DCM review: Winners were also losers in 2008

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By:
Alex Chambers, Clive Horwood
Published on:

The primary market share of the top 10 global debt houses declined considerably in 2008, according to full year figures released by Dealogic. The impact of the financial turmoil, far from concentrating activity in the hands of the biggest players, is apparently leveling the field.

The top debt houses took a smaller slice of a smaller pie in a shrinking market. Barclays Capital has leapt to number one in volumes on the back of its takeover of Lehman Brothers in the US, edging out last year’s big three of JPMorgan, Citi and Deutsche Bank. For full-year 2007, Lehman ranked fifth and Barcap sixth, so the impact of Lehman’s US bond franchise has become immediately apparent. However, the combined group’s volumes fell by more than $200 billion to $368 billion last year, a 37% fall, compared with a decline in the total market of 27% to $4.42 trillion. Barcap/Lehman’s joint market share fell 1.3 percentage points to 8.3%.

Those hoping that the decline in Barcap’s market share is a sign that its takeover of Lehman’s US operations is not yielding the full expected benefits are likely to be disappointed. The market share of second-ranked JPMorgan, itself consolidating Bear Stearns’ numbers, fell from 9.4% to 7.9%. Third-placed Deutsche’s share dropped from 6.8% to 5.7%, and Citi’s from 7.2% to 5.7%. The overall market share of the top 10 global DCM houses fell by seven percentage points, from 61.5% to 54.5%, according to Dealogic’s numbers.

The banks that bucked the trend and increased market share are, perhaps surprisingly, two that have suffered most from the credit crunch: fifth-ranked RBS and seventh-ranked UBS. RBS moved into the top-five global houses by market share, in large part, thanks to the integration of ABN Amro’s fixed-income platform.

One to watch in 2009 will be the combination of Merrill Lynch and Bank of America. In volumes Merrill ranks sixth and Bank of America ninth. If the merger had closed in 2008, BofA/Merrill would have ranked first with $396 trillion of volume and 9% market share.

Impressive potential

Taking revenues as a guide, the potential of BofA/Merrill is more impressive still. Bank of America leapt to fifth place in 2008 revenues, and Merrill ranked fourth. Together, they had 9.9% of the global DCM revenue pie. Top-ranked JPMorgan had just 7.6% revenue share. That said, Merrill’s share of global revenues in 2007 was $1.5 billion, ranked second. Its revenues from DCM more than halved to $710 million in 2008. At the end of 2007, Bank of America ranked just outside the top 10 for revenues for the previous 12 months, suggesting its fixed-income franchise has gained momentum while the new investment banking management head, Brian Moynihan, puts capital markets teams together.

According to Dealogic’s numbers, both revenues and volumes for the top 10 DCM houses fell by 37% from 2007 to 2008.

There are several explanations for the levelled playing field in global DCM. Many of the traditional mechanisms through which the biggest banks controlled the new-issue market have weakened. They can no longer rely on billions of self-led securitizations or subsidized league table offerings to bolster their market-share numbers. Furthermore, origination of new issues is transformed when many of the biggest underwriters are no longer willing to offer liquidity to borrowers – either in the form of cheap loans or subsidized medium term notes.

Against this, smaller local banks are playing to their strengths and securing mandates through long-term relationships. Also, although volumes have fallen, the number of banks competing for deals has not – yet. The fight for survival is in its early stages; in 2009 a number of underwriters will probably fall by the wayside if volumes do not pick up. The one bright spot for the biggest debt houses is that while the number of deals has fallen, the fees for doing them are starting to rise.

The most high-profile evidence is provided by the SSA sector – a high-volume business long associated with minimal fees. Following the emergence of government-guaranteed bank debt and a higher associated fee structure (15 cents for a three-year bond), there followed a cantankerous debate between banks and the largest borrowers. For example, the European Investment Bank has now agreed to a five-cent fee rise on a five-year bond to 15 cents and a 2.5-cent increase on a three-year deal to 10 cents. This scale of increase is likely to be replicated for other frequent issuers, easing the pain of providing a service at a loss.

The real money should be made in the corporate sector, where fees have returned to a level associated with another era. Single-A rated corporates are now paying 25 to 30 cents on a three-year bond. Fees are probably one-third higher now than they were a year ago, but still around one-third lower than they were a decade ago.

Global DCM revenue rankings 2008

Rank

Bank

Revenue $mln

% share

1

JPMorgan

1,033

7.6

2

Citi

860

6.3

3

Barclays Capital

856

6.3

4

Merrill Lynch

710

5.2

5

Bank of America

645

4.7

6

UBS

622

4.6

7

Deutsche Bank

615

4.5

8

Credit Suisse

606

4.4

9

RBS

544

4

10

Morgan Stanley

543

4

Subtotal

7,035

51.6

Total

13,743

100

Source: Dealogic


Global DCM volume 2008

2008 Rank

Bookrunner Deal value $mln

% share

2007 Rank

Deal value $mln

% share

1

Barclays Capital

368,765

8.3

1

584,342

9.6

2

JPMorgan

350,628

7.9

2

570,648

9.4

3

Deutsche Bank

252,909

5.7

4

413,069

6.8

4

Citi

250,621

5.7

3

436,804

7.2

5

RBS

217,186

4.9

9

267,855

4.4

6

Merrill Lynch

214,926

4.9

5

378,858

6.2

7

UBS

202,463

4.6

10

266,398

4.4

8

Goldman Sachs

187,011

4.2

8

269,322

4.4

9

Bank of America

182,820

4.1

7

307,913

5.1

10

Credit Suisse

180,186

4.1

11

249,997

4.1

Subtotal

2,407,515

54.5

3,745,205

61.5

Total

4,420,057

100

6,094,887

100

Source: Dealogic