Euromoney 30th anniversary: Capital market landmarks
Everyone's memory is different, some have no memory at all. But a handful of deals appear to stand out as those that broke new ground and had even competitors tipping their caps in admiration. No fewer than three people, at exactly the same time, apparently saw ducks floating in the bath and leapt out shouting "Eureka" - the birth of the floating rate note. Few firsts have such a canard attached, but they are all now part of Euromarket mythology. By Rebecca Bream.
It's surprising how little the leading lights of the international markets can remember about the markets' past, or even their own careers. Perhaps it's merely because investment banking stresses such a forward-looking attitude.
The markets are so fast-moving that anything that at the time seemed innovative or groundbreaking is soon overshadowed by the latest sensational deal. Trying to find "biggest" landmarks is a particularly troublesome pursuit in these days of ever-increasing liquidity. What stand out in people's memories are the trends that a handful of deals helped to establish, and then the factors that made the trend a commonplace part of the market. Ultimately the markets lack a sense of history because history is not what they are about.
But there are some interesting stories to be unearthed in the Euromarket's past; some of these landmark deals are still famous and some have been over-looked. Everybody knows that the first Eurobond was the 1963 Autostrade deal, but what other deals have made an impact over the past 30 years? We asked some of today's market leaders to select a few interesting chapters from their past.
1969/1970: first ever Eurodollar FRNs - Dreyfus/Enel
Over the last 30 years there has been much speculation about who invented the floating-rate note. Euromarket legends from Sir Siegmund Warburg to Evan Galbraith of Bankers Trust to Stanislas Yassukovich of White Weld have been given the credit. Each of them is said to have dreamed up the idea while taking a bath. FRNs were launched at a time of rising interest rates when bond deals were difficult to market. They were designed to give investors protection against sudden interest-rate increases and bridge a gap between long-term Eurobonds and medium-term syndicated loans for issuers.
Whoever's was the original idea, two deals vie for the title of first Eurodollar FRN. In May 1969 a deal was launched for the Dreyfus Offshore Trust that bore all the signs of a FRN. The $14.7 million deal was listed on the London and Luxembourg stock exchanges but was not registered with the Securities & Exchange Commission or made available to US investors. Dreyfus offered an interest rate floating at 0.25% above six-month Libor and included a common stock offering. The deal was managed by Kuhn Loeb, Kidder Peabody and Wertheim.
Dreyfus may have been first but the deal that really kicked off the FRN market came a year later for Italian electricity utility Ente Nazionale per l'Energia Elettrica (Enel). This $125 million 10-year deal was launched in May 1970 and lead-managed by SG Warburg, BTI and White Weld. The notes were guaranteed by the Republic of Italy and paid interest of 0.75% over six-month Libor.
The deal was a hit and four more issues followed before the end of 1970. Progress was slow for the next few years, but by the end of the 1970s FRNs had become the fastest-growing sector of the Eurobond market.
February 1986: first jumbo Eurobond - Canada, $1 billion
Although there had been $1 billion FRN and zero-coupon deals for several years, when Canada's $1 billion deal was launched early in 1986 it was the first fixed-rate Eurobond of its size - the first true jumbo.
Deutsche Bank Capital Markets was the bookrunner for the deal, and bankers who were involved claim that there was never any doubt that a deal of this size could be pulled off. "Canada was one of the premier issuers in the Euromarket at the time," says Walter Henniges, head of debt capital markets at Deutsche Bank in Frankfurt. "Everything in the market was in the deal's favour." The deal had a maturity of 10 years and a 9% coupon. "The initial demand was very strong," says Henniges, and it sold well to institutional and retail investors across Europe.
The size of the deal, its tight pricing and its liquidity in a market much less conducive to liquidity than today has given it lasting significance. "A terrific deal. It was the first real benchmark bond, the first real treasury surrogate," says Paul Richards at Merrill Lynch. "It is probably the only Eurobond issue which has had an active secondary market throughout the whole of its life," says Henniges. In fact it was the deal that many of the traders who lead the markets today cut their teeth on.
The deal is unusual in that most people in the market have good memories of it, and few would begrudge it its success. When the bond matured in 1996, RBC Dominion in London even threw a party. As for the team who executed the deal, there was little chance to rest on their laurels. "I didn't have time to go to the party," says Henniges.
September 1989: first global bond - World Bank, $1.5 billion
The World Bank had always been an agenda-setting borrower. When it issued its first Eurobond in 1979 it brought legitimacy to the market. "The World Bank had always had a cynical attitude towards the Euromarket," says a syndicate head. "Its debut Eurobond deal was an important signal that this was a serious market for serious issuers." And with its global bond in 1989 the World Bank launched a product that has become an integral feature of today's debt markets, and one that is soon to celebrate its 10th anniversary.
