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Deutsche Bank GECC GlaxoSmithKline EEB/TGI Bank of America |
In mid-August last year, it would have been difficult to find a bank that was not of the opinion that the credit crunch would be short-lived. Most were saying that the sub-prime troubles were relatively limited, and that the widening spreads and diminishing liquidity would come back soon, as they had during previous blips in the overall bull market of the past several years. But not everyone was so quick to dismiss the possibility of a prolonged problem. On August 22, Deutsche Bank issued a $3 billion, 10-year bond with a yield of about 145 basis points over US treasuries, and six days later went to the European market for €1.5 billion at 90bp over Libor, also with a 10-year maturity. The general market consensus at the time was that the German bank had paid far too much, but Deutsche bankers were taking a more realistic view. “When we’ve seen setbacks in the past decade, they were mostly only temporary setbacks; even the longer ones were only for a few months,” says Chris Whitman, group treasurer at Deutsche Bank. “We took the early view that the problems this time were more pronounced and would be more long-lived.” In the two months following the $3 billion deal, Deutsche Bank raised about €24 billion, far above the bank’s original funding plan for that period. With the money markets largely shut and the bond markets not open to shorter-dated maturies at that time, Deutsche’s funding team realized that selling longer-term liabilities was going to become increasingly important for a bank of its size. “If the wholesale market is confined to overnight liquidity for a prolonged period of time, the amount you have to roll over gets bigger every day,” says Whitman. “For any financial institution with a large balance sheet, that is a daunting development.”
Need for speed
Deutsche had also realized the necessity for speed, and Whitman credits the bank’s syndicate team with getting each deal done very quickly, a necessity during a time when windows for issuance were opening and closing just as fast. This was especially true for the euro deal on August 28. Launched at 1pm GMT, it was wrapped up less than three hours later. That day conditions became progressively and violently worse, especially in the US, where the Dow Jones industrial average fell almost 300 points on the day. These deteriorating conditions could have affected Deutsche’s deal to the point where, Whitman speculates, it might have had to reprice had the deal lingered over until the next day. That it did not is thanks in part to the fact that the deal was entirely self-led, and therefore free of time-consuming consultations with other banks but also to the joined-up thinking between Deutsche’s origination and syndicate teams.
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“We wanted to position Deutsche Bank as strongly as possible and were not particularly focused on conflicting opinions” |
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The general consensus that was initially critical of Deutsche’s August deals has since swung around to recognize them as highly intelligent. Whitman say that some clients were initially “put out” that they’d have to follow the bank and fund at similar levels but Deutsche had its finger firmly on the market’s pulse, and the intervening months have seen its decisions vindicated. “We saw a seismic shift happening,” says Whitman. “At the time, we said that this crisis could continue through to 2009. We wanted to position Deutsche Bank as strongly as possible and were not particularly focused on conflicting opinions.” And it’s not only Deutsche’s clients that have now acknowledged this but its competitors as well. Debt capital markets bankers are often asked which deals they would highlight from the past year. Twelve months ago the answer to that question would have comprised more innovative trades or successful deals from first time borrowers. Now, it is the trades that have opened up liquidity that bankers will highlight. Plain and simple senior deals would not have raised a single eyebrow last year but have, since the summer, been so difficult to get away that every success has been worthy of special attention from the wider market. Says one banker: “Each transaction is a unique challenge in its own way. Every single deal is high profile, and requires mobilisation of all of one’s resources.”
And it is Deutsche Bank’s August deals that are credited with first-mover status in that environment. With the benefit of hindsight, many DCM heads have ruefully acknowledged the wisdom of Deutsche’s decision to issue at the levels it did, an admission borne out by the senior bank deals from other institutions that would follow Deutsche’s lead. After years spent funding at nine or 10 basis points over Libor, banks have recently been looking at a pricing range of between 75bp and 125bp, a dynamic that has “blown everything you thought you knew out of the water,” according to one senior DCM official. “Deutsche Bank was the first to show the willingness to fund at the new levels,” says another. “Gradually, everyone else had to do the same.”
