforts was the success of the $1.2 billion yankee that RBOS issued in August after two months’ planning. Among other innovations was that the bonds were not issued through a special purpose vehicle, simplifying the structure for investors.

Huggett says: “The yankee deal was a tremendous success. Initially we only wanted to raise $750 million but the demand we got was a lot bigger than anticipated. We increased the deal to $1.2 billion and could have increased it even more, except that we had no more room left on our shelf registration.

“We’ve been fairly regular users of the dollar preference share market, with a number of $200 million to $400 million deals to the retail market. And we issued $1.5 billion of dollar paper in March 2000, when the goodwill from the acquisition of NatWest hit our capital ratios. But we’d never done an innovative tier-1 dollar deal before, so the outcome of the yankee issue was particularly satisfying.”

Other borrowing highlights include £350 million and £500 million perpetual deals launched in November 2001 and March 2002 respectively.

Huggett thinks jittery investors are still looking for size and liquidity as much from the financial sector as from any other, and says RBOS has adjusted its approach to try to answer this need. He says: “The last 12 months have been some of the most turbulent ever, and most investors have shown they still want large, liquid benchmark issues rather than smaller deals. For example, we reopened our €1 billion [$920 million] lower tier-2 issue on the basis of reverse enquiry from investors who were looking for extra liquidity; in the past, we might just have issued smaller, separate deals.”

Huggett is understandably cagey about revealing where he is planning to come to market next. But he says the bank will maintain its efforts to innovate. He adds: “We’re always looking at the markets to see where we could issue, as we continue to have a need for capital, although now our reserves are helped by retained earnings. We’ll always look at new structures and ideas, and trying to tap new types of investors.”

TM Gazprom

The market spent a long time in anxious anticipation but when Gazprom’s inaugural $500 million international bond arrived in April it was worth the wait. Had it been the first of Russia’s corporates to enter the market after the 1998 crisis it might have had more impact. Nevertheless, it is the benchmark deal for that market in its truest sense.

The deal was priced on the back of an order book of $2 billion at only 87.5 basis points over the Russian 2007 sovereign and more than 100bp tighter than the existing corporate curve. “We walked a fine line between achieving the very tight pricing that satisfied the issuer and the Ministry of Finance and a pricing that made it attractive to investors. The bonds have since traded round about the issue spread, which implies that Gazprom left very little on the table,” says Aidan Freyne, managing director of fixed-income syndicate at Schroder Salomon Smith Barney, joint bookrunner on the deal with CSFB.

Admittedly, Russia’s international corporate bond issuance got off to a pretty lousy start last year, which hasn’t made it too difficult for Gazprom, the world’s largest gas producer, to shine. Rosneft’s issue that opened the market last year was highly expensive for the issuer and set a difficult precedent for those hoping to follow it. Sibneft actually postponed its bond because the market looked so dire in the wake of Rosneft.

A few decent corporate issues have come to market since (see MTS, page 63), and the market has been in a bull trend since the beginning of the year but Gazprom has actually made things look even rosier for existing and prospective issuers. “Because Gazprom priced where it did, it meant that previous issues from companies such as Sibneft and Rosneft tightened in the secondary market,” says Freyne.

Gazprom has a few clear advantages over other issuers. It has explicit support

from the Russian government – Sergei Kolotukhin, the deputy prime minister, even attended the last day of the roadshow. It is clearly a proxy for the sovereign as there has been no international sovereign issuance and there is no sign of any on the way. It even shares the same rating with the government.

Nevertheless the deal could have easily suffered from being delayed for so long – it was postponed for months while the government reorganized the company but in the end the deal actually benefited from coming to market a lot later. “Since we first mandated to do the deal there has been a two-notch upgrade for the Russian Federation and the changes in management at Gazprom during this period have helped to make the company more transparent and comprehensible to investors. We were also fortunate that the market tone for Russian credit was very positive when we finally came to market.”

This helped not just the price but also the tenor. When the deal was first mooted, it was going to be for 18 months, then a two-year maturity was on the cards, then three years. Suddenly, after Sibneft issued, five years was a possibility.

Some investors say the deal was actually too successful from the issuer’s point of view and that with Gazprom they did not get enough compensation for the risk they were taking. There are some complaints from foreign investors active in Russia that the company is still not transparent enough but Freyne says it is on the right track. “When we went on the roadshow,” he says, “Gazprom’s corporate governance was a lot more clear, although not completely clear. But the presence of representatives from the Ministry of Finance left investors in no doubt that the government supported the company’s efforts to improve corporate governance.”

Gazprom now has board approval for another $400 million bond. If and when this comes to market will be Gazprom’s real test. It is relatively easy to issue a highly sought after and long-awaited debut, less so to maintain the momentum and live up to the market’s high expectations.

Kathryn Tully

Best financial borrower

Kazkommerts-bank

In a handful of international financial issues from central and eastern Europe in the past 12 months, Kazkommertsbank’s (KKB’s) $150 million Eurobond should certainly be rewarded for reopening Kazakhstan’s highly illiquid bond market in April. This is particularly the case when a presidential decree resulted in the only other previous deal originating from the country this year being cancelled before the payment date – Kazakhoil’s €125 million ($116 million) deal in February.

For KKB, which hadn’t done an international bond since 1998 when it did a $100 million deal through ING, and had been pondering coming back for some time, being next in the market after this debacle was a brave move, as it was testing whether investor appetite was there any more for the country as much as for the bank itself.

However, KKB is a strong, profitable credit with a western-style management, which meant that investors were interested in it in spite of the country’s problems. “KKB successfully overcame the political event risk resulting from a Kazakh presidential decree that thwarted the Kazakhoil transaction,” says Reid Payne, director, global fixed income syndicate at ABN Amro, which was joint bookrunner on the deal along with JPMorgan. “A combination of dominant market share, strong business model, and strong management enabled it to drive wide investor interest.”

The pricing of the bond looked quite expensive for the issuer with a coupon of 10.125% and a pick-up of more than 500 basis points over the outstanding sovereign 2007 bond. However, much of this disparity is because the sovereign is highly illiquid and trading extremely tightly anyway. The lack of a liquid local benchmark meant that the pricing was based on a spread over US treasuries of 590bp. “Given that there was a lack of Kazakh comparables, this was really a price discovery exercise,” says Payne.

