Believe the hype

  • 20 Jun 2003
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The World Bank's pioneering global bond of 1989 ushered in a thrilling period for the Euromarkets, as Neil Day reports.

Despite all the financial market innovation of the 1980s, serious market distortions still existed into the last years of the decade, preventing the free flow of capital around the world. But in the final months of the 1980s a deal was to hit the market that would do more than any other to break down barriers to capital flows, and pave the way for the boom in issuance that followed in the 1990s.

One person to whom the inefficiencies of the market had been blindingly obvious was Ken Lay, then head of US dollar funding at the World Bank in Washington, DC. In the early 1980s, the supranational had been raising the bulk of its dollar financing in the Euromarkets, only accessing US investors once or twice a year with Yankees.

The reason for this was the better pricing the World Bank could achieve through Eurodollar issues - in the US markets, the supranational traded some 15bp-20bp back from US agencies. The result was sharp discrepancies between the level at which the World Bank traded in the Yankee and Euromarkets.

"There were occasions on which we would issue a Yankee bond and then within a month or two either side we would issue a Eurobond, with the same maturity and the coupons very close, but the two deals would trade on a 50bp spread, even having adjusted for the coupon payment frequency," says Lay. "And even though you could argue that anyone who was involved in World Bank bonds would want to arbitrage that difference away, it just wasn't happening."

The World Bank was not entirely comfortable with the extent of its reliance on non-dollar-based investors for the bulk of its dollar funding. It was also convinced that the disparity in spread performance was the result of friction in the system. "If you could eliminate that friction, you would end up with a product that has substantially better liquidity and relative value performance," says Lay.

The first moves that the borrower made to address the problem were designed to broaden its franchise with US investors. To this end, in 1986 it adapted for its own purposes the medium term note financing vehicle developed by the Auto Finance companies. By 1988, it was raising around $1bn off the programme, which was known as the Continuously Offered Longer Term Securities (Colts), but its spreads proved stubbornly resistant.

Lay and his colleagues therefore examined the structural barriers to the arbitrage that should, in theory, have brought the Yankee and Euromarkets into line. The result was a document presented on January 13, 1988 to the World Bank's newly appointed treasurer, Don Roth, which outlined Lay's thoughts on how to overcome the market's inefficiencies.

"Looking out over the next several years, we envision a product mix that would have as its centrepiece a globally syndicated 'institutional' offering, issued in size and saleable at issue (ie, no lock-up) in each of the three major centres," wrote Lay.

He argued that the segmentation of the institutional market between domestic and offshore components was no longer appropriate, and that the needs of large active money managers were similar regardless of whether the investor was a Japanese life company, a US pension fund manager or a European investment trust.

"These investors buy and sell in size, are highly sensitive to relative value and place a premium on liquid trading markets (as reflected in expectations of comparatively narrow bid-ask spreads for orders of $1bn or more.)"

Lay concluded that the "ideal product for these investors should be designed as much as possible to incorporate these 'institutional' characteristics and not to play to the largely irrelevant 'yankee/euro' distinction".

Lay believed that Euromarket institutional investors' purported preference for annual coupons and bearer bonds was conventional wisdom - perceived and not real.

But while the concept of what would be called a "global bond" was not, in Lay's words, rocket science, the deal required intensive preparatory work, which explains the 19 month gap between the initial memo to Roth and the launch of the transaction. The World Bank therefore engaged with market participants on three fronts.

On the investor side, the World Bank began an unprecedented canvassing of investor opinion, which involved calling upon about 125 institutional investors worldwide to sound out their views on the concept. But while the response was encouraging, the same could not be said of the reaction from the banks.

Whether in the US or Europe, bankers were fearful that the global bond would further solidify the growing power of US banks. European and Japanese bankers were afraid that the instrument would offer US bankers the opportunity to intrude on their turf, while, says Lay, US bankers were concerned about the prospect of Euromarket-style competitive price cutting infecting the fixed US commission sructure.

Yes means no
The result was a bit of passive resistance to the idea, with bankers saying "yes", while meaning "no", arguing mainly that investors in Europe would not accept the US conventions that were features of the planned bond. This briefing against the deal inspired the International Herald Tribune (IHT), for example, to run a piece just ahead of its launch declaring that bankers believed the global bond concept to be fatally flawed.

However, the World Bank team had been working on a third front to ensure that it was anything but. "The idea wasn't going to work unless the paper traded with little or no friction across borders," says Lay. "There was therefore a lot of work that went into what you could call the plumbing. A lot of the work that we did in setting up the infrastructure for the deal didn't get much play publicly, but it was crucial to making the concept work."

