Awards for Excellence 2005
Bill Young
the great innovator of European ABS
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SECURITIZATION HAS TAKEN many years to become an indispensable part of European capital markets. Just 10 years ago it was a little understood, rarely used technique borrowed from the US. During the past five years, though, it has caught on with issuers and investors at a pace that has been nothing short of astonishing. Bill Young, formerly of Citigroup, now at Goldman Sachs, has headed up securitization teams that helped shape the European financial landscape. After working for Citibank in the US straight after completing college, Young journeyed to Europe in the late 1990s without expecting to still be in London seven years later. Once at Citigroup London, he set about establishing a small capital markets business working with continental European players that needed finance for commercial real estate. At that point Citibank was not a big player in ABS but that was about to change dramatically – suddenly he was behind the wheel of one of the strongest fixed-income franchises when Travelers merger with Citibank brought Salomon Brothers’ investment banking capabilities into the fold.
No individual can claim responsibility for the state of a whole market segment, but some come closer than others. Although there a few bankers with securitization backgrounds that have extremely large profiles, especially those that used ABS as a tool for M&A activity, none can boast a portfolio as broad as Young’s.
Young has done more than his fair share of trades that have been corporate finance-driven, but he has also been instrumental in changing the way that mortgage finance is conducted, how much debt utilities take on board, and how large infrastructure projects are paid for.
He is associated with more innovations in ABS than any other banker in Europe, and his peers rate him as the best in London – high praise in the ultra-competitive financial services industry. However, Young demands that praise is shared with his current and former team members.
“One of the great pleasures of my career has been to work alongside such gifted people at Citigroup and Goldman Sachs,” he says. “It has been a challenging, invigorating experience… looking at issues in depth and trying to find a new creative solution to a client’s problem or specific need.”
The £1.5 billion ($2.7 billion) Punch Taverns issue in June 2000 was one of the first groundbreaking deals. It put together a portfolio of managed and leased pubs purchased from Allied Domecq. Morgan Stanley lost the refinancing mandate when Citigroup stepped in with a novel plan. Why not avoid the hassle of carving the portfolio into managed and leased components? No-one believed securitizing a managed portfolio was feasible. Another essential twist was to create massive triple-A rated portions of debt via a monoline credit wrap. The sterling market would not have been able to absorb that much paper without some of it being credit enhanced.
“Punch was simply a question of us listening to our clients,” says Young. “If you like the economics of pubs, you should like both leased and managed pubs. It was important to look at the different characteristics of the leased and managed pub sectors and to structure and distribute the transaction accordingly. We believed there would be significant demand for lower tranches, even below investment grade, given the quality of the asset class.”
It is worth remembering that at the same time Citi was arranging a £2 billion whole business securitization for Welsh Water. Faced with such large amounts of paper to distribute, new structuring and distribution ideas were needed. Welsh Water was able to raise debt at 92.5% of its regulated asset value – the next best offer on the table was from Guy Hands’ principal finance team but worth only 75% of RAV.
“All of these structures were ideas that a team of people developed to solve a problem where there was either a liquidity problem or a distribution issue. We had a great team of people on it. And we did the same on the master trusts, again listening to the client,” says Young.
The development of the master trust for UK residential mortgages transformed the nature of mortgage financing. Suddenly unpredictable prepayment speeds were not such a problem. With the master trust it was possible to create bullet securities and much larger transactions were now part of the norm. If there was insufficient capacity in Europe, you sold the paper to US investors as well. Abbey National and Bank of Scotland were the two UK banks to first go down this route in 1999.
“Master trusts brought with them a pick-up in efficiency, not only on where the swap was priced but also on the securities, just because again they’re easier to price and, for an investor, easier to understand if they’re just buying a bullet. The whole idea has always been to broaden the investor base on those deals,” Young says.
Young joined Goldman Sachs in the summer of 2001 in search of a new challenge.
Broadening the investor base continued to be a theme in his new role on the repackaging of an acquisition bridge loan ahead of the legal completion of the purchase. Toll Road Funding was the €1.025 billion (later increased by €250 million) issue that partly refinanced a €10 billion purchase of Autostrade by the Benetton family-owned vehicle Schemaventotto in 2003.
During the sub-underwriting stage of syndication, the mandated lead arrangers, Mediobanca and Unicredito struggled to get other banks to take down the loan because of its size and tenor. In the end Barclays and Goldman Sachs, aided by Crédit Lyonnais and La Caixa, came in and devised a completely different refinancing plan.
“A number of our transactions have hinged upon unlocking a new and more efficient access to the capital markets. Frequently it involved broadening the investor base, or introducing an asset class to a new pool of money. With Autostrade we spent a lot of time working out how we could distribute a bridge loan in the interim period. Rather than just syndicating it in a standard loan, we were able to wrap it and distribute it to non-traditional investors,” says Young.
While also at Goldman, Young put together financing for the purchase of Kabel Deutschland from Deutsche Telekom by private-equity firms Apax Partners, Goldman Sachs Capital Partners and Providence.
This transaction was distributed through the bank market, although it would have been possible to have sold bonds. Deutsche Telekom was able to raise cash by divesting this non-core subsidiary, extremely important given its credit profile at the time. The market was suffering from a reduction in liquidity because of the fallout from Callahan and other cable names getting themselves into trouble. Markets overshoot and when that happens there are opportunities for operators that remain focused on credit issues to purchase assets cheaply.
Last year’s £1.5 billion Tube Lines deal for the refurbishment of the London Underground was another example of where a new approach added a great deal of value. By bifurcating the risk it was possible to price it as a quasi-government risk instead of an expensive corporate.
Now operating in a pure investment banking model, without the benefit of substantial commercial banking coverage, Young is offering value primarily via ideas.
Commercial banks have a natural scale advantage in the asset-backed market because of their depth of coverage, selling commercial banking products, and the high end of the value chain can often be structured finance business.
Changing landscape
But the European bond market landscape is undergoing change, partly in reaction to greater competition. A number of securitization teams are now moving out of flow sectors that provide significant volumes but require little or no value added in terms of ideas, and therefore smaller returns to the banks.
Many opportunities remain. These include the long-overdue restructuring of the German banking system, and how financial institutions shift underperforming assets from their balance sheets. New accounting regulations in the form of IAS will force large portions of the financial services industry to mark to market.
And although ABS originators might fear that a weakening economic outlook will affect volumes, Young says they might be looking in the wrong direction.
“I think the supply side may be even more driven by bank behaviour than necessarily asset growth. A key issue is what European banks want to do with their balance sheets and how they want to fund themselves in the future, and how they view other funding alternatives like covered bonds and unsecured credit,” he argues.
It is not just the banking sector that will face pressure to use innovative techniques.
“One of the most interesting areas of finance at present is the public sector. Governments across Europe are facing a number of challenging situations,” says Young. “There are a number of budgetary issues, but also the need to achieve cost-efficient financing. Understanding governments’ needs and constraints, and introducing creative solutions, will be a key driver going forward. Many of the issues facing the public sector in Europe are applicable to the US and the state and local governments.”