Nevertheless Payne was pleased with the price and how the bond has performed since. “KKB’s secondary market performance has been competitive versus the Russian corporates and it has been quite resilient given the surrounding volatility,” he says. The bond has appreciated from the reoffer price to a high of 99.80 and at press time was trading at 99.30.

It is also widely traded, providing some much needed liquidity among Kazakh issuers, although it was initially only sold to investors outside Kazakhstan, including German and US accounts. It will also give a much-needed boost to the domestic market when it is listed on the Kazakhstan stock exchange in June.

Bank TuranAlem has since done an issue through Deutsche Bank – a $100 million five-year deal. But Bank TuranAlem was also one of the only two issuers that launched international issues last year and the KKB deal is unlikely to inspire too many other new issuers, particularly when there is limited demand for Kazakh credits. KKB took a gamble coming to the market after the failed Kazakhoil deal. In the end, though, it was a gamble that paid off.

Best sovereign borrower

Turkey

Turkey had a rough year in 2001 – after the devaluation of the lira in February, a major economic crisis and a collapse in confidence there was a lot of ground to make up with investors. Yet the treasury had organized a very successful domestic debt exchange by the middle of the year to improve the acceptability of Turkey’s debt profile. By September, it was doing the roadshow for its first international issue, and then, of course, with September 11 the global capital markets were thrown into turmoil.

For Turkey to overcome all of this and launch its first international issue by last October – a four-year, €500 million ($460 million) deal – and make it a success was hard enough. Since then simmering tensions in the Middle East, fears about a US intervention in Iraq and the continuing health problems of the Turkish prime minister have not made Turkey’s life much easier. So the skill and timing with which Turkey has launched a further seven transactions subsequent to that first October deal have been applauded far and wide. Along with Russia, it is the biggest emerging-market recovery story in the region.

Now investor confidence is increasing all the time, but it was hard work getting there. “To turn the whole thing around after a deep economic and confidence crisis and convince the investor base we were back on track was the main challenge,” says Aydan Karaoz, deputy under secretary of the Turkish treasury. “For single-B credits, no matter what you say, people do look at you with some degree of scepticism. In the first roadshow in September, people bought the story but you could tell they still had concerns.” Turkey’s answer has been to be as frank with the market as possible. “Even at the worst of times, we have also tried to give the right reflection of us from a credit standpoint.”

Karaoz says that when it comes to emerging markets, the opportunities are not always there. “Windows open and then they close. Our view is to get prepared as if we were to come to the market tomorrow, but then wait for the right moment to do so.” Turkey has done so remarkably astutely on every occasion amid a flood of potentially bad news about the country and has a reputation for picking the best spots in the market, not just with its timing but also in its choice of maturities, currencies and investor bases.

Karaoz say: “We try to follow the markets as closely as possible, to see what our paper is doing and follow the investment flows, about whether we should target retail or institutional investors, for example.”

Turkey did just this in April. It held off doing a euro issue this year because its euro curve had widened, partly on the back of retail selling. But its €600 million deal in April was so successful, with much stronger demand from institutional investors, that it was subsequently tapped for a further €150 million.

Turkey was in the market every month between October and April, yet it is not perceived to be hitting it all the time or for the maximum amount available. A lot of its deals have been many times oversubscribed but it has resisted the temptation to exploit bursting order books. Instead it has launched a couple of very successful tap issues, but the spreads on the bonds have also improved 250 basis points to 300bp in the past three to four months. “We never look to get the last penny in the market,” says Aydin Karaoz, deputy under secretary of treasury. “We care a lot about our secondary market performance and all our issues are now trading above par.”

Turkey has also been savvy in using a wide range of bookrunners. “The first thing we look at are the price levels quoted,” says Karaoz, “but we have also increased our number of bank relationships to around 12, whereas in the past Turkey only worked with four or five banks.”

Turkey has reasonably light borrowing requirements this year – out of the $3 billion it needs it has already borrowed $2.2 billion. “This is only a matter of one or two additional transactions at most, but we will look at our position with our accounts and may consider exceeding our target a little bit and do some opportunistic financing,” says Karaoz.

Given that post-Argentina, Turkey has become the market’s darling, this should not be at all difficult to do.

Runner up – best corporate borrower

Mobile Telesystems

Of the other international corporate deals launched from the region this year, there were a couple of distinctive transactions. The controversial e800 million ($736 million) bond issued last October by Poland’s state-owned utility company PGNiG, the largest-ever euro-denominated corporate bond from the region, won Euromoney’s corporate deal of the year for 2001 (see February 2002 issue). However, for astuteness in its overall borrowing, Russian mobile operator MobileTelesystems (MTS) deserves a special mention.

It was widely predicted that after Rosneft’s issue in November, investor demand would remain dented for some time. However MTS, a Ba3/B+ issuer, surprised everyone by sneaking in a $250 million three-year deal just before Christmas through Dresdner Kleinwort Wasserstein and ING Barings.

Admittedly Gazprombank had just come to the market the week before, having the dubious honour of directly following Rosneft, but that deal was done in euros – a e200 million transaction – whereas MobileTelesystems was issuing in dollars, the same as Rosneft and Sibneft, which was also in the pipeline. MTS also sold the 144A deal to a more global audience, with institutional demand accounting for more than half the distribution, whereas the Gazprombank transaction was sold mainly to European retail accounts.

Coming so close to the holiday could have been risky as some investors thought it was too late in the year for them to get involved. However, the gamble paid off and it meant that MTS did not have to wait around to do the deal until January. The deal was priced around the mid-range of what was expected, to yield 11.25%.

The company had been looking for $300 million but instead of sacrificing the price further , it issued a tap issue for a further $50 million through the same bookrunners in March, with the same terms.

Asia

Best sovereign borrower

Republic of the Philippines

Few sovereign deals came out of Asia over the past 12 months. Those that did make it to the markets included China, Malaysia and this year’s winner for best sovereign borrower in Asia, the Republic of the Philippines. China and Malaysia both came once to market but the Philippines was able to take advantage of its improving story and the fact that investors were looking for new credit to tap the market three times.