The $1.5 billion 10-year deal was announced on September 18 1989, with a coupon of 8.375%. The bookrunners were Deutsche Bank and Salomon Brothers, a combination that the World Bank put together to ensure maximum distribution with investors in the US and Europe. "At the time, the theory was that if you wanted to cover all the markets you needed a strong European firm and a strong US firm to provide complementary distribution," says Charlie Berman, head of European debt capital markets at Salomon Smith Barney.
The concept of global bonds aimed to take advantage of marketing over three time zones and to iron out differences in pricing across investor bases. It was inspired by a problem the World Bank had in getting US domestic investors to accept deals priced as aggressively as those bought by investors in Europe and Asia. "The World Bank had much better market acceptance in Europe than in the US, where they had to pay quite substantially over the agencies," says Walter Henniges, head of debt capital markets at Deutsche Bank in Frankfurt. "Their problem was how to have access to funds in times of difficulty in the European market and not be held hostage by the US domestic cartel," he says.
Although many banks were sceptical about the product, Salomon and Deutsche championed globals from their positions of domination in the Eurobond market. "This was the birth of a very important market," says Paul Richards, managing director of debt issues at Merrill Lynch, a co-manager on the World Bank deal. "The market had been pitching issuers aggressively to do a global deal at the time, but there were lots of unbelievers. Most borrowers don't want to be the first, they want to see proof of success of a product."
But the World Bank stepped forward. "The World Bank was a driving force in the whole development of this product," says Berman, citing World Bank innovators Jessica Einhorn and Ken Lay as key proponents. "The World Bank were always trying to push the envelope," he says. Niall Cameron, director of new issues at Merrill Lynch agrees: "They like to make a statement. The World Bank is very focused on being the first into a new market or product," he says.
Discussions between Salomon and Deutsche and the World Bank about their pricing problems yielded global bonds as a possible solution, and a deal was planned. The key to the deal's success was basically mechanical. "A global bond is in essence a series of operational mechanisms that allow paper to trade freely from one market to another," says Berman. "It is all about settlement which allows the broadest primary placement and superior secondary trading."
Despite the success of this deal, the global bond product needed time to gain acceptance in all areas of the market. "A number of European houses were highly sceptical for a long time. Globals were clearly seen by some as an act of American imperialism, US houses trying to take over the European markets," says Berman. This is because banks with US domestic distribution had distinct advantage when trying to get a global deal done, and the US houses have since come to dominate the market.
For the first couple of years business in globals was quiet, but gradually the deals that would establish the market were done. "Deals like the 1992 $2 billion Ontario issue, the first non-triple-A global bond, showed that global bonds were not just a province of the World Bank," says Phil Bennett, head of international capital markets at Salomon Smith Barney. The first Deutschmark global, a Dm3 billion deal for the World Bank in 1993, presented Salomon and Deutsche with more complicated problems of clearing and settlement than the first deal, but showed that the product had a wide application. "Global bonds are now such a fundamental part of the market," says Berman.
The growing success of global bonds has also spelled good fortune for Salomon Smith Barney, and gave it a strong niche to operate from even in the depths of the US treasury scandal. "The global bond was such a distinctive area of competence for us that we retained leadership in even during some challenging periods for the firm," says Berman. The product also helped the firm to get a greater foothold in the European market. "We leveraged off our secondary-market capabilities and promised liquidity," says Bennett. "A critical element was our understanding of the main institutional investors in London, and also our strength in Asia."
But despite Salomon's success at launching, and then dominating, a new market, the team there don't forget that it couldn't have been done without an issuer willing to go out on a limb. "The World Bank deserves a lot of the credit for developing this market," says Berman.
June 1993: privatization of YPF, Argentina, $3 billion
In the late 1980s Argentina inspired little investor confidence. But with the coming to power of president Carlos Menem in 1989, the reconstruction of the troubled economy began. "There was an extremely rapid transformation of general fiscal and monetary policy in Argentina from 1989," says David Mulford, the former under-secretary at the US treasury during the 1980s and early 1990s and now chairman international at CSFB. Hyperinflation was tamed, the economy began to grow again and the government embarked on a wide-ranging privatization programme. The sale of national oil company YPF was the centrepiece, the deal that aimed to put Argentina back on the map.
Credit Suisse First Boston and Merrill Lynch were called in to coordinate the IPO, the first privatization for a Latin American oil company. CSFB had already served as advisers to the Argentine government when it was deciding how best to privatize YPF, looking at the option of a strategic sale as well as a flotation. It was concluded that an IPO would best serve the wider interests of the country as well as raise the most capital. For instance, the deal caused the fledgling stock market to grow a third in just one day. "YPF was regarded as the crown jewel of all corporate assets in Argentina," says Mulford. "The deal was intended to make a major statement to the world."
