Business, pleasure and chance were given their due weightings at last month’s Sixth Annual Financial Institutions Conference in Mijas, Spain. Issuer choice was a central theme, but hosts UBS did not expect participants to devote all their time to such discussions. There was talk aplenty about the development of new investor bases or the creation of fresh product for banks and insurance companies in the face of changing regulations, but there were also other ways to stretch the brain and exercise the risk muscles. Glorious golfing was on offer each morning before the seminars and the last day was rounded off with go-karting.
At the opening session, David Soanes, head of debt capital markets at UBS, warned the potential borrowers and investors in the audience to expect the unexpected. As a case in point, he reminded us of the forecast made 12 months earlier by many analysts that interest rates would rise and credit spreads widen. On the contrary, he pointed out: “Yields fell and spreads went on an enormous bull run.”
Night follows day
How so much of our everyday experience is unpredictable was confirmed for Soanes and the other participants when he accidentally stepped into a fountain in the courtyard of the house where dinner was served on the conference’s final evening. And the mishap occurred at the start of the evening, so he couldn’t even claim to have been “tired”.
Soanes hardly needed a soaking to prove the sheer bloody-mindedness of things. As he reminded us earlier, the credit markets had done it for us in the first quarter of the year. “We always thought that, like night follows day, AIG would always be triple A,” he remarked at one session. Enough said.
But not enough for the weather gods of Andalucia, apparently. The unseasonably chilly weather on the penultimate day did not fit the conventional wisdom either and rather shattered the hopes of those eager to catch up on some sun as well as the current state of hybrid debt technology.
Other diversions were not too easy to find either; the Mijas hotel was in a beautiful location but nightlife was tame nearby, so anyone venturing out after dinner would have to venture to Marbella or Malaga and would be particularly bleary-eyed the next morning.
So it was fortunate that one illuminating seminar on the application of game theory to capital issuance was held in the afternoon. Moderated by Mark Winter, card shark and some-time head of capital management and securitization at UK mortgage bank Bradford & Bingley, the session threw up more odd swings of fortune. Several illustrative hands of poker were played and it was the referee rather than the crafty market players who came out on top. No-one would have expected the FSA’s man in Mijas, poker-faced regulator Tom Crossland, to take his challengers to the cleaners, but he did. It was pure luck, insisted the rest of the card school – mainly issuers.
Applications of game theory now cover a wide range of areas in the financial services industry and could have predicted that heavy losses would be sustained in the credit index sector when all the players tried to exit at the same time.
But sometimes the herd-like nature of the markets proves advantageous to issuers. One of the more remarkable phenomena over the past 12 months that received attention in Mijas has been ever greater reliance on non-institutional participation in the sale of tier 1 paper. Claire Bright, head of asset and liability management at UK mortgage bank HBOS, spoke in glowing terms of the bank’s latest tier 1 security. In fact she called the £750 million preference share issue a real paradigm shift, the first offer of sterling-denominated preferred shares since 1997. Barclays and UBS sold them to 39 retail intermediary investors, which accounted for 15% of the deal.
Guy Cornelius, co-head of distribution at UBS, explained that the underwriters have made a firm commitment to liquidity, not historically a strong point of retail-distributed paper.
Expensive liquidity
But liquidity is sometimes not that good even for institutional investors, according to Tamara Burnell, head of financial institutions, fixed income at M&G Investment Management. She said that there has been minimal liquidity in the cash market. And this has become worse during the recent volatility. Prices are merely indicative – any attempt to execute in a half-decent size was frequently doomed to failure. Traders were willing to use any number of techniques to avoid actually providing liquidity – including tried and tested ones like being in a meeting whenever the phone rings. “We’ve given up and now play in the credit default swap market,” Burnell lamented.
As is frequently the case, dealers disagreed. Ben Neilson, head of financial institutions trading at UBS, said: “The market is still liquid, although less than prior to March 10. But liquidity is expensive. Right now investors have more liquidity than the dealers.”
Cornell Egger of UBS Asset Management argued that it was clear that liquidity on offer depended on the market backdrop. He revealed that he was able to sell a e45 billion stake in an HVB tier 1 issue in January without having any impact on spreads. He was under no illusion that he would be able to that under current conditions. And tomorrow? Well, that’s another day.