In November, the Philippines issued a e500 million ($460 million) bond. The deal attracted some negative publicity, with the issuer being accused of paying too much. And some observers were confused as to why the sovereign entered the euro market instead of the yen or dollar markets. Previously, it had successfully placed a ¥50 billion ($400 million) 10-year shibosai (privately placed samurai) issue. It was 3.24% cheaper than the subsequent euro issue. But before too much attention is paid to the criticism it must be remembered that the euro offering was the first major deal of the new administration and was a perfect test of whether president Gloria Macapagal Arroyo and finance minister Jose Camacho were successfully getting the Philippines story out.

“Everyone was saying ‘do dollars, do dollars’,” says a banker close to the deal. “But Camacho said that it was important that the Republic diversified its source of funding.” It did just that. In going to the euro market it was able to build a new following of supportive investors outside Asia, which it was able to call on again in its subsequent offering.

The Philippines can also rightly claim that it successfully took advantage of Argentina’s misfortune, with investors reweighting their portfolios in the Philippines’ favour. Europe had long been a buyer of Argentina risk. Turkey was in turmoil too. “The economic news coming out of the Philippines was getting better and there was instability in Latin America and eastern Europe. It played both cards very well. It was very smart,” says a banker.

The Republic went out initially with a e300 million transaction but because of the interest generated it increased the deal size to €500 million. “It was steaming along,” adds the source. “It attracted over e2 billion worth of interest.”

Camacho is credited with turning the Philippines into a sensible and attractive borrower. With reference to the finance minister’s past career at Deutsche Bank, one observer says: “Camacho is very polished. And it is good to have an investment banker in that role. He is market aware and gives the necessary credibility. The Philippines now has a very mature attitude about raising debt and is doing a good job.”

It followed up the euro transaction with a dollar deal in January. Unlike the euro offering, its $750 million, 15-year global issue received unstinting praise. And the Republic’s overall strategy and its timing are commended. “It wanted to pre-fund its requirements up front and it took advantage of a classic moment,” says a banker. There was increased liquidity and interest rates were low. “It basically said, ‘let’s do it now, right away’. So from a planning perspective it was perfect,” says the banker.

Camacho is lauded again because of the way he convinced investors. According to one source investors could look him in the eye and they knew they would get their money back. A total of 205 accounts agreed, with many of the participants gaining exposure to the credit for the first time.

The Republic came to market again in March with a $1 billion, seven-year bond. The story was a similar one. Because of the success of its other deals, demand was strong once again. It was able to raise the issue from its intended $700 million.

Best agency borrower

Asian Development Bank

The Asian Development Bank returned to the markets at the end of January after a two-year absence with a $2 billion, five-year benchmark global bond. The transaction is the first of an expected $4.5 billion refinancing strategy that is set to continue over the next couple of years. This meant it was paramount that the deal set a successful benchmark. The deal also marked the arrival on the international stage of the bank’s new head of funding, Juan Limandibrata.

The ADB is commended for the timing of the issue and the fact that it realized that despite being triple-A rated it would still have to make investors, especially those outside Asia, sit up and take notice.

Before coming to the market the bank embarked on roadshows in Japan, Asia and the US. “ It was a very shrewd move on the part of the ADB to go out and retell its story,” says Max Blandon, head of debt at Morgan Stanley, one of the deal’s lead bookrunners. “It needed to reintroduce itself to the market.” The borrower also had to overcome the Japanese angle – Japan is the ADB’s largest underwriter. “Because Japan is going through significant problems the threat of a credit rating downgrade would impact on the ADB,” says Maximo. “And because of this angle it had to tell the story in a unique way.”

Being the Asian Development Bank, many expected the usual pattern of the paper only going into Asia. However, with the US leg of its roadshow the bank managed to get the US market quite excited about its name. The Asian bid remained strong, with 75% sold into Asia’s central banks, with the Middle East showing some interest. The rest was successfully placed in the US.

The ADB showed sensitivity and flexibility with regards to when it should re-enter the markets. It spotted a window of opportunity that more sluggish borrowers would have missed. The Eurobond market experienced extensive activity the week before it issued. Fannie Mae and Italy were among issuers, making it difficult for ADB to come to market. Other players were waiting for the Federal Open Market Committee meeting. However, when Federal Reserve chairman Alan Greenspan said that interest rates were not going to be raised, the ADB reacted quickly and entered the market almost immediately. If the deal had been delayed any longer the ADB might not have received such commendations.

The ADB should also be credited for what it attained in pricing, bringing the bank more in to line with other supranational credits such as Fannie Mae and the World Bank. Despite aiming for 2 basis points behind the World Bank in previous issues the ADB had often been at 6bp and higher. This time it came in at the tight end of the credit curve, only 1.5bp behind the World Bank.

Best securitized bond issuer

Samsung Capital

Samsung Capital was the first Korean entity to realize the benefits of securitization. In March 2001 it did the first-ever cross-border securitization deal by a Korean consumer finance company. It subsequently continued to build on its experience, coming to the international marketplace three times with its asset-backed securities.

In August 2001, for example, it completed a $234 million deal backed by consumer loans and on May 16 2002 closed a $296 million deal backed by auto loans. Although other corporates had bigger deals, such as LG Card’s $500 million offer, no other corporate came to market as often as Samsung.

“It has a rapidly growing business and has consulted with the world’s leading consumer companies,” says Kevin Lam, director of ING Barings’ Asian securities group. “It understood that securitization could finance its growth without growing the balance sheet. It can sell off its assets and is able to lend out again. It’s taking advantage of that benefit.”

Samsung Capital was also one of the few to take advantage of the return of monoline insurers to the market, which made doing cross-border transactions possible. The interest of the monolines means that deals can be wrapped and given triple-A ratings.

“There are leaders and followers,” says one banker. “Samsung Capital is willing to push the envelope rather than wait for some guys to do something and then mirror that.” Lam agrees and also believes that this has much to do with KH Won, the corporate’s CFO. Lam says: “He is worldly, sophisticated and used to dealing with international customers. He is very receptive to new ideas.”

When selling its last deal in May, Samsung’s roadshow took in many of

the important financial centres,

including London, New York, Singapore and Hong Kong. Seventy per cent of the deal finally ended up in the US. And although the deal was the standard Korean structure, at 36 basis points over one-month Libor it was priced tighter than previous deals.

Not one corporate in the region has embraced cross-border securitization with the enthusiasm that Samsung Capital has. There is a feeling among bankers that other companies, such as LG Capital, view cross-border transactions as nothing but a necessary evil as they attempt to diversify funding sources.

