| Grant Kvalheim | ||||||
Even a year ago US bulge-bracket firms refused to acknowledge that a foreign bank could come within striking distance of having a decent US bond business. That’s no longer the case.
This year, in large part because of the boom in global multi-currency and dollar deals and greater European investor participation in them, UBS Warburg and Deutsche Bank have made serious headway in the dollar bond new issue and secondary market rankings.
“There has been a tremendous increase in the efforts of foreign banks in the US bond market,” says a managing director in global debt capital markets at a top-four bulge-bracket firm. “UBS Warburg has a huge trading effort and keeps getting bigger. It is a contender with everything it does, as is Deutsche.”
Deutsche, after years of expensive hires and false starts, clawed its way to 10th in the US domestic bond market by the beginning of September, compared with 16th this time a year ago. UBS Warburg jumped to 12th position from 18th.
In the global dollar bond market, which surged 28% in new-issuance volume to $303.4 billion by September, Deutsche came in fifth, up from 10th last year. UBS Warburg was eighth and both beat CSFB and Chase.
Admittedly only Deutsche and UBS Warburg come anywhere near US competitors. Merrill Lynch, Goldman Sachs, Salomon Smith Barney and Morgan Stanley in that order dominated the top four on the bookrunner league table for dollar globals by the beginning of September.
Barclays Capital, though aggressively hiring and going ahead with a strategy to increase its US debt market profile, languishes in 23rd in domestic US bonds and 15th in dollar globals. ABN Amro has made inroads, coming in at 13th in the US domestic bond business, up from 18th in 1999, and was 12th in the global tables, but is not considered in the same league as Deutsche and UBS. And the French banks are still nowhere.
“US bulge-bracket firms dominate, let’s face facts,” says John Walsh, co-head of global debt capital markets at CSFB. “So foreign bank inroads have been made, but if you look at the top-five firms in global financing there is no question that they are, in any particular order, Morgan Stanley, CSFB, Goldman Sachs, Merrill Lynch and Salomon Smith Barney.”
That said, trends in the global debt markets play to the strengths of such banks as Deutsche and UBS Warburg as much as they do to the US bulge bracket. If the European banks continue to capitalize on those trends as well as they have this year, at least one will knock a US firm out of a top-five league table spot in the not too distant future.
It has been a happy confluence of events for the European banks. Investors’ need for large, liquid bond deals has meant more and more US and non-US corporates issuing multi-billion dollar deals as globals rather than as yankees, dollar Eurobonds or US domestic deals. The growing desire for spread product among European and Asian institutional buyers and the need to compensate for the weakness of the euro with dollar assets has boosted non-US investor participation in dollar deals.
“Part of what feeds into what we are doing is the phenomenom of global bonds,” agrees Grant Kvalheim, managing director and global head of debt capital markets at Deutsche Bank in New York. “Global bonds are not new, but what is new this year is that the percentage of bonds sold overseas has increased. Whether it is selling bonds into Europe, Asia or anywhere else, we are seen to have a well-developed global sales force that works extremely well together.”
At the same time, the years of hard work by Deutsche and UBS Warburg in building credible US sales, trading, research and origination have kicked in to the point where they are now considered among the best.
“When we ask investors who the top trading houses are these days, Deutsche Bank and Warburg are among them,” says a managing director in global debt capital markets at a bulge-bracket firm. “They have made tremendous inroads in secondary market trading – they are very actively making markets in deals they have decided are important and it has started to show.”
Both Deutsche and UBS Warburg have targeted the sectors that are now dominating the jumbo dollar business: finance, telecoms and agencies.
They have also painstakingly built up their reputations with global borrowers as reliable providers of secondary markets in the US and globally, whether they have led a particular deal or not. To score points, UBS Warburg will make a 3 basis point bid-oVer market for a bond if it sees a US competitor making a 5bp market on a choppy day ahead of, say, key economic figures or a long weekend.
| Bruce Widas | ||||||
“You have to remember that these issuers are talking to the Street a lot and also talking to end investors,” says Bruce Widas, managing director and head of US debt capital markets at UBS Warburg. “If they hear that among the major banks that do a particularly good job for them on the liquidity side is UBS Warburg, then on the back of that they are willing to try us.”