Finance minister Domingo Cavallo was adamant that 51% of YPF had to be sold to give the government's privatization plans credibility. The banks warned that as the company was worth in excess of $7 billion this would be a huge deal for the market to absorb, especially as the Argentine recovery was barely 18 months old. "We took the view that we could do a cash stock distribution of $2.25 billion to $2.5 billion, which was more aggressive than anybody else," says Mulford.
The IPO was structured to have three tranches, distributing the shares to domestic and international investors, including an American depository share tranche. The shares traded up significantly on the IPO's launch in June 1993, and the deal ended up raising $3 billion. YPF has since gone from strength to strength, and was sold to Repsol in April 1999 for $16 billion.
To boost the sell-off above the level of a 51% stake, a plan was devised for an exchange offer. Under the previous government, workers going into retirement had been given special bonds called bocones instead of pensions, bonds that paid no interest for the first eight years. Pensioners, who are highly politically active in Argentina, felt cheated out of their pensions and in many cases took to the streets to demonstrate. "With no current cash return, all these people were getting was older," says Mulford.
In the exchange offer, pensioners had the option of swapping their becones for shares in YPF, whereupon they would receive a 4% dividend yield. There was a one-year lock-in to prevent the pensioners selling en masse at the start of the IPO. This exchange offer was widely taken up, and when the year had passed many investors held on to their stock rather than selling it because it had performed well. In the end the exchange offer added $1.5 billion to the $3 billion already raised by the IPO, and 58% of the company was sold.
Not many in the markets thought that a deal of this size for an Argentine company would succeed. "At the time this was one of the largest equity offerings ever seen, especially from the emerging markets," says Christopher Carter, head of investment banking at CSFB. "Before the launch most people considered it to be an impossible size for any emerging-market country, let alone Argentina." But CSFB had few doubts about the deal's potential. "We thought YPF was a world-class energy company," says Carter. Before the IPO, new management had been brought into YPF, and it had been significantly rationalized.
CSFB and Merrill Lynch did lots of groundwork before the offering explaining to investors the situation in Argentina and outlining the the risks and benefits. Minister of finance Cavallo was persuaded to undertake an exhaustive round-the-world series of roadshows with the banks. The preparation paid off in broad distribution for the deal, which sold to funds that weren't just Latin American specialists. Roughly 20% of stock was sold in Argentina, but about 50% went to US investors and 30% to the rest of the world.
After the success of the YPF privatization, other emerging-markets governments were encouraged to privatize their state assets and use ever more ambitious deals to accomplish this. It also re-established Argentina as an acceptable place for foreign investment. "This offering marked the global acceptance of Argentina's rehabilitation and a total endorsement of Menem and his team's policies," says Carter. "You couldn't sell $3 billion worth of stock if investors didn't believe in the country."
July 1996: landmark securitization - Cyber-val, Ffr40 billion
Securitization looks set to accelerate in the next decade. Particularly as emerging markets get back on their feet again, it will be increasingly used in deals as one of the most sophisticated and flexible means of raising capital. But the market is still in the early stages. When the Cyber-val securitization was executed in 1996, the market was in its infancy, and used mainly by US credit-card companies.
The deal, worth $8 billion, was a securitization of a quasi-sovereign loan made from Crédit Lyonnais to the Etablissement Publique de Financement et Restructuration (EPFR), the entity formed in November 1995 to manage assets of Crédit Lyonnais as part of its restructuring package. This loan was an integral part of the French government's plan to bail out the troubled bank, and the securitization obtained a triple-A rating on the back of the implicit support of EPFR from the government.
Cyber-val was structured into four tranches of FRNs to match the amortization schedule of the underlying loan, two with a four-year maturity and two with a five-year maturity. Merrill Lynch and Morgan Stanley were selected, as well as Crédit Lyonnais, to act as bookrunners on the deal. "Cyber-val was significant from the standpoint of establishing securitization in the market at large," says Anders Bergendahl, co-head of global debt capital markets at Merrill Lynch. "It was a big size, a high-quality credit and it was a proper European name and not just another US credit-card issuer."
Investors turned out to be more receptive to new structures than had been expected, and the deal opened up a European investor base for securitization. The buyers were over 60 different accounts in France and around the world, with corporate treasuries and money-market funds favouring the four-year notes and banks and asset managers buying more of the five-year paper. A second Cyber-val followed a few months later worth Ffr60 billion. This time the bookrunners worked on ensuring a further broadening of the investor base by making the paper comply with local regulations across Europe, most significantly that it would be zero risk weighted in Germany. "As a result, the floodgates opened for German investors," says Bergendahl.
February 1998: jumbo euro-denominated deal - Republic of Italy, €4 billion
At the beginning of 1998 the euro was still a novelty for bond issuers, and borrowers had to pay a premium to issue in the nascent single European currency. This was still the prevailing atmosphere when, in February 1998, the Republic of Italy launched its mammoth euro-denominated financing. After this deal, however, the euro became a reality for many issuers, investors and banks across Europe. It was also the culmination of a strategy by Italy to win investor confidence, reduce its cost of borrowing and position itself as an issuer at the heart of the euro zone.
