The shifting sands of CEEMEA bond market share

Bulge bracket banks’ hold on CEEMEA market share across loans and bonds is slipping. Shaken loose by the tumult of the financial crisis they are ceding more ground to powerful local players. But the shift comes with challenges as well as opportunities, writes Steve Gilmore.

  • By Gerald Hayes
  • 24 Jun 2013
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In 2005 the top 20 bookrunners on CEEMEA syndicated loans had 68% of the market. Even before the global financial crisis struck this was falling, and by 2007 their share had shrunk to 59%. But the crisis brought with it a bigger shift that almost cut the top 20’s share in half. It sank to just 37% in 2008 and it has not recovered since. So far in 2013 the top 20 have less than a third of the CEEMEA loans market.

The stark drop in the extent to which the main bookrunners dominate the market stems from fundamental changes in how borrowers approached the loan market post-crisis. 

“The year 2008 brought a shift in how loans were put together,” says Quentin d’Helias, head of CEEMEA loans syndicate at Société Générale. “Up till then there were perhaps five to seven banks that arranged most of the deals and retail banks bought into them without relying on a relationship with the client.”

This carefree world came to an end with the crisis. As banks became more concerned with credit risk and counterparties, and borrowers with the quality of their banks, relationships became more important.

At the same time widespread risk aversion meant banks were less willing to underwrite deals and the market moved towards club loans, which favored a larger pool of leads, says Ashu Khullar, co-head of loan syndications at Citi. The result is that many borrowers have developed a close relationship with a much larger group of banks, which they use to get the best terms possible.

The crisis also caused some well-established banks to pull back from the CEEMEA market and leave a gap others were quick to fill. Some of these new entrants have focused on attracting talent. Others have used cruder tactics.

“At the unsophisticated end of the market banks have simply thrown balance sheet at the syndicate loans market and broken in,” says one senior loans banker. “At the other end, banks like ING have hired small expert teams and built up market share that way.”

Prominent among the new players are local banks in the Middle East and Russia, which now have a much larger share of local business. Sberbank and VTB Capital control large balance sheets and have broken into the top 20 league table for Russian loans. Ten years ago Middle Eastern borrowers would look at local and international banks when picking lead managers. But now local banks are the first port of call, and only when they want larger amounts do borrowers start calling in international names, the loans banker adds.

Head to head or side by side 

Loans bankers in houses high up the league table are not quaking in their boots, however. Borrowers call in international banks when they want size but local banks confine themselves largely to their domestic markets, and this is unlikely to change, they say.

“They don’t compete for the same business because they don’t take the same kinds of risk,” says d’Helias. “The rise of local liquidity is key for the rise of local banks, but for larger dollar deals it’s the international banks that borrowers turn to.”

Even as local banks gain experience and expertise they are unlikely to threaten international banks’ dominance of the top end of the market. They may be becoming more sophisticated and therefore better able to offer underwriting, M&A and DCM products in addition to the usual array of commercial bank services, “but the extent to which they decide to move into the investment banking space is really a function of the extent to which they are comfortable with the related risks,” d’Helias says. “That type of expertise can be acquired, but you need a strategic and cultural shift in those banks for them to be willing to take the risks and because of that one would expect to see them offer these services in local and regional markets.”

Others are less sanguine about sharing the market with stronger local peers, however. The rise of local liquidity is a crucial part of the development of the loan market and naturally allows local banks to get involved in deals. “But there a few local banks that clearly have ambitions to compete with the big guys,” says Khullar. 

Bond mandates and good manners 

One area in which they can and have been competing is in bonds. The same groups of banks with which corporate and financial clients have developed closer relationships in the loans market are more eager than ever for ancillary business.

In the new regulatory backdrop of Basel III banks are on the lookout for profitable business that does not use up balance sheet. As most loans in the CEEMEA market are drawn loans and very capital intensive, bond mandates are a perfect way for banks that lend to get more bang for their buck. And they can use a drop in the number of big players in the loans market to their advantage.

“It was more competitive pre-crisis and so we used to ask nicely,” says the senior loans banker. “We’re still polite, but when we lend we make it clear we want to see the bond mandate follow.”

Balance sheet has thus become crucial for syndicated lending and the key to DCM business too. But the rise of local liquidity is also bolstering local banks’ argument that they deserve a seat at the table when it comes to big bond deals.

