Best borrowers 2007: Best bank borrower: US Bancorp


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The bank’s hybrid securities activity illustrates the stark contrast between the US and European bank capital sectors.

Euromoney’s borrower awards 2007
Overall awards
Best sovereign/supranational/agency borrowerBest bank borrower
Best insurance borrowerBest ABS
Best CDO borrowerBest covered bond issuer
Best corporate borrowerBest high-yield/leveraged finance borrower
Latin America regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Central & Eastern Europe regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Asia regional awards
Best sovereign borrower Best corporate borrower
Best financial borrower
Middle East and northern Africa regional awards
Best borrower

Daryl Bible, US Bancorp

"To my knowledge we have issued almost every form of capital. Enhanced trust preferred, Reit preferred, DRD, mandatory convertible"
aryl Bible, US Bancorp

The scale of innovation in European hybrid securities has slowed dramatically but in the US the pace has been frantic. US Bancorp has been at the front line of the advances. It is almost a prolific issuer of hybrids and, as such, a case study of a bank that manages its balance sheet to take account of all of the relevant regulatory capital requirements. It is generally regarded as a savvy issuer that not only gets the relevant regulatory treatment but also maximizes rating agency benefit. Furthermore, it is very conscientious about market timing, price and best execution.

"Since December 2005 we’ve been one of the more active issuers there. To my knowledge we have issued almost every form of capital. Enhanced trust preferred, Reit preferred, DRD, mandatory convertible," says Daryl Bible, treasurer of US Bancorp.

Bible was one of the first US treasurers to truly embrace the shift in the US that made it possible for him to lower the cost of capital at US Bancorp by conducting a wholesale recapitalization with the use of hybrids. For about 10 years European banks have used hybrids, rather than just common equity, as part of their capital ratios but the US lagged behind. That is no longer the case – and bankers forecast a continuation of the significant activity linked to US financial institutions.

"I think that a number of the other US banks have followed us – we are definitely being copied," says Bible.

At the start of 2006 the market received a significant jolt when Wachovia sold a $2.5 billion mandatory convertible, the first US tier 1 capital instrument that exchanges into preferred stock and the first US tax-deductible D basket tier 1 security. This was a significant step forward for US banks because few had thought the Federal Reserve would allow such a structure – which was labelled Wits. Until then the only acceptable tax-deductible structure had been trust preferreds.

But any doubts about this security were dispelled when US Bancorp followed up a couple of months later with a $1 billion issue lead managed by Goldman Sachs and Wachovia that was the first unrestricted tier 1 preferred security to achieve D Basket status from Moody’s by including a replacement capital covenant. This meant that the borrower gave a commitment to replace the capital on redemption with another security of equal quality. On the Moody’s debt-to-equity continuum (from A to E) the D basket is highly sought after because of the greater equity recognition such a security receives from the rating agency.

Late last summer, US Bancorp scored another first when it sold a retail-targeted US-tax-deductible D basket hybrid without a mandatory coupon deferral trigger. This $786 million deal was structured by Merrill Lynch and widened the range of funding opportunities for US banks. Not only did it qualify as tier 1, to maximize the rating agency benefit, it also obtained superb execution; able to upsize significantly the size at the tight end of the price guidance range.

US Bancorp followed up in December 2006 when it issued a $376 million C Basket that was the first tax-deductible tier 1 issue for a US bank holding company to receive equity benefit from all the rating agencies – a significant improvement on the traditional trust preferred structure.

The bank also did a direct preference share issue, which qualifies as unrestricted tier 1 capital. It was sold in DRD format, a tax efficient structure for qualified investors – although it was not tax deductible for UBS.

"We look at all the different markets, and all the different currencies. We look for the best execution and pricing for our company and shareholders," says Bible.

In February, the bank sold €1 billion of lower tier 2 via Merrill, Lehman and UBS – its first foray in the single currency.

"We were very fortunate," Bible says. "We were in the marketplace needing to issue tier 2 capital and looked around at what was available. The basis swap between dollars and euros was in our favour – it’s our cheapest capital ever."

A year ago US Bancorp also did a C$450 million lower tier 2 issue that printed in the Libor plus teens, thus achieving investor diversification as well as thrifty funding. All this activity and market leadership provides a portrait of an issuer that is able to quickly decide on new structures and currencies. Bible explains that this is attributable to the CEO, CFO and himself having a good and transparent relationship, and yet US Bancorp does not have a big funding operation despite having a $64 billion market capitalization.

"I would say we are lean and mean. Ken Nelson is in charge of funding and I would say that there is nobody better than him. I’m very fortunate to have a senior management team with between 10 and 20 years’ experience," says Bible.