The first step was persuading US issuers to use them in the Eurobond market.
“For a number of people it was getting comfortable with us in our ‘home market’ and then getting comfortable that we can execute as well in the US market,” says Deutsche’s Kvalheim. Deutsche did deals for Household Finance Corp, Heller Financial and GECC in Europe before doing trades for them in the US. “We are interested in long-run repeat business so these companies understand that we are not going to ask for a mandate if we don’t think we can do the job,” Kvalheim explains.
UBS Warburg is often the lead for dollar deals for such financial groups as Household and CIT. It was bookrunner on Household’s $1.3 billion 10-year global with JP Morgan in July and joined Lehman Brothers as bookrunner on CIT’s $1.3 billion three-year deal in March. Warburg has also turned up on GECC and GMAC bookrunner positions.
An increase in non-US issuers doing large dollar-denominated transactions has also helped foreign banks put their home relationships to good use. Deutsche Bank joined Goldman Sachs and Morgan Stanley as bookrunner on the ground-breaking $14.5 billion deal by Deutsche Telekom, $9.5 billion of which was in dollars and the rest in euro, yen and sterling.
Both ABN Amro and Deutsche Bank have made headway in agency underwriting. ABN was as a bookrunner by Fannie Mae for the first time for its $5.5 billion five-year global benchmark note in July and in August Deutsche Bank snared its first bookrunner position on a Freddie Mac deal when the agency launched a $4 billion two-year global reference note.
The Freddie Mac deal attracted one of the biggest-ever international participation levels this year, with more than 56% going into non-US hands – an achievement that is partly attributed to Deutsche’s being a lead manager. “It is the first time in a reference note transaction that Deutsche has been a lead manager. Its presence added to the international distribution,” says Jon Prince, Freddie Mac’s director of debt marketing.
“Large US issuers really need to push beyond the US distribution network because if you are issuing over $10 billion a year, at some point you will run into a saturation issue,” says Therese Esperdy, managing director in global debt capital markets at Chase.
The outlook is for mega-deals to continue, for global underwriters to dominate and for smaller issuers and securities firms to become marginalized.
The likes of Deutsche and UBS Warburg are snaring market share from smaller players not the bulge bracket. As Deutsche and UBS have climbed the tables in dollar globals so far this year, Bear Stearns, for instance, has slipped from sixth to 10th.
The battle among the global giants will centre on which has the biggest balance sheet and the best global financing products and advisory services.
Increasingly, big issuers are adamant they won’t be dealing out bond mandates to banks that won’t give them cheap loans.
While building up their own weak links in the one-stop-shop, such houses as Deutsche Bank and UBS Warburg will be flagrantly using loan portfolios in the US to build up bond clients.
“The advantage we have is that we are a bank,” says Deutsche’s Kvalheim. “It’s a key thing that distinguishes us from competitors. We impress upon our clients that lending is not a good-return business; we are prepared to do it as part of our overall corporate relationship but we will not do that if they turn around and give their bond business to someone else.”
Demand for large deals will continue as the investor community itself continues to consolidate. More funds under management mean a greater need for large orders in highly liquid deals in which they can be assured of having most top securities firms providing 24-hour markets.
“Issuers want to provide liquidity, so borrowers that would normally do, say, two $300 million deals a year are now combining funding needs into one deal big enough to be considered a liquid global bond,” says a banker. “These issuers want to help their banking relationships so more commercial banks are turning up in a joint lead management role.”
Deutsche and UBS Warburg look set to keep snapping up market share. Deutsche’s goal is to be among the top-five bookrunners in US investment-grade corporate bond debt in the next two to three years and ultimately in the bulge bracket. “There’s absolutely no doubt that we are going to get there,” says Kvalheim.