This work involved persuading the relevant authorities to help borrower remove any obstacles in the deal's way.

For example, Lay and the World Bank's legal expert, Scott White, spent hours with the New York Fed persuading its officials to allow the Euroclear and Cedel portions of the deal to be traded on Fedwire in omnibus accounts, potentially involving substantial additional volume running through the Fed account of the bank that held the securities in the European clearing systems. This work cut the time it took for Euro and Yankee securities to trade across borders from three or four days to a day or less.

When the first ever global bond finally hit the market, it proved to be an unquestionable hit. Led by Deutsche Bank and Salomon Brothers, the $1.5bn 8.75% 10 year transaction - twice the size of the World Bank's previous largest deal - was seven times oversubscribed, prompting the IHT to declare it a staggering success.

Taken together with the pioneering swap of August 1981, the World Bank's global bond truly catalysed and enabled what was to become the trend of the 1990s in the bond markets: globalisation - an overused and abused term in many instances, but here, wholly appropriate. For the first time, borrowers could, thanks to the swap market, issue in whatever currency provided the best opportunity, and, thanks to the global bond, sell paper to whichever investor base provided the best bid.

Back of a van
But for the process to be complete, more currencies would need to be brought into the global market. And just as the launch of the first dollar global had required the World Bank to work closely with local authorities in New York, the launch of globals in other currencies would need similar preparations.

John McNiven, one of the fixed income team that took Merrill Lynch to the top of the league tables in the 1990s, now retired in Sydney, recalls some of the obstacles that had to be overcome before the first non-dollar global could be launched in November 1990, a C$1.25bn deal for Ontario Hydro. "We managed to crack the issue of settlement between the US and Canada," he says, "which previously had been done by putting the securities in the back of a van in New York or Toronto and driving them to where the investors were."

McNiven was keen to establish a global Canadian dollar franchise to help boost Merrill's league table position. While the firm enjoyed a strong US domestic franchise, its weaknesses in Europe had prevented it from gaining Euromarket share. The idea was, therefore, for Merrill to enable supply of Canadian dollar global bonds that it could then sell to US investors attracted by the weakness of the Canadian currency and the higher coupons on offer.

Ontario Hydro's issue was also notable for increasing co-operation between banks. In an unusual step, and at McNiven's prompting, Merrill, having prepared the transaction with the borrower, invited Nomura and Scotia McLeod to join it on the top line, making the deal the first on which three banks acted as joint bookrunners. The move was initially resisted by some of his colleagues, but McNiven won the argument because, again, the motive was partly to support Merrill's aim for a higher league table position.

"Previously, when the borrower had to choose just one bank, there were always winners and there were losers," says McNiven. "But I saw that as a recipe for disaster, since you were always more likely to be a loser. I said that it was better to share the books between three and have a greater chance of winning mandates rather than risk having nothing at all."

The advantages to the borrower were more obvious. "We told the borrower that they would be better off having three people servicing it than just one, especially on a deal of such a large size," says McNiven. "They wouldn't be fed a line by just one party, but would instead have the benefit of three banks co-operating and generally get things done in a more consultative and transparent way. At the end of the day, it was clearly better for the borrower, better for investors and better for the industry."

In the years following the first non-dollar global, several other new markets and asset classes were opened up, although these too required much groundwork. The World Bank again took the lead, working with the authorities in Japan and then Germany, as in 1992 it launched the first yen global for ¥250bn and in 1993 the first Deutschmark global for DM3bn.

The first corporate global bond, a $1bn deal for Matsushita of Japan, hit the market in 1992 and the first global FRN, for the Kingdom of Sweden, was sold in 1993.

Vested interests
The opening up of so many currency markets and asset classes to international investors and borrowers across the world, when combined with the introduction of the fixed price re-offer system by Morgan Stanley and New Zealand on the eve of the 1990s, should have led to a golden age for the bond markets. But although issuance boomed, once again the vested interests and competitive instincts of bankers ensured that progress was in fits and starts.

The early petty arguments about the merits of the global bonds raged on until the mid-1990s, even though banks were keen to break into the global market. "I can running a workshop entitled 'Global bonds: myth or reality?' at the Euromoney global borrowers forum in 1993 or 1994, and the issue was still very controversial because of the vested interests on all sides," says Charlie Berman, co-head of European credit markets at Citigroup.

