Local and regional debt issuance, particularly in euros, has been the fastest-growing sector of the international bond markets. Annual issuance in 2002, for example, was up 258% on issuance three years before. Most is accounted for by the German Länder. Of the top 10 issuers in the past year, seven are German – with Land Berlin topping the issuer league table with almost $10 billion-worth. The other three are Canadian issues.
The investor base in this market is skewed too. Most buyers are German mortgage banks and Landesbanken which use the paper as collateral for Pfandbriefe.
Despite this imbalance, the leading bookrunner by volume of local and regional debt is Merrill Lynch. The firm competes with WestLB for domination of the German market through an operation spearheaded by Manfred Ludwig, the bank’s director of German public sector origination. The key relationship is with Berlin for which the bank has run books on eight significant deals in the past year, mostly in the domestic public market.
But it is outside Germany that Merrill’s dominance is more interesting. In particular the Italian local authorities business has been dominated by the firm, which brought the first deals to market in 1996 for the City of Naples, in 1998 for Lazio and in 1999 for Sicily. Perhaps the highlight of this association, though, was the October 2002 $1 billion 30-year issue for the region of Lombardy, a debut issuer.
It was a tough deal, particularly given exceptional volatility in stock and bond markets. At the time as Nazarro Angelini, managing director with Merrill, said: “There was a little scepticism in the market because this type of transaction had never been seen before.” In the event the deal was a blowout. Merrill has also done deals for the Comune di Milano and the regions of Abruzzo, Tuscany, Umbria and Puglia.
It also gained a foothold in the burgeoning Spanish market with the November 2002 deal for Castilla La Mancha – the borrower’s debut in the international capital markets. As with the Italian deals, a key element of Merrill’s mandate win was its ability to work with local underwriters to ensure maximum foreign distribution.
The competition has woken up to the march that Merrill has stolen. Nomura has poached both people and deals from the firm and Lehman has used derivatives education to try to entice Merrill’s debutants into a second wave of more sophisticated financing. No-one should bet though that the firm will give up this lucrative and growing franchise without a fight.