Past experiences of delays and higher up-front fees have added to their unease. It will take some time before they become as comfortable as Samsung and access the market as consistently.

Best high-yield issuer

Globe Telecom

Globe Telecom is the leading wireless communications provider in the Philippines, with 4.6 million subscribers, equivalent to 42% market share. Its aim is to continue to dominate and expand its prominence in this niche Philippine market. And it is doing so by using a careful funding strategy.

It sought access to the debt capital markets in March of this year with a $200 million global bond offering. According to bankers it could have raised three time as much. “The management is very astute,” says Steve Roberts, head of Asian fixed income at SSB. “They could have borrowed $600 million but they didn’t. The company just needed $200 million and the market liked that. It knew what the capital spending requirements were and borrowed accordingly.”

One of reason why Globe is such a successful but careful borrower, say observers is, the influence of Singapore Telecommunications, which holds a 28% stake in the company. Singtel has managed to avoid the trouble that so many other telcos have fallen into. “Its knowledge is definitely passed on,” says one.

“The success of Singtel is channelled through into the management of Globe,” says another.

Globe Telecom’s latest offering was definitely helped by the borrower’s track record. Its first and only previous entrance to the market was in 1999 with a very successful $220 million offer. And since that time it has delivered on all promises made. In the past three years its EBITDA increased from $18 million to over $300 million and it grew the subscriber base 10 times.

And, unlike its peers around the world, it has stayed out of the debt trap. Its ratings have also been in contrast to the industry as a whole. In 2001 its unsecured rating was upgraded twice by Standard & Poor’s and now stands at BB with a positive outlook. Moody’s Investors Service took similar action.

Issuing at the end of March this year was considered brave by some market participants. The markets were tough. Telco paper had a distinctly bad smell associated with it. In the US domestic market, high-yield telcos were constantly in the news for all the wrong reasons. But after a 10-day global roadshow, with the company’s president Jerry Ablazier in tow, 35% of the offer was hungrily accepted by US investors and 15% was successfully sold into Europe.

What makes this more of an achievement is that it was the first Philippine corporate bond offering since Globe’s previous deal. “The management and the company are transparent,” says Roberts. “When you have a president who can stand up in front of investors and talk so passionately about his company and in such detail it will always go well.”

Of the 10 one-on-one meetings Globe held in Asia, it had a 100% success rate. And globally, the average was an impressive 84% strike rate, up from 70% on its debut in 1999.

Best investment-grade issuer

Singtel

Singapore Telecommunications is one of a dying breed. It is one of the few highly rated investment-grade telecom companies left globally. In November it took advantage of its standing, successfully executing a three-tranche $2.29 billion offering.

Until May, when Malaysian national oil company Petronas launched its $2.73 billion transaction, it was the largest ever corporate bond issue out of Asia.

The funding Singtel needed was to finance its acquisition of Cable & Wireless Optus for $10 billion. Singtel already had $3 billion of its own cash but there could have been a further requirement of $6 billion. It eventually drew down $3 billion in the form of a loan that was syndicated out. But there were limitations as to how much it could raise in the form of a syndicated deal in the Australian dollar market, say bankers.

So when it knew what the cash requirement was, it decided to do term financing on the bond side for US$2 billion equivalent in Australian dollars, Singapore dollars and US dollars.

The reason that Singtel stands apart from other corporate issuers is that for a first-time borrower in the international capital markets it showed a level of technical understanding that surprised all bankers involved in the process. The Asian bid was familiar with the Singtel story but investors outside the region were less well informed. To many it was still a telco and in addition an Asian corporate.

Management faced a particularly aggressive grilling from potential US investors about its overall business strategy, its liability management, and details of its balance sheet.

Its eventual success can be attributed to the way in which it was able to differentiate itself from other telecom companies and persuade investors to focus primarily on the strength of its credit. According to those close to the deal Singtel did its homework thoroughly. It knew its numbers inside out. “Although you would expect this, it’s not always the case,” says an observer. “I have on other occasions been embarrassed by a client.” He adds: “The effectiveness with which Singtel answered the questions built a lot of momentum for the offer.”

Figures back up the claims. Out of 30 one-on-one meetings, 18 of which were in the US and five in Europe, Singtel was 100% successful in bringing investors on board. “When people saw them in operation they would go and get more senior guys in to listen,” claims a banker involved in the deal.

When the four-day roadshow started, Singtel’s order book immediately swelled to $1 billion. By the time of pricing it stood at $18 billion, eight times oversubscribed, with 650 investors wanting a piece of the action. The distribution achieved was globally extremely well balanced. What Singtel achieved in this offering was to create a highly credible platform that will allow it to reaccess the capital markets when it needs to.

Latin America

Best sovereign borrower

Colombia

Only in one Latin American country has the government’s financing strategy significantly changed investor sentiment and brought a turnround in the sovereign’s reputation in the international capital markets over the past 12 months. That country is Colombia.

In April 2001 Colombia was something of a pariah in the debt markets, with no prospect of being able to issue plain-vanilla dollar-denominated debt. Standard & Poor’s downgraded the sovereign twice in two months, president Andres Pastrana was losing control of his political coalition, and the country had somehow to find $2.7 billion in external financing requirements for the year.

The first key deal to lay the groundwork for Colombia’s rehabilitation was brought to the markets by Goldman Sachs and JPMorgan with the additional help of the World Bank. The Bank put up $250 million in rolling principal and interest guarantees, which was then leveraged into a $750 million, 10-year bond with an investment-grade credit rating.

The investment-grade rating brought a lot of crossover accounts, new to the credit, and the World Bank guarantee reinforced in the market’s mind the fact that Colombia had solid support in the corridors of power in Washington.

The bond resembled in some ways a series of zero-coupon bonds that Argentina had issued the previous year – these also came with rolling World Bank guarantees – but was structured differently to prevent the illiquidity that had plagued the Argentina bonds ever since.

Suddenly there was no stopping Colombia. A small yen issue came hot on the World Bank bond’s heels, led by Kokusai and Merrill Lynch, and then the World Bank issue was reopened for another $250 million, making it Colombia’s largest and most liquid global bond to date.

ABN Amro and UBS Warburg then brought a €400 million ($368 million), 10-year bond to market, continuing Colombia’s strategy of relatively small and frequent euro-denominated issues.