"The Europeans regarded global bonds as a tremendous threat, the Americanisation of the Euromarkets. And of course the Americans would argue that the Europeans were just trying to protect their cosy little unprofitable market in Europe from what was a logical thing to do."

The market's response to the introduction of the fixed price re-offer had been even worse. "The fixed price re-offer very quickly became abused," says Paul Hearn, who was at JP Morgan in the early 1990s and is now global head of primary markets at BNP Paribas in London. "It only makes sense to the extent that the level at which the fixed price re-offer is set is the level at which investors are - disciplined, market-clearing levels.

"However, it didn't take very long before the fixed price re-offer became irrelevant and what everyone was focusing on was the all-in. Yes, in theory you were not meant to sell bonds below the fixed price re-offer until the deal broke syndicate - but deals would tend to hold at the fixed price re-offer for about an hour and then the syndicate would break and the thing would trade down again, so it was abused fairly quickly as a result of competition."

And it was not only banks who were abusing market practices.

In the early days of the fixed price re-offer, in March 1990, the Republic of Italy approached the market for bids for a $1.5bn seven year deal. Although the sovereign indicated that it favoured a consensual approach, its stubbornness in the face of weak demand ensured that the deal turned into a fiasco - albeit with the help of bankers' eagerness to win the prestigious mandate.

Salomon Brothers won the mandate and began marketing in a 55bp-57bp over Treasuries range, but it soon became apparent that investor interest was in the 60bp area. Italy therefore moved the spread - but only to 57.8bp over. As a result, the spread quickly widened to 62bp over. In contrast, the EIB had taken a more flexible approach that week, widening price talk on a Ecu300m seven year deal from 14bp-16bp over Ecu OATs to 18bp-20bp over, with eventual pricing of 18bp over.

What the Italy deal showed was that investors had quickly caught on to the weaknesses of the fixed price re-offer. "When the deal is priced at 57.5bp over, and investors see 30 cent fees, which means 6bp more yield, they look at the downside for the underwriters," one syndicate member told EuroWeek at the time.

"If the spread widens to 63.5bp over, then the syndicate is still making a profit. If investors are not convinced that there is any consensus and don't believe that the issue is fairly priced, they might as well wait until the spread widens."

Simon Meadows, then head of syndicate at Salomon Brothers and now co-head of fixed income distribution at Credit Suisse First Boston - went home that day long $900m the Italy deal. He says that the issue highlights how the fixed price re-offer represented a quid pro quo between banks and issuers.

"Borrowers had to understand that the fixed price re-offer was not just a question of us getting them to pay us a fee, but that we wanted to work for that fee and that there needed to be a consensus on pricing," he says.

However, even when a borrower did understand the rationale for the fixed price re-offer, it did not necessarily mean that it was always willing to put its money where its mouth was. "The fact of the matter is that the Italians were tougher than the EIB on that day, " says Meadows.

The deal stands in contrast to a deal that Italy launched three years later and which was to become EuroWeek's deal of the decade. This was a $5.5bn global bond split into $2bn 10 year and $3.5bn 30 year tranches, led by Goldman Sachs and Salomon Brothers in 1993.

Looking back at the issue, EuroWeek wrote that "the transaction underlined more than any other previous global bond just what could be achieved by combining domestic and Euromarket placement."

Going to pot
Although griping about the global concept and abuse of the fixed price re-offer system continued, the latter until today, by the mid-1990s both had become accepted parts of the international bond markets -the former because of the possibilities it opened up and the latter because of the order it brought to the market.

"It was a big change, a big improvement," says one Euromarket veteran, "because prior to that it was a hugely risky business. It was a mug's game and New Zealand really changed all that."

One final piece of the jigsaw still remained to be put in place, however, before the picture of the international bond market practices that we have today was complete: the pot system.

Like the fixed price re-offer, the pot system was an invention of the US domestic market. The fundamentals of the practice were that rather than having a retention, banks would be allocated bonds based on their ability to sell paper and the quality of their accounts, which clearly required the leads and/or the borrower seeing the names of investors.

Other large issues had employed elements of the system, but the deal that brought the pot structure, albeit a modified version of the US one, to the heart of the international bond markets and provoked a major debate on its merits was a $2bn global bond for General Motors Acceptance Corp (GMAC).

The transaction was lead managed by Bear Stearns and Morgan Stanley, with the use of the pot for the auto company's deal first suggested by the former.

