Capital markets bankers in Asia are complaining of a new trend threatening their profits: corporate finance issuers are mandating more banks per deal than ever before. According to data provided by UBS, the average number of banks on an IPO of over $1 billion was 2.8 in 2007, 3 in 2008, 4.6 in 2009 and 5.4 in 2010. The trend is apparent in bonds as well: a fine example came on May 4th with the $500 million deal for Indias aptly-named Syndicate Bank, which featured no less than eight bookrunners: Bank of America Merrill Lynch, Barclays Capital, Citi, Deutsche Bank, HSBC, J.P. Morgan, Royal Bank of Scotland and Standard Chartered. While Indian borrowers are somewhat notorious for mandating as many banks as possible on their fundraising transactions, bankers now say the practice is spreading to other countries in the region. It is noticeable among Chinese state-owned issuers, sources say, but is not limited to that sector: We were disappointed by the number of firms that ended up working on ABC [The IPO of Agricultural Bank of China in July], says a senior banker who worked on the deal, in as much as it made the logistics of meetings difficult and cut into fees. We always knew the number of bookrunners on big SOE deals like this would grow, but its happening in the private sector as well.
One reason for the trend is that post-crisis issuers are keener than ever to keep a number of banks that might provide them with financial support happy, and bookrunner mandates on equity and bond deals are a means to that end.
Issuers want to keep as many institutions as possible happy without paying any extra fees, says one banker with regional responsibility at a leading European firm, and obviously upping the number of bookrunners is a way of doing that. The downside is that the meetings become much more chaotic, and the client may not get best advice as more voices are added to the conversation.
Established capital markets franchises in Asia, to which the above speaker belongs, have something of a vested interest in bemoaning this trend since the main beneficiaries are the second and third tier banks that are winning more league table credit than ever before by latching on to deals they might previously have been excluded from.
Of course issuers have always been aware of the value that a bookrunner mandate holds for banks trying to build their franchises, especially when the deal is large and therefore confers a big chunk of league table credit. Asias sovereign bond issuers are known for their frequent rotation of bookrunners, who may work on every transaction for one country for years before being rotated out without warning. Issuers are happy to admit the practice: asked about it during a conversation with Euromoney on the sidelines of the Asia Development Bank conference in Hanoi in May, Cesar Purisima, secretary of finance of the Philippines, said:
Banks are lining up to be linked with our bonds, and well give everyone an opportunity. While we are very happy with the supportive and creative firms weve used so far, we do like to mandate new banks and will continue to do so.
Not all bookrunners on a deal are equal. Issuers are increasingly appointed global coordinators to manage the larger number of teams working to market and sell their deals, with those global coordinators tending to receive a larger portion of the fee pool as a result. The global coordinators are usually chosen at the time all the banks are mandated, although on some dealslike the aforementioned ABC IPOthe appointment is delayed, leading to intense albeit potentially unproductive rivalry among the banks to secure the more lucrative lead role. Bankers who worked both on the ABC listing and the years other $20 billion deal, the sale of US insurer AIGs Asian business AIA, say that while the latter dealwhich had a total of 11 bookrunnerswas better managed. Although ABC had fewer bookrunners on the Hong Kong part of its listing, the increased competition resulting from the delay in appointment of the global coordinator role made cooperation difficult.
Bankers do not expect any $20 billion deals with lists of bookrunners approaching double digits this year, but the trend for more firms being appointed on deals is set to continue. Banks, keen to win business and keep clients happy, are unlikely to be able to reverse the trend unless they can manage the unthinkable and negotiate among themselves to change the prevailing practice.
This trend for more bookrunners on deals can be important when people like me ask of our bankers wheres the money? says the regional head of a global investment banking firm. If we are putting capital on the table for clients, and the fees are split among too many banks, then eventually the business becomes unsustainable.
The trend also makes sole bookrunner mandates more valuable: Cheung Kong Infrastructures $1 billion perpetual bond, sold by JP Morgan alone in September last year, was the most frequently cited response when Euromoney asked Asia investment banking heads at the end of last year which deal they most wished their firms had worked on. Corporate high yield bonds and issues for niche firms still offer opportunity for sole bookrunner mandates: witness Morgan Stanleys bond for Bangkok Bank in October, or Barclays Capitals sole deal for Thai oil exploration company PTTEP on March 29th this year. These, though, are rare exceptions:
Sole mandates can work very well, says a debt capital markets banker in Hong Kong, but they sometimes arise because the bank has a strong grip on the client for purposes of fee maximization and more mature borrowers are unlikely to go for that.
|Too many cooks?|
Average number of bookrunners for IPOs over $1 billion
|Source: UBS, Dealogic|