“In Russia and the Middle East local banks are building out a sales force for international and not just domestic bonds,” says Spencer Mclean, head of syndicate, west, at Standard Chartered. “Some are bringing investors into the order book, and it makes sense to build up the capacity to turn this into mandates and earn fees and other banking business.”

The upshot is that the top 20 bookrunners in the CEEMEA bond market have also ceded market share, although the decline has been less drastic compared to loans. In 2006 and 2007 the top 20 had 93% of the market, which decreased steadily to 85% in 2012 and the same share year to date. The share of the top 10 has fallen from 73% in 2007 to 63% in 2012. 

This in turn has changed the way issuers select their lead managers. They are using the increase in the number of competing banks to their advantage and now ask far more of potential bookrunners.

“Competition for bond mandates is much tougher,” says Martin Hibbert, head of debt capital market origination for CEEMEA at Deutsche Bank. “Sovereign mandates can be linked to what you’re doing in their country. For example what are you doing in their local bond markets?”

Gaining corporate bond mandates can be linked to whether a bank trades foreign exchange or has trade finance lines with that company. Borrowers are simply using the growth of the market and their knowledge of the market to ask more of bookrunners.

“It’s a natural progression,” says Hibbert.

Ducking responsibilities 

But a less welcome trend is the increase in the number of lead managers on bond deals, particularly in regions where local banks are playing a larger role. In Russia, deals typically boast three or four lead managers, up from two or three a few years ago. The trend is even more pronounced in the Middle East.

“The average CEEMEA issuer doesn’t come to the Eurobond markets more than twice a year,” says Marco Huber, head of DCM for CEEMEA at VTB Capital. “So assuming a Middle Eastern issuer has about 10 lending banks, he needs to award mandates to five or six lead managers on each transaction if he wants to involve all of them in the Eurobond offerings.”

This is unlikely to end any time soon. Just as Russian and Middle Eastern banks have risen up the league table so too will banks in other countries, such as Turkey and Nigeria. Turkish banks have not yet emerged as lead managers on Eurobond offerings by Turkish issuers. But it should only be a matter of time before they turn their lending relationships into international bond business. Like their Turkish peers, Nigerian banks are already making headway on domestic deals.

“I wouldn’t be surprised to see Nigerian banks starting to act as lead managers on international bonds by Nigerian issuers in the next couple of years, as they are already active in the local capital markets,” says Huber. 

Bankers expect more and more banks on top line transactions as more and more look to capitalise on existing relationships and balance sheets. But they are worried that the increase in the number of lead managers comes at the expense of execution, they say because co-ordination is difficult with a large group of leads.

Others are concerned that those banks that have broken into the bond business largely on the strength of their lending relationship sometimes lack the necessary staff and skills, which also slows down execution

“Plenty of banks have come on to deals and ducked their responsibilities and I think this is going to become more of a problem,” says one senior DCM banker. “It’s important to recognise that just because someone lent money they’re not necessarily able to offer quality advice on a bond deal.”

One solution would be for issuers to tier the responsibilities of the their lead managers. Maclean predicts an increase in the number of leads, but thinks issuers will select two or three as global co-ordinators. “That has to be in the issuer’s best interest,” he says. “Have two or three banks do most of the work without negatively impacting the final outcome, and reward the rest with co-lead or lead positions.”  

  • By Gerald Hayes
  • 24 Jun 2013

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 13,485.80 35 12.64%
2 Citi 11,728.10 31 10.99%
3 Bank of America Merrill Lynch 11,727.25 30 10.99%
4 HSBC 10,091.34 29 9.46%
5 Santander 9,784.51 27 9.17%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 Citi 15,985.59 61 11.10%
2 JPMorgan 14,992.78 59 10.41%
3 HSBC 11,482.63 54 7.98%
4 Barclays 8,704.42 31 6.05%
5 BNP Paribas 7,314.81 22 5.08%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 26 Oct 2016
1 AXIS Bank 6,343.17 130 18.89%
2 HDFC Bank 3,833.38 102 11.41%
3 Trust Investment Advisors 3,461.85 150 10.31%
4 Standard Chartered Bank 2,372.20 33 7.06%
5 ICICI Bank 1,992.51 54 5.93%