Brett Graham, then senior managing director and head of capital markets at Bear Stearns in London, who now works on the buyside as a principal at Vertical Capital in New York, says that the pot system was employed in an attempt to overcome the problems that corporates including GMAC and also Ford had faced when launching their early globals, with Ford having issued the first single-A corporate global bond.

"The intellectual argument for their use of the global market was that they should have been able to achieve pricing tighter than on pure US domestic securities, for two reasons," says Graham. "Firstly, the deals were simply bigger, so you had greater liquidity, and secondly, you had a broader investor base. But what had been happening throughout 1994 was that global bonds were being priced cheaper than US domestics. That was because non-US investors, who were new to corporate bonds, were mostly buying them if they could flip the paper into the US two or three days after launch at a tighter level, and this practice was being tacitly encouraged by the banks."

As well as the lack of credit buyers in Europe, the syndicate structure of previous globals was a root cause of this problem. "You had a lot of banks in the syndicate purely because they had a commercial relationship with the issuer," says Graham. "They didn't necessarily have the distribution for this type of paper or provide supporting credit. They were therefore competing with each other or the same investors om price, undercutting one another or selling the bonds back through the brokers."

GMAC had witnessed this on a recent issue launched in the then fashionable Euro-Asian format -- basically a global bond without the US leg. While nearly all syndicate members had told the borrower that they were oversold and short, the majority of the paper traded back to the leads through the broker market.

"That was the straw that broke the camel's back for GMAC and when we approached them with our idea they bought into it," says Graham. "Every bank was telling them that they could sell their credit overseas, so GMAC said 'fine, we're going to test you on it'. And while the response from dealers was, to say the least, controversial, the result was irrefutably successful."

European banks were aghast at giving away the names of their investors and some US  banks were also against the idea, and one bank declined its syndicate invitation. To this day some European market participants still resent the concept, but after many arguments, use of the pot has become widespread. "History is the ultimate judge and not only is every single global bond now done with the pot system," says Graham, "but even the big Eurobond issuers use it."

Euro revolution
In parallel with the removal of barriers between the Euromarket and others that the global bond produced, the 1990s was a decade when barriers within the Euromarket's home, Europe, were torn down. And the catalyst for this revolution was the euro. The introduction of the single currency may only have taken place in the last year of the decade, but the prospect of its arrival was a driving force behind much of the activity and innovation that took place during the 1990s.

In the early years of the decade, this took place in the euro's precursor, the European Currency Unit (Ecu). Issuance in the synthetic currency had begun back in March 1981, when Kredietbank Luxembourg launched the first ever Ecu issue, for Softe, a Luxembourg-based financial subsidiary of Italian telecoms company Stet. However, it was only at the end of the 1980s that the market began to be taken seriously by those banks wanting to be  major players in the Euromarkets.

In April 1989 France launched the first Ecu1bn transaction, and volumes then grew rapidly. In 1989, Ecu issuance, at $12.2bn equivalent, accounted for less than 10% of dollar volumes and was behind the Deutschmark and sterling. But by 1991 the Ecu was the most active European currency at $30.6bn, compared with $78.7bn in dollars.

While almost any borrower that could find attractive arbitrage was willing to issue in the currency, many of the landmark transactions to hit the market from 1989 onwards were politically motivated. The Ecu1bn French deal, for example, formed part of the French government's plan to establish an Ecu segment in its recently launched OAT market to signal its commitment to the European project.

And just as the French government's commitment to promoting and pushing forward the Ecu/euro market has continued to this day, the European Investment Bank's (EIB) attitude to the currency in the early 1990s was similar to its present stance.

When the supranational launched a Ecu500m five year issue in January 1990 -one of the largest non-sovereign issues to date - bankers in Paris told EuroWeek that "the deal forms part of a wider EIB plan to launch a number of issues across the maturity range, establishing an EIB yield curve".

Also keen to get in on the act was the United Kingdom, which in February 1991 launched a Ecu2.5bn issue. The UK's move was partly motivated by its desire to help the City of London retain its position as the leading financial centre in Europe. More specifically, the Liffe exchange was at the time engaged in a battle with Matif in Paris for supremacy in Ecu futures.

But according to one banker, Liffe's battle was always a losing one, given that whereas in Paris Ecu futures were one of the most exciting contracts to trade, in London they were one of the more boring.

France was anyway more committed to regular Ecu issuance. This was again illustrated in November 1990 when the sovereign launched a Eu1.5bn 10 year OAT, the largest in the currency and around double the size of its French franc OAT auctions.