By the end of May, Colombia was able to come to market with its first plain-vanilla dollar bond in over a year: a $500 million, five-year deal from Morgan Stanley.

Investors were still worried about Colombia’s large stock of short-term local debt, however. So the country, in association with Salomon Smith Barney, structured a massive Ps6.1 trillion (roughly $2.5 billion) domestic debt swap. Some 52 small local bonds were swapped into three big and liquid new instruments: three-year and five-year fixed-rate bonds and a 10-year floating-rate bond.

Even though maturities were extended, the attractiveness of the new issues meant that Colombia managed to lower the yield it was paying on the debt. By the time the exchange was completed it had been such a success that Colombia decided not to even bother with the international exchange that it had been considering at the same time.

Four more deals followed in 2001, each at a lower spread than the last, and extending out as far as 2020.

Colombia has begun to spread its business widely, mandating six different banks on the new deals, bringing the total number of different lead managers it used in the year to 10.

In 2002, it even managed a major deal that had no lead manager at all: it repeated the success of its 2001 domestic debt exchange with a second one, this time doing all of the work in-house.

By the end of 2001, Colombia had not only managed to raise all the money it needed for the year but had already pre-financed most of its 2002 needs as well. In a country desperate for any kind of stability, the pre-financing came in very useful indeed when presidential elections came along in May.

And while political volatility has shown up in the country’s spreads, Colombia is nowhere near the state it was in at the beginning of 2001, when it was pretty much closed off from issuing in the dollar market at any price.

Felix Salmon

Best structured/securitized borrower

Petrobrás

Petrobrás, Brazil’s state-controlled oil company, managed to open up the biggest new market for Latin debt of the year. The trick was counterintuitive: it would buy political risk insurance (PRI), protecting investors against the risk of non-payment because of Brazilian legislation preventing the company from honouring its debts.

Petrobrás is not exactly the obvious candidate to open up the PRI market because its ownership structure implies a natural moral hazard. Since the Brazilian government controls Petrobrás, any time it wanted to save on a coupon payment it could simply pass a decree saying that the company wasn’t allowed to make it. Immediately the insurer would then have to pick up the payment responsibility.

The PRI nevertheless managed to bring Petrobrás’s credit rating up to investment grade, and that was enough for investors in the US who were used to seeing spreads closer to 165bp over treasuries on similarly rated paper. Petrobrás, in contrast, came at 475bp over. This was, though, still hugely inside the sovereign, which was trading at close to 845bp over treasuries at the time.

Petrobrás came with three PRI deals over the course of the year. The first two, in May and June 2001, were lead managed by UBS Warburg and totalled $1.05 billion; the third was a $400 million deal in January, lead managed by UBS Warburg and Morgan Stanley, which was reopened for another $100 million in February.

The Petrobrás deals spawned so many imitators that insurance companies ran out of Brazil exposure to sell. But the investor-base arbitrage remains: a relatively cheap tweak can bring a company out of the universe of dedicated emerging-market investors and into the sights of industry-based investors in the US.

Petrobrás wasn’t content to stop there, however. If oil bond investors in the US require much less yield than their emerging-market cousins, then triple-A investors require much less yield still. Enter Petrobrás’s exports of heavy fuel oil, a flow of cash ripe for securitization.

Although the securitization of crude oil production is standard practice in Latin America – both Mexico’s Pemex and Venezuela’s PDVSA do it regularly – heavy fuel oil is another matter. For one thing, it’s sold to small shipping companies rather than to enormous oil multinationals: the customer base is of much lower quality.

Also, the market in heavy fuel oil is concentrated in a few ports, notably New York and Rotterdam. But Petrobrás’s fuel oil is in Brazil so the cost of shipping it north has to be factored into the equation.

In order to get to a triple-A rating, Petrobrás therefore first wrapped the deal with surety bonds, essentially guaranteeing timely payment of principal and interest. That wasn’t quite enough, however, so it also entered into an offtake agreement with Citibank, which agreed to buy a minimum amount of fuel oil every month. Citi’s cost of hedging that agreement was simply absorbed into the yields of the new bonds, which came at 6.6% and 6.75% for the two fixed-rate tranches and 85bp and 100bp over three-month Libor for the two floating-rate tranches. Tenors were nine, 10 and 12 years; the lead managers were Salomon Smith Barney and BBVA.

At the end of the structuring process, the only risk that bondholders were taking was that Petrobrás wouldn’t produce any more fuel oil at all. They bought $750 million of paper in total. At present rates of production, there’s probably room for as much issuance again.

Best corporate borrower

Grupo Televisa

Mexico’s Grupo Televisa certainly knows about market timing. It issued two bonds over the past year, a 10-year in September and a 30-year in March. The former came just a few days before September 11; the latter managed to take advantage of the lowest yield on 30-year US treasury bonds in the past 20 years. (Actually, yields were slightly lower during the LTCM and 9/11 crises, but no-one could issue any

debt at those points in time.)

Quite aside from their timing, both deals were hugely impressive. The 10-year, which was lead managed by Salomon Smith Barney and JPMorgan, priced just 14 basis points wide of the Mexican sovereign benchmark: the tightest pricing of any Mexican corporate 10-year bond ever. That’s an especially impressive achievement considering that Telmex’s 2006 bonds were trading at 30bp over Mexican government paper at the time, despite the fact that they had only half the tenor and were rated two notches higher by Moody’s.

The original price guidance, at the start of a three-day abbreviated roadshow, was 25bp over Mexico’s paper, for a $250 million bond. By the start of the third day, price talk had tightened to 18bp to 23bp, after a $550 million book had been built. And by early afternoon, the bond priced, upsized to $300 million, at just 14bp over. The order book was $819 million; the date was Thursday, September 6.

Settlement was on a T+5 basis, which worked out as September 13. And despite the fact that spreads had widened out dramatically and that a couple of the investors were based in the World Trade Centre, not one of the buyers invoked a force majeure clause to try to back out of the deal. Investors – overwhelmingly high-grade investors from the US – were sold on Televisa’s global production abilities, as well as the growth of the Latino market in their home country.

Televisa then increased its stake in television station Univision, using bridging finance from JPMorgan, Salomon Smith Barney and Deutsche Bank. Those three houses then got the mandate for the $250 million, 30-year bond which was designed to refinance the bridge. The leads expected to be able to find demand at 8.75%, or 341bp over treasuries.

