Sovereign mandates from the CEEMEA region are rare and, partly for that reason, they are highly valued. But they are also perceived as being an enormous tribute to a bank competition to win them is intense and key to winning follow-on deals from other issuers such as government agencies, banks or corporates.
"To win repeat business from sovereign issuers is the strongest endorsement of a banks execution strength," says Nick Darrant, head of CEEMEA syndicate at BNP Paribas in London. "And there are ancillary benefits, especially in countries where sovereign issuance is rare. The publicity generated around these deals domestically serves to promote a banks reputation with other issuers in the country."
In particular, sovereign debut deals are often executed as a benchmark-setting exercise for the country that other borrowers from the region can use to place their own deals.
Consequently, the benefit for a bank in being regarded as the choice of the sovereign and also familiar with an investor base keen on the country can be large.
For every Russia sovereign deal for example, there are several Russian quasi-sovereign issuers that also issue regularly such as Rushydo, Sberbank, Russian Agricultural Bank and Gazprom as well as a host of other banks and corporates from the same country.
Nigerias long-awaited debut for $500m at the start of this year was a coup for lead managers Citi and Deutsche Bank not just because of the deal itself but also because of the vast array of oil companies and banks that may now look to tap the international capital markets.
Sovereign deals also attract attention from other sovereign issuers considering their next step in the bond markets. In the case of Nigeria, for example, Senegal, Tanzania and Ghana are also rumoured to be looking to tap the Eurobond market this year.
"It creates a virtuous circle as the more mandates a bank obtains and crucially the better it performs on these deals, the more it is likely to win more mandates," says Alan Roch, syndicate director at Royal Bank of Scotland in London.
And the attention is for good reason the intense experience of working with investors focused on sovereign deals can spring opportunities that may otherwise have been missed. "The specific expertise gained from working with sovereign issuers can benefit the execution of other market peers in our case in recent times we advised Lithuania to pursue a 10 year dollar note, which worked very well," says Darrant.
"On the back of that success, and the feedback gathered from investors, we were very clear to Hungary on the strength of demand for 10 year and 30 year tranches."
Nigerias $500m deal is smaller than many sovereign issues Russias dollar note last year was a dual tranche $5.5bn specimen and the State of Qatar placed $7bn in November the year before.
Large sizes are important to banks vying for league table positions. By contrast, corporate and private bank deals are typically $500m or lower. Although some banks claim to focus more on P&L rather than league table positioning, others are more openly ambitious and weigh up the longer term marketing benefits.
As well as being good for business, sovereign debuts are the most exciting trades, both for the banks and the issuer.
"Theres only one debut, and its interesting to be in a team positioning the curve through the credit story," says Andrew Dell, head of CEEMEA DCM at HSBC in Dubai. "Return to market trades are similarly exciting you have to think through why they are doing it and how to get the best result."
Whereas frequent borrowers have a strong sense of judgement with regards to pricing and timing, deals for debut and re-entry issuers often carry little in the way of fees.
The importance of the sovereign mandate is such that banks are willing to forego immediate profitability to do the trades, an act welcomed by some sovereigns but largely disapproved of by many financial institutions in the market.
The honour, volume for league table recognition, and follow-on business from placing a CEEMEA sovereign deal is such that some banks offer zero-fee deals to issuers.
"Banks entering this market now or re-entering, are particularly willing to slash fees to build market share quickly, and yet often without the execution resources of the established houses," says Darrant.
While those houses see themselves as offering the same service at a lower cost, making them a shoe-in for sovereigns keen to publicly slash costs to gain the favour of taxpayers, there is a weight of argument against those notes.
Many say that as with most things in life, sovereigns will pay for what they receive in terms of service and there is a strong argument for quality over price. "Regarding the selection process, both experience and fees have been relevant for the mandates," says Oana Adina Sandu, an adviser in Romanias ministry of public finance.
Although accepting zero fee deals internally demonstrates the ability to push banks to a sovereigns will, the coverage, market insight, new issue execution, research and secondary market trading may then be lacking. "For a zero fee deal, its possible that a bank would be tempted to put less experienced staff on the note," says Dell.
"And it doesnt work well with sales teams either if a sales guys sales credits are linked to the fees, which they often are, then they will be less inclined to push that bond forward to investors. With less support there could be a sell-off in the secondary market and then the investors who didnt buy it are pleased to have avoided it and the issuers reputation is tarnished."
Darrant says, however, that the performance and professionalism of a syndicate manager is unlikely to depend upon the fee incentive, but there is a risk in having adequate syndicate resources for their execution.
It can be a false economy if the size or pricing of the deal is damaged. "A more experienced set of banks could shave 5bp-10bp off an issuers yield easily, which is actually from 20c or more to almost a full point in typical five to 10 year maturities," says Dell. "In emerging markets there are a several firms trying to make a splash and zero fee deals do impress some issuers but its almosts always a sub-optimal result for the issuer."
Some sovereign issuers, however, would disagree. Ukraine, for example, is infamous for being willing to mandate for zero fee notes, while others, such as the Republic of Hungary, operate a set fee system, forcing banks to compete on other criteria.
over zero fees
"For euro and dollar denominated bonds only primary dealers may be selected, in other markets we choose leads from among market leaders," says Laszlo Buzas, deputy chief executive of the AKK, Hungarys government debt management agency.
"As the republic pays standard sovereign issuer fees, theres no fee competition, applicants should compete on several other criteria like past experience, sales capabilities, research, secondary market activity or ranking in the primary dealer system."
Lithuania justifies an emphasis on fees by insisting also on a threshold for achievement. "Banks often try to emphasize league tables and awards to differentiate themselves," says Mykolas Majauskas, chief economic adviser to the prime minister of the Republic of Lithuania.
"However, when you see that 10 banks are awarded for excellence and are number one or number two in the league tables, this simply makes the criteria irrelevant. So once banks get through a relevant track record threshold the decision mainly comes down to fees and client relationship."
Having paid a fee for a deal or not, after the completion of a note there is plenty of opportunity for sovereigns to show their pleasure, or displeasure with previous deals. Banks are rotated on and off mandates at the issuers will.
"Normally, if you are happy with your transactions, there is no need to rotate the banks just for the sake of it," says Majauskas. "Continued relationship between the issuer and the manager is often more important and sometimes one deal is not enough to develop a good rapport between the execution teams.
"Nevertheless, partial rotation is needed both for the banks and for the clients to ensure that best practice is acquired and appropriate motivation is maintained."
Sandu in Romania says the central European sovereign borrower also applies rotation criteria to its mandates for issues under its MTN programme to benefit from banks experience and their investor reaching.
Syndicate officials are aware of the system, which keeps banks on their toes. Some have primary dealerships and being a primary dealer is a prerequisite for obtaining new issue mandates in those countries. But performing well increases the frequency of mandates."Youre judged on your performance on your last deal," says Darrant. "If an issuer is pleased, theres every chance youll be mandated again. Theres no standard rotation, although some issuers do chop and change more than others as they have a lot of mouths to feed."