Soon afterwards the French government made the commitment that it would raise 15% of its debt in the synthetic currency.

"Of course purely financial considerations played a part in our strategy," says Sylvain de Forges, described as one of the architects of the Ecu market and today chief executive of Agence France Trésor, "but the political motivation behind it was completely explicit. That was clear from the fact that changes had to be made to very high level legislation to allow the republic to issue in currencies other than the French franc."

The transaction, described as "beautiful" by one French banker, was also notable for the way in which it, and other groundbreaking French Ecu deals, foreshadowed the use of syndication for the launch of new government bonds, which has become commonplace since the introduction of the euro. The Trésor was also pleased with its use of the fixed price re-offer system - even if, says de Forges, he had to spend hours explaining how it worked to some of the more domestic French franc houses.

The boom in Ecu issuance in early 1992 had been supported by the signing in December 1991 of the Maastricht Treaty, which laid down the conditions and timetable for European monetary and economic union (EMU). However, it soon became clear that politicians' enthusiasm for the EMU was far greater than their populations' - with serious consequences for the Ecu market.

"The Ecu market was marvellous in the first months of 1992," recalls de Forges. "We successfully launched our 30 year Ecu OAT in the January to extend our yield curve, and I still have a picture of a celebratory drinks party where everyone was smiling and happy. But summer of 1992 was awful and what followed was no better. Everything broke down after the Danish referendum."

On June 2, 1992, the Danish people had rejected the Maastricht Treaty in a referendum, plunging the Ecu market into crisis. "We had a meeting with our primary dealers about six weeks later and most of them considered it no longer necessary to quote prices on screen, and the few that continued to do so were quoting with very large bid/offer spread," says de Forges.

"Liquidity went down very rapidly and although we disagreed with that there was little that we could do."

The situation deteriorated over the next few months as the Exchange Rate Mechanism (ERM) crisis hit, the UK and Italy being allowed to pull out of the system in September and Spain to devalue the peseta. And although France voted 'yes' to the treaty by 50.7% to 49.3%, the narrow margin inspired little confidence and issuance in Ecus slowed to a trickle. In 1993 only just over $7bn equivalent hit the market.

David Ovenden, today global head of credit at BNP Paribas, but in the early 1990s at JP Morgan and chairman of the Ecu sub-committee of the AIBD, says that the market had always been particularly vulnerable to such a crisis for two reasons: its market making agreements; and the fact that, for all its merits, it remained a synthetic currency subject to political whims.

The Ecu market was one of the few in which "head to head" market-making -under which participant banks were required to quote prices to each other - was still market practice. While this made sure that the market was liquid for investors, it at times made it, says Ovenden, too liquid and trading obsessed.

"The Ecu market was one in which the old trading mentality still prevailed," he says. "Provided a trader picked up the phone, they were forced to make two way prices, and as a result they could get stuck with positions, particularly on deals that were almost completely locked away and which enabled traders to play all sorts of games. There were a lot of very aggressive traders who were just ruthless at squeezing the market, and in the end these abuses led to the downfall of 'knock for knock trading."

This was compounded by the political uncertainty surrounding the EMU project. "There was a lot of uncertainty over whether EMU was going to happen, which countries would join at the first stage, and whether you'd have a hard Ecu or a soft Ecu," says Ovenden. "There was an enormous amount of sensitivity around issues such as whether Germany would 'allow' Italy, in particular, to come in, because Italy was trading at 500bp over Germany at that stage."

And when uncertainty became too great, there was only one option open to traders. "We had various crises where in essence the markets were just too difficult or too technical too trade, and people just refused to pick up the phone," says Ovenden. "And you'd always try and get someone on the line who'd just come back from lunch or wherever, and who hadn't heard what was going on, and then they'd make a price and get it wrong."

Ice maidens
Not for the first time in its history, the bond market turned a crisis to its advantage. EU sovereigns that had both successfully and unsuccessfully defended their currencies against speculators turned to the bond markets to replenish their foreign currency reserves and in some cases finance growing deficits DCM officials and syndicate managers leapt at the opportunity.

For example the Kingdom of Sweden made an announcement in October 1992 that it needed to borrow $35bn after its banking system had been plunged into crisis.

Bankers rushed to the aid of Sweden with suggestions about how the sovereign could raise the money - although speaking to those still around today it is hard to tell which was more attractive: the fees on offer, or a pitch to Sweden's all-female treasury team, the "Ice Maidens", led by the respected Christine Holm. And the borrowers joined in the spirit too: one Finnish treasury official drove all the way from Helsinki to Frankfurt to join a celebratory dinner after a Deutschmark transaction just so that he could show off his Rolls-Royce.