Initial price guidance was aggressive, at 325bp over treasuries, but even that level attracted $1.4 billion in interest. So the leads increased the deal size to $300 million and tightened the price guidance further, to 305bp to 315bp over; the bond was finally priced at the tight end of that range, at 305bp over treasuries. The coupon was 8.5%, and the yield was 20bp below that originally envisaged, at 8.55%. The paper was 47bp wide to the Mexican sovereign and just 8bp wide of Pemex’s 2022 bonds, which had a shorter maturity and were two notches higher rated.

What’s more, Televisa’s bond marked the first time ever that a privately owned Mexican corporate had issued 30-year debt.

As for timing, in the two weeks following the issue, the yield of the 30-year US treasury rose by 20bp. For a 30-year bond, that meant savings for Televisa of some $7 million compared with what it would have had to pay had it issued the bond at the same spread two weeks later.

Best financial-sector borrower

Banco Itaú

Most Brazilian bond issues come from banks and most of these bank issues are highly predictable: small, short-dated deals sold to a limited investor base. Banco Itaú does such deals as well as anybody and indeed did three over the course of the year: a $100 million 18-month deal through WestLB, a $100 million two-year bond with BNP Paribas and a $100 million three-year bond lead managed by Dresdner Kleinwort Wasserstein.

But where Itaú broke ranks with the rest of the Brazilian financial community was with an issue of 10-year subordinated capital securities through Merrill Lynch. Itaú followed the lead of fellow winner Petrobrás in wrapping the deals with political-risk insurance: that was enough to get an A3 rating from Moody’s – the highest ever given to a Brazilian bond issue.

Itaú also took a leaf from the book of Mexican bank BBV Bancomer, which had done a similar capital securities issue through Merrill Lynch earlier in the year. With the ground already broken, Itaú could simply roadshow investors who were comfortable with the asset class of capital securities and just wanted to know more about the credit.

What had never been done before was the combination of PRI with capital securities; indeed, this was the first ever hybrid capital security out of Brazil.

Another innovation in the Merrill deal was that it came in two tranches: one in dollars and one in yen. The $100 million tranche was later reopened for another $80 million; the ¥30 billion tranche raised an astonishing $242 million on its own. Both carried 10-year maturities – something also virtually unheard of in the Euroyen emerging markets, where even sovereigns usually come at less than five years.

The Itaú bond set a number of other landmarks: for one thing, it was Brazil’s longest-ever bank bond, notwithstanding the subordination. It also marked the first time that any Brazilian entity other than the sovereign had issued in yen.

The deal came at a very turbulent time in Brazilian capital markets, at the height of Argentina contagion, and came very close indeed to getting pulled. The only reason the roadshow went ahead was because Itaú wanted to meet a new potential investor base regardless of whether or not it was going to end up selling any debt. In the end, however, the bank achieved financing 437bp through the sovereign in dollars, and 464bp through the sovereign in yen.

North America

Best sub-sovereign borrower

New York City

US municipal bonds make rare appearances in Euromoney these days. They’re good, tax-free investments, and have rarely been newsworthy because city budgets have performed relatively well, or at least improved, in the past decade.

There is one issuer, though, whose story is rather more complex: the City of New York. Its issuance programme is run by the office of management and budget, part of the office of the mayor, and issues between $7 billion and $8 billion a year. That makes it one of the largest issuers of debt in the US. It needs to be: the city has a 10-year capital plan of $50 billion, which is roughly six times more than the next largest municipal, Chicago. “We need to be at the cutting edge of issuance because we are so big,” says Alan Anders, deputy director of the office of management and budget. “We’re bigger than other municipal issuers because we are much more centralized. We don’t parcel out debt issuance to the water authorities or other city authorities as others do. It’s all done through us.”

Anders has 22 people on his staff, uses nine securities houses to bring the deals and to bring him ideas, and can issue debt through one of five different vehicles. The main one is the general obligation debt. In 1997 the Transitional Finance Authority was added. This allows for up to $11.5 billion to be raised for capital purposes in addition to the general obligation debt programme, and is an asset-backed programme securitizing future personal tax revenues from the city. That makes it separate from both New York City and New York State in the event of bankruptcy. It has a higher rating, AA, than straight debt so it is a cheaper form of funding.

In addition, there is the municipal water finance authority, TSASC, which is the funding vehicle for securitizing future revenue from tobacco litigation (New York won $7 billion of $206 billion granted to 46 states) and Jay Street Development Corp, which is solely to help finance building a new courthouse in Brooklyn.

The past year would have been tough anyway: the impending recession was hitting city coffers. But the attacks of September 11 made matters much worse. And for Anders and his team it was not just a financial problem: they are based at 75 Park Place, just yards from where the World Trade Centre towers stood. Having escaped the collapse, they were unable to return to their building until March.

Work had to continue. “We had some of our variable-rate debt due on September 12,” says head of investor relations Ray Orlando. “So we had to make sure it was paid.” Redemptions are a regular feature of the muni market: bonds are often issued with 30-year maturities but with one-day puts, and are continually rolled over.

Immediate help came in the form of a popular piece of technology. “I’m a Palm Pilot freak,” explains Anders. “I had all the numbers we needed in there, so as soon as I’d walked back to my apartment in the [West] Village I started calling.”

Another worry was that one of the trustees for the bonds was Bank of New York. It’s based right across the street from Anders’ office and was experiencing its own severe problems as a result of the attacks. Despite all this, says Anders “there were not many puts, and we had no failed auctions”.

The next job for the team was to find offices. After a couple of days in the mid-town office of one of their bankers, they spent a week in the City’s information systems headquarters before moving to space in Brooklyn.

They waited for a couple of weeks before setting up a formal investor conference call, in part because some potential participants were dealing with their own post-attack problems. Usually, the city’s investor conference calls have about 50 people on them; this one had 350.

At the start of October they started issuing debt again. “We wanted to reintroduce all our credits to the market, and decided to start with the best,” says Anders. So the first post-attack deal was for $1 billion, priced on October 2 from the Transitional Finance Authority vehicle. It’s not part of the original $11.5 billion limit granted in 1997 but part of the $2.5 billion extra granted to the vehicle by the state legislature on September 13 to help pay for any expenses directly related to the attacks.

