Credit crunch: Power shifts to the buyers

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The credit crunch has precipitated a shift in the balance of power in the European debt capital markets.

Before the summer, almost every deal that came to market was heavily oversubscribed, and all a bank needed to do to attract a flood of subscriptions was to open a book. It was a seller’s market. Now, though, it has become very much a buyer’s market. "It used to be that the power in the debt markets lay with the borrowers," says Demetrio Salorio, deputy head of debt capital markets at Société Générale. "Now we are getting into a market where investors have more power."

There are various causes of this new dynamic. Not least are investors’ concerns about the credit quality of financial instutions, which has led to dramatically wider credit spreads for this sector. Furthermore, the decline of leveraged investors such as SIVs, and retrenchment by others such as bank treasuries, has left the classic traditional investor – so-called real money – firmly in charge.

One consequence of this is that it casts the league tables into a new light. In the past, investment banks have been able to boost their league table standings by underwriting short-dated floating rate notes and selling them to SIVs and banks’ treasury functions. Frequently, such deals were originated at such a discount as to make the deal a source of not inconsiderable loss. A million dollars typically purchased a billion dollars of market share. For this very reason league tables are often derided as a poor way to measure underwriters’ expertise, and yet still many borrowers use them to help decide which bank to award a mandate to. But the credit crunch has shut down the FRN market and so that avenue to boosting league table position is closed. Assuming the bank FRN market remains shut in 2008, league tables will become something more closely resembling what they were originally intended to be: a measure of which banks are being rewarded for providing the best, rather than the cheapest, service. The new market environment will also favour those institutions that have strong franchises in covered bonds for instance – this is a sector that is expected to see much higher volumes because of constraints in the securitization market.

Given how little financial institution activity took place from the second half of 2007 it is difficult to draw strong conclusions from the league tables. But between the first and second halves of 2007, several banks moved significantly in the European bond league tables. Citi dropped from third to fifth, JPMorgan fell to ninth from seventh, and Société Générale fell out of the top 10 altogether from sixth. It is of course far from certain that the lack of league table FRN deals is the sole cause of these declines. Some banks have suffered because of being focused more on financial institutions than on corporates, which have been less affected by the credit turmoil. But what is certain is that all debt houses are going to have to adapt to a new environment. Borrowers will be paying high premiums for some time to come. "Banks need to adapt their capital markets technique to the new environment," says Salorio. "Relationships will be key."

European DCM Top 10 Bookrunners 2007
H1 2007H2 2007
RankBookrunner parents% shareRankBookrunner parents% share
1Barclays Capital8.431Deutsche Bank9.65
2Deutsche Bank8.192Barclays Capital7.79
3Citi5.893HSBC6.07
4RBS5.204RBS5.61
5HSBC4.745Citi4.45
6SG CIB4.556BNP Paribas4.32
7JP Morgan4.447Credit Suisse3.87
8ABN Amro4.328ABN Amro3.79
9BNP Paribas4.309JP Morgan3.79
10UBS4.2710UBS3.56
Source: Dealogic