Plenty of fees were also on offer from the UK, which embarked on a series of highly successful funding exercises shortly after its ejection from the ERM. One was a $3bn 7.25% 10 year transaction led by CSFB and SG Warburg, which, according to Simon Meadows, received a little help from an unlikely place.

"We launched it late at night into Tokyo and the initial response was lukewarm at best," he recalls. "But James Leigh-Pemberton, who was running syndicate at SG Warburg, popped out for a stroll in the middle of the night, went into St Paul's, and said a prayer.

"Then when the Middle East came in early that morning, the book really started to build, and it turned into a riot."

Race for supremacy
It was in 1996 that confidence in EMU returned and the Ecu market began to recapture market participants' attention. In December 1995, at an EU summit in Madrid, Europe's leaders had agreed on a one for one parity between the Ecu and the euro when it was introduced. And by that time convergence between EU sovereigns, which had been interrupted by the ERM crises, had resumed. The great race for supremacy in the euro market thus began.

Borrowers, keen to ensure that they would reap the benefits of the deep and broad market that the euro promised, sought out projects that would grab the attention of investors and allow them to produce instruments suited to the needs of the new market. None was more headstrong in the competition that ensued than the  European Investment Bank.

From 1997 to 1999 and beyond, no borrower had established more "firsts" in Ecus/euros than the EIB, which launched its first euro benchmark in January 1997. The first pure euro transaction, the first euro global and the first euro benchmark programme were just three of its many achievements. But while at the time the EIB's belief in the euro was - and remains - rock solid, today René Karsenti, director general, finance at the EIB, admits that his confidence in the project was strongly tested by the market.

"After the Madrid summit and the agreement to have parity between the Ecu and the euro, the market reacted extremely cautiously," he says. "But our strategy was to launch a transaction in Ecu clearly stating that there would be one for one equivalence between the two. There was some scepticism from banks and other issuers, who thought that I was going too far with this declaration. However, we had not only a vested interest in the success of the euro but also a resolute commitment to the euro and to adopting a pioneering role.

"So when I was asked by a journalist whether I believed that there would be one for one equivalence, my answer was: 'I think it is crystal clear, it will be one to one'. But I must confess that even I was not 100% convinced that it would be sure to happen initially under such terms, because of the amount of criticism and scepticism surrounding the wording of the Madrid decision."

Nevertheless, the EIB's groundbreaking euro transactions proved a success, and other issuers raced to establish their euro credentials. Borrowers including Cades, 3CIF and Austria launched euro benchmarks through a series of new structures - euro-fungibles, parallel bonds, catamarans - many of which, like the early global bonds, required much unglamorous preparatory work.

"We would sit there and dream up what would be attractive to borrowers and investors," says Joe Dryer, then at BNP Paribas and now global head of capital markets origination at Dresdner Kleinwort Wasserstein. "But all that innovation was then supported by a lot of work that was being done behind the scenes.

"On exchangeable bonds, for example, you had to make sure that you avoided creating a tax event when you converted your Ecus or French francs into euros on a coupon payment date. We had to go around and talk to accountants in all the relevant jurisdictions to ensure that it wouldn't be seen as a sale and buyback on the conversion date and that it was a clean exchange."

The transaction that showed more than any other what was possible in the new currency was, once again, a landmark issue for the Republic of Italy.

The sovereign had already launched various euro-related transactions, but in February 1998 it took the new market to a new plane with a Eu4bn 10 year deal via JP Morgan, Paribas and SBC Warburg - the largest single tranche fixed rate Eurobond ever. Following the template established by the Kingdom of Spain the previous year, the issue was designed to to be fungible with a BTP on the introduction of the euro, thereby offering investors the promise of high liquidity.

"We have followed a strategy of issuing larger and larger benchmarks as the name of the game after the euro will be liquidity," Vincenzo La Via, then head of funding at the Italian treasury, told EuroWeek. "The success of this deal shows just how eager investors are to buy this kind of product and the extent to which they are focusing on the euro and liquidity."

The dam breaks
The focus on liquidity highlighted by La Via was not, however, restricted to and prompted by the euro. The growing proportion of assets managed by institutional rather than retail investors that had prompted the World Bank, for example, to launch the first global bond, had only accelerated over the 1990s.