The bonds are thus known as recovery notes. They have a duration of one year so that they can either be paid by federal government grants or, if these are not applicable, by a longer-duration bond issue when they fall due. Demand was high. “We had the mayor mention the forthcoming deal several times in TV appearances as a way for people to show their support,” says Orlando. “Of the $1 billion, $350 million went to retail, which is more than we’ve ever had.”

The issue’s success was such that over the next four weeks the city launched five more deals. By November 1 the office of management and budget had raised a total of $4.2 billion. The water authority was the second deal, priced on October 10 and raising $210 million. Next was a $1.5 billion issue of revenue anticipatory bonds on October 17, then on 23 October the first post-attack deal from the general obligation programme, for $400 million. On the last day of the month the TFA priced $422 million, followed the next day by a $700 million general obligation variable rate deal. Since then a further $2.8 billion has been raised.

With the immediate crisis over, the next step for Anders and his team was to prepare for the mayoral handover from Rudolph Giuliani to Michael Bloomberg at the start of 2002, and for the growing budget deficit. “We’ve had a balanced budget every year since 1981,” says Anders. “No other authority has that record, we think, and we aim

to keep it.” There is a strong incentive at the mayoral level to do so: if the budget is out of balance by $100 million or more – out of an overall budget of $42 billion – he loses control of it.

Initially there was a projected shortfall of $5 billion – $3.5 billion of that has been accounted for by various measures implemented by the mayor, such as cost-cutting. That leaves $1.5 billion for Anders to raise. He already has $500 million of it from the October 2 issue.

“We never used the proceeds from that deal in the end,” says Anders. “But we expect to have to use half of it to pay for post-September 11 expenses that the federal government won’t

reimburse, such as using firemen and police as security at the site rather than bringing in security guards.” So that leaves just $1 billion to raise, and Anders expects to do that from the transitional finance authority before the end of July.

Best agency borrower

Freddie Mac

In early September Freddie Mac was getting ready for two deals. It was in the process of marketing a 10-year reference note, and was set to price its auction for two-year paper on September 12. Both were postponed after the terrorist attacks on the World Trade Centre and the Pentagon.

Neither of Freddie’s two main funding officers was in the office that day. Jerome Lienhard, senior vice-president in charge of global debt funding, was seeing investors in Stockholm, and couldn’t get any farther than London until the end of the week. The treasurer, vice-president Louise Herrle, was at a meeting in North Carolina.

At that stage, no-one would have blamed them for waiting a few weeks for the market more properly to assess the situation. But Lienhard and Herrle decided they had to press ahead. “I don’t want to sound as if we were beating our chests but there was certainly a feeling that we should try to act as leaders,” says Lienhard. “And we felt it was important to maintain the commitment to our funding calendar.” The relatively smooth selling of short-term notes by both Freddie Mac and Fannie Mae on Wednesday 12 provided some comfort.

So that Friday, September 14, the auction of its $5 billion two-year notes went ahead. “We’d assessed the potential outcome closely, and were pretty sure we’d be okay,” says Lienhard. “But we couldn’t quantify the emotional aspect, and that skewed the risk element. The deal would either go very well or very badly.”

It went well, so much so that Freddie Mac decided to launch the $5 billion in reference notes the following Monday. It then announced that it would launch a e5 billion ($4.6 billion) reference note in the second half of September. That was priced on September 26. As a result “we were the first borrower to access the major markets” after the attacks, says Lienhard.

The euro reference note programme is another reason for giving Freddie Mac this award. Freddie set up its programme in 2000, with its first deal in September that year. It committed itself to raising e5 billion for each new issue, and to issue at least once a quarter.

It has done just that, and thus has continued to act as the leader in making jumbo issuance in euros a regular and accepted practice. “It’s gratifying to see that large liquid deals of at least e5 billion are normal now, rather than an expectation,” says Lienhard.

Some market watchers were sceptical, even last year: Freddie Mac had hardly tapped the legacy currencies before. But Freddie persevered, saw the market deepen as KfW and to a smaller extent the EIB started to issue jumbo euro deals, and Lienhard’s relationships with European investors from his time at Toyota Motor Credit helped fill in Freddie’s gaps.

Now, says Lienhard, large deals issued in euros “have moved out of childhood into adolescence. We’re getting deeper penetration beyond the top tier of European investors. Roughly 50 first-time investors in our paper come in with each deal, especially those in Spain, Italy and the Benelux countries. Compare that with the mature dollar market, where we get no more than 15 new investors coming in.”

The cost of funds is not prohibitive. The five- and 10-year paper is more expensive than dollars but both have closed the gap. “There’s a four to five basis point spread now,” says Lienhard. “And the all-in costs of our September euro deal were cheaper than the dollar deal a week or so before.”

The third reason why Freddie Mac won the award was their approach to the 30-year sector. With the Fed dropping 30-year paper, US treasuries of that maturity were all but dead by October, and agency debt was trading 10bp to 15bp over Libor – it had gone as high as 30bp over before coming back in, but agencies such as Freddie Mac prefer to see it at sub-Libor levels.

So it faced a dilemma. “We wanted to reinvigorate the 30-year sector,” says Lienhard. “But with interest-rate levels where they were, and given the shape of the yield curve, we had no real need to issue any new paper.” It also had a calendar commitment to the sector for mid-February.

The answer, which Lienhard and Herrle worked out with book runner Goldman Sachs, was to do an exchange offer mixed with a small issuance of new paper. But the exchange was different to the more normal exchanges, explains Lienhard. “Usually you exchange old, illiquid paper. This time we were exchanging reference notes.” There were two of them involved: the September 2029 and the March 2031 bonds. Freddie planned to exchange up to $2.5 billion, and then issue $500 million in new notes to create a new 30-year deal. “We were prepared to issue more new paper if we had to, to make sure we had a $3 billion deal,” says Lienhard.

In the event, investors were willing to exchange $928 million of the 2029, and $5.749 billion of the 2031. Freddie took back most of the former but just 28% of the latter. Along with the $500 million of new notes, the new security was just over $3 billion. “It’s created a new on-the-run 30-year,” says Lienhard. “And there’s demand from investors for us to do it again, and we’ll definitely contemplate it.”