The 10-year deal was managed by JP Morgan, Paribas and Warburg Dillon Read, a coterie of banks that had dominated the bookrunning of euro deals since the start of the market. It had initially been planned as a deal for between €2 billion and €3 billion, but the size was increased to €4 billion ($4.4 billion) when the lead managers recognized the extent of investor demand for Italian paper.
"We felt it was a very strong market at the time for Italy," says Cyrus Ardalan, global head of fixed-income marketing at Paribas.
The impact of this deal came not just from its currency but also its size, coming at a time when "super-liquidity" was the buzz-word. "This represented a watershed in terms of size and liquidity for a sovereign issue," says Ardalan. Until Freddie Mac launched a $5 billion deal later in that year, the Italy deal held the title of the largest-ever single-tranche fixed-rate bond. It is still the largest Eurobond at the time of going to press.
"This was a deal to rival any of the biggest that have emerged subsequently from the States, particularly given that it was a Eurobond and not a global," says Andrew Pisker, global head of bonds at Paribas. "But lots of people didn't believe that there was enough depth in the euro market."
"This deal was the cornerstone in confidence towards the single currency," says Manfred Schepers, global head of debt capital markets at WDR. "People thought: 'If Italy can do a €4 billion deal in a currency that doesn't exist yet, at such a compressed spread, then the euro will happen'," says Schepers.
The deal has a 5% coupon and was priced at 17 basis points over OATs. Another interesting feature was that it was launched as a Eurobond but designed to give the Italian government the option of combining it with its domestic BTPs at the start of Emu, which is what happened. "It was one of the first and certainly the biggest cross-over deal from a Eurobond to a domestic deal," says Stefano Ghersi, head of debt capital markets in southern Europe at Paribas.
Italian domestic investors had become disillusioned with the falling yield of government paper and the treasury decided to target overseas investors with a Eurobond. This would give investors at least six months to familiarize themselves and comply with Italian withholding tax requirements, something that had put them off domestic debt in the past. The BTP fungible with this deal was created some months after the launch, with an identical structure.
Although such a large deal in a new currency would have been unheard of in 1995, this is when the foundations for the issue were laid. In that year Italy launched an Ecu1 billion FRN, the first of a series of deals in Ecu and other European currencies. The deals were intended to regain investor's confidence after the country's crisis of the early 1990s.
After EIB's groundbreaking euro-denominated deal that launched the euro in February 1997, Italy became the first sovereign to issue in euros, with a €1 billion seven-year deal priced at 15 bp over the OAT, launched a month later. "These deals confirmed Italy as a leading player in the single currency," says Schepers. A Dm3 billion deal late in 1997 ensured that Italy did not alienate its more conservative investors who were not yet comfortable with the euro. "Starting in 1995, there was a clear preparation that went into the 1998 euro deal, getting retail and institutional markets across Europe to understand Italian credit," he says.
This series of deals achieved the aim of significantly reducing Italy's cost of borrowing. In May 1998 Italy, rated AA by Standard & Poor's, was able to launch a $2 billion deal priced almost as if it was a triple-A credit.
The deal sold well all over Europe, according to the bookrunners. "I have never seen distribution like this on a bond," says Schepers. "It was the first time investors saw what the euro was all about."
|A handful of Eurobond firsts 1970 to 1999|
|First Euro commercial paper||Jun-70||Alcoa||$5 million||Schroder Wagg/White Weld|
|First samurai bond||Nov-70||Asian Development Bank||¥6 billion||Daiwa Securities|
|First zero-coupon bond||Jun-81||Pepsico||$75 million||CSFB|
|First currency swap||Aug-81||World Bank / IBM||$210 million||Salomon Brothers|
|First yankee bond||Jan-84||British Columbia Hydro||$200 million||Shearson Lehman Brothers|
|First perpetual FRN||Apr-84||National Westminster Finance||$500 million||County Bank|
|First exchangeable bond||Feb-86||IBM||$300 million||Morgan Stanley|
|First fixed-price reoffer deal||Nov-89||New Zealand||$350 million||Morgan Stanley|
|First 100-year bond||Oct-93||ABN Amro||$150 million||Morgan Stanley|
|First Russian Eurobond||Nov-96||Russian Federation||$1 billion||JP Morgan/SBC Warburg|
|First euro-denominated bond||Feb-97||European Investment Bank||€300 million||Paribas/CDC Marchés/SBC Warburg|
|First European high-yield corporate bond||Apr-97||Geberit||Dm157.5 million||Merrill Lynch|
|Source:Capital Data Bondware|