And from the mid-1990s onwards, borrowers and bankers had been working at producing instruments that offered investors as many of the features of government bonds as possible.

This was the motivation for moves that created the largest non-government bond segment in Europe: the jumbo Pfandbrief market, launched in 1995. Until then the 200 year old product had been the preserve of buy and hold domestic German investors. But as a result of the narrow investor base and lack of liquidity in the product, triple-A quality Pfandbriefe were trading at around Libor plus 15bp while triple-A agencies were trading at 10bp-15bp through.

Pfandbrief issuers and their bankers therefore came up with a plan to produce a completely new instrument, one that would attract first German and then international accounts by commitments to issues of at least DM1bn, market-making in size, and narrow bid/offer spreads - all inspired by the Bund market itself. And although vested interests once again raised their ugly head, as some German banks feared the arrival of foreign competition, the innovation was pushed through.

At the forefront of the action was Stephan Bub at Bayerische Vereinsbank. As head of both issuance and trading, Bub was able to commit the mortgage bank to the project and issue the first ever true jumbo Pfandbriefe - albeit slightly later than planned. "We had wanted to come with the first issue in March and wanted the other mortgage banks to join us," he says.

"We had targeted that month because we wanted to settle on futures dates, to make hedging easier. But none of the others received internal approval in time, so we waited another couple of months. Then when it became clear that they were again proving to be gun-shy, we went ahead with our issue in June, and after that the dam broke."

Jumbo issuance then boomed as mortgage banks sought to take advantage of the apparently boundless new funding available and bankers fought hard to take part in a market that had huge league table potential. But while borrowers such as Depfa used the new instrument wisely, others abused the new opportunities, the effects of which would come back to haunt the German mortgage banks.

Nevertheless, the jumbo concept proved a success, the strongest evidence of which was the way countries such as Luxembourg, France, Spain and Ireland flattered Germany's market with imitations.

They were not, however, the only ones growing aware of the merits of such a product.

Not long after the launch of the market, Bub, for example, discussed the idea behind the product with officials from Freddie Mac. With their vast funding needs, the US agencies were continually looking at new financing opportunities. But the form that their liquid programmes would eventually take overshadowed even the booming jumbo Pfandbrief market.

Fannie goes global
The seeds of what would become the largest non-government funding programme ever, Fannie Mae's Benchmark Note programme, were sown back in 1994, when, in June, the US agency launched its first ever global bond, a $1.5bn 10 year issue via JP Morgan and Merrill Lynch. According to Linda Knight, Fannie Mae's treasurer, the project was very much investor driven.

"Our first global came about as the result of a marketing trip that our then chairman, Jim Johnson, and I did in 1994," she says. "We met with large institutional investors, central banks and other important players in the fixed income market, and they were asking for larger, more liquid deals, and if we, Fannie Mae, would be able to issue in global form."

The US agency's decision to proceed with such an issue was then taken, appropriately, at the world's busiest international airport. "Jim and I were walking down one of those long corridors in Heathrow on our way to the gate, when Jim asked: 'Did you hear what I heard on these visits?' I said 'absolutely' and told him that I already had people working on the idea.

"He then asked how quickly we could launch it, and I said that there was a lot of work to be done and that September would be possible. He turned to me and said: 'June would be good Linda'. And so it was June."

Despite the success of the global, the bulk of Fannie Mae's funding continued to be raised off the agency's MTN programme. Meanwhile, the borrower continued to explore ways to finance the rapid growth in its on-balance sheet mortgage portfolio. The method it settled on was to offer investors securities that would look as much as possible like government bonds, a timely idea given the forecast decline in Treasury issuance.

In December 1997 the agency therefore announced that the following year it would raise up to $40bn through what it called Benchmark Notes of between $2bn and $5bn.

"The programme was really the successor to our early global strategy and was primarily focused on bringing to the fixed income market liquidity, transparency, predictability and global distribution," says Knight. "What we had seen through the second half of the 1990s was the growth and focus of money under management into the hands of large institutional investors.

"They need to be able to access the market in very large size, they need to know where bonds are trading, and they need to have the confidence that they can not only buy a security but then sell it when they need to change their investment profile, and do so very easily and at a tight bid/offer spread. The Benchmark Note programme offered them all that."

The first Benchmark Note, a $4bn five year via CSFB, Goldman Sachs and Merrill Lynch in January 1998, attracted $8bn of demand.

The programme enabled Fannie to ramp up its funding. In 1990 the agency had issued $19.6bn of long term debt. By 2000 long term issuance had risen to $110bn - a number equivalent to all Eurobond issuance in 1984, illustrating just how large the international market's potential had grown.