Best high-yield corporate borrower

Echostar

The return to favour of the high-yield market in the past six months is yet another bizarre twist in the story of skewed US capital markets. Nothing highlights that more than the deal done for Echostar at the end of last year. It was a $700 million deal lead managed by Deutsche Bank which forms part of the funding for one of the most hotly contested M&A deals of recent years.

Rupert Murdoch put in a bid for Hughes to get its satellite TV business. For a long time it looked as if General Motors, Hughes’s parent, would accede, even after Charlie Ergen, Echostar’s founder and CEO, launched a competing bid. Few would expect a relative upstart such as Echostar to defeat Murdoch, but it did.

It was close, though. Two days before a key board meeting Ergen sacked one of his advisers. UBS Warburg was trying to renegotiate the terms of its half of the $5.5 billion loan it and co-adviser Deutsche Bank had agreed to put forward.

Deutsche couldn’t cover it, so Ergen, in an unusual move, pledged $2.75 million of his own assets – some of his holdings in his company’s stock. That helped swing it his way, and a week after he’d won CSFB stumped up a loan to replace his shares.

The high-yield bond was the first part of the take-out of the loan. At $700 million, it’s the largest M&A-related junk issue in a decade, and with coupon of 9.125% represents Echostar’s lowest of all its deals – interest rates of 1.75% helped, of course.

Timing could have been a problem but markets stayed open for the deal. “The market had a lot of momentum during the fourth quarter,” says Carl Mayer, managing director in Deutsche Bank’s high-yield department, “so for a marquis name like Echostar, investor demand was very strong despite pricing the transaction just before Christmas.”

Best financial-sector borrower

Wells Fargo

Many banks’ outstanding bonds went through volatile periods as investors expressed concern for the health of their commercial loan books, their business models, or both. Wells Fargo offered a safer haven than most.

And in the primary markets it also offered just what the market wanted.

On the institutional side, this meant plain-vanilla paper. In the past 12 months Wells Fargo has issued four $500 million deals: a three-year, two five-years, and one global 10-year bond. There was nothing fancy, just simple, straightforward fixed-rate bonds that the bank then swapped into floating rate.

“Our performance in the institutional market is very much a function of the consistent business strategy of the bank as

a whole,” says Nino Fanlo, Wells Fargo’s treasurer.

It’s the way in which the bank tapped retail demand that really makes it stand out as best financial-sector issuer, however.

Since August last year Wells Fargo has issued three tier-one preferred deals. Each was targeted at retail investors, and each was structured using call monetization. It’s not unique to Wells Fargo but one banker familiar with the company says: “Wells is a very adroit user of this market.”

The structure works like this: Wells Fargo issues a 30-year non-call five deal to retail, and the call value is par. It’s a fixed-rate deal, and will be swapped into floating rate.

This allows the bank to take advantage of the steep yield curve and get a cheaper cost of funds than in fixed rate. And the swap is structured so that it can be cancelled on the same day the call falls due.

The counterparty on the swap – for which read the bond underwriter – takes out an option on the calling of the bond or cancellation of the swap. The cancellation of the swap will normally go hand-in-glove with the call but the counterparty can still cancel the swap even if Wells Fargo decides not to call the bonds.

Wells Fargo’s first such offering in the past 12 months was a $1.3 billion deal underwritten by Morgan Stanley. Goldman Sachs spotted an opportunity in the market in November to offer Wells a bought deal using the same structure, for $200 million, and followed that up with a public $450 million deal in March.

The structure meets retail investor demand in a cost-effective manner for the issuers. Fanlo says: “Once we monetized the volatility in the option, we captured a very favourable cost of funds for the bank.”

Best asset-backed securities user

GMAC Commercial Mortgage

Structured products have lost some of their lustre during the past 12 months. The furore surrounding the role played by special-purpose vehicles in the downfall of Enron has at times threatened to spread to the market of asset-backed securities as a whole. GMAC Commercial Mortgage has remained a consistent innovative and diversified issuer of asset-backed securities throughout this period.

The firm’s strength, explains Dan Sparks, managing director and head of structured product syndicate and trading at Goldman Sachs, is that “they are excellent at taking care of institutional investors and providing them with all the information they need. They’re consistently coming to market with different deals, so keeping investors in the loop is crucial.”

Since May last year GMAC Commercial Mortgage has issued just under $4.5 billion through asset-backed deals using a variety of structures, ranging from tax-exempt bonds, through fixed-and floating-rate commercial mortgage back deals, to real-estate collateralized debt obligations (CDOs).In May 2001 it also issued the first securitization of loans backed by mezzanine debt, raising just under $460 million.

Last December it securitized loans used to finance three buildings owned by Lucent Technologies, the troubled telecommunications equipment maker. “These buildings are crucial to Lucent’s operations,” says David Creamer, CEO of GMAC Commercial Mortgage. “This deal, for $323 million, is one of just two done in the US in the last five years on behalf of a financially troubled company based on real estate assets.”

It’s also securitized less obvious assets. One such example is a deal last June for just under $450 million. “We securitized the leases on equipment crucial to certain types of real estate,” says Creamer. “Such as for nursing homes, or restaurants.” Creamer and his team followed that up with a $71.7 billion deal backed solely by healthcare leases in December.

With four deals under its belt since the start of 2001, and with a fifth in the market at the moment, GMAC Commercial Mortgage is the largest manager in the US of real estate CDOs. In the last 12 months the team has launched three such CDOs, raising a total of $1.175 billion.

The first two, in June and November, packaged commercial mortgage-backed securities and Reits, while the last one also included regular asset-backed securities. Its first deal, in February 2001, raised $861 million.

“In each CDO we’re a majority equity owner,” says Brian DiDonato, senior vice president, managing director, GMAC Institutional Advisors, who runs the CDO programme. “We regard this as term financing, and try to create the most stable capital structure we can.”

Unlike some other CDO issuers, the group has not shied away from the market since the FASB released its thoughts on consolidation of some special purpose vehicles. If the board’s initial outlook were implemented, managers of CDOs might be forced to consolidate the structure onto its balance sheet as the prime beneficiary, depending on how much of the deal they owned, and how much potential profit and loss they are exposed to. But, says DiDonato “the two deals we’ve done since the FASB published its draft have been structured to be consistent with it.”

This forthright, cutting-edge approach is one that Creamer intends to continue. “We always like to be innovative but we also want to structure products which meet with the needs and demands of our investors. And we jealously protect our reputation with them.”

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