It was in euros, however, that the US agency did perhaps the most to test the boundaries of the market, when in August 2000 it announced the establishment of its EuReference Notes - learning from the EIB's Euro Area Reference Notes (EARNs) and later inspiring Kreditanstalt für Wiederaufbau. Under the programme Freddie committed to issuing at least Eu20bn through benchmarks of at least Eu5bn and following a quarterly calendar. The first issue, a Eu5bn 10 year via Deutsche Bank, Schroder Salomon Smith Barney and UBS Warburg, proved a roaring success.

As much as any other landmark in the euro market's relatively short history, the programme highlighted just how much the new currency had changed ways of thinking - not least for Jerome Lienhard, senior vice president of global debt funding at Freddie Mac. "I remember when I first heard about the euro," he recalls. "I was sitting in Credit Suisse's headquarters in Zurich and their chief economist was describing to me how this currency was going to become real. I honestly couldn't believe it. I thought it would never happen."

But today, Lienhard can be counted as one of the biggest supporters of the euro capital markets. "The advent of the currency changed the face of the market," he says. "The legacy of the euro for the international capital markets has been its ability to homogenise all the old local markets and create enormous liquidity."

Institutions freed
Greater liquidity was not the only trend to be driven by changes to investor behaviour in Europe in the 1990s. Credit product, for the first time, began to be in heavy demand. The new appetite was driven by two key changes: the introduction of the euro and the relaxation of institutions' investment criteria.

The euro meant that investors were no longer able to enhance their returns by taking currency and interest rate plays in legacy European currencies. These had been particularly popular in the run-up to EMU as investors piled into convergence plays, aimed at taking advantage of the narrowing of interest rate differentials within the EU. And those investors who had previously been restricted to investing in their own currencies and domestic markets were first allowed to increase their foreign currency holdings and then invest in a far broader range of products when the euro was introduced.

Many European institutional investors were also freed from previous criteria that forced them to invest in only the highest quality securities. "US institutions had previously been far more developed in their participation in non-government securities than Europeans," says Manfred Schepers, who was for most of the 1990s at the centre of the DCM operations of what was to become UBS Warburg. "But that changed dramatically in the second half of the 1990s. It is only about five years ago, for example, that the Dutch state pension fund, ABP, started diversifying out of government bonds and into credit."

Thus began the great European credit market odyssey. Early tests of the new paradigm included issues in tributary currencies, such as major transactions for Lafarge and KPN in French francs and Deutschmarks, respectively - the latter currency proving the most fruitful, being seen as the best proxy for the euro. Issuance in Ecu/euros, however, remained subdued, as few investors appeared to be ready to experiment simultaneously in the credit market and a currency that did not yet exist.

But within months of the euro's official launch, the credit market began to show its potential. A Eu1bn transaction for British American Tobacco was a prime example. The single-A rated issue was launched for Eu1bn and soon increased to Eu1.7bn.

Corporates, in Europe engaged on an M&A spree, relished the new financing opportunities available. None more so than Olivetti, which in the euro's first year launched its landmark Eu9.45bn floater via Tecnost International Finance to support its successful takeover of Telecom Italia, which was at the time five times larger than the bidder. "Tecnost rewrites the corporate rule book," wrote EuroWeek in its 1999 Review of the Year.

As anyone in the market today will know, the telecoms theme was to come to dominate the market, both in Europe and internationally. And Deutsche Telekom's $14.6bn eight tranche milestone in June 2000 - across dollars, euros, sterling and yen - showed more completely than any other deal just what all the innovations of earlier years had made possible.

But hidden among the early successes that followed the introduction of the euro were the seeds of some of the market's greatest failures.

One banker seeking to highlight the quality of a benchmark issue for Marconi in March 2000, at the peak of the equity market's bull run, described the company as "not just another telco".

The previous April, a Baa2/BBB+ US company called Enron had raised Eu400m of six year funding at 60bp over mid-swaps via Lehman Brothers and Paribas.

Ahead of the deal, Enron's chief financial officer, Andy Fastow, told this journalist that his deal was not only a milestone for the company, but also a measure of how quickly the corporate market had developed. "This is," said Fastow, "an important deal in the evolution of the euro market."

An age of extremes
In the post-Enron, post-9/11 world we live in, it would be easy to despair. However, those involved in the Euromarkets, now subsumed into the globally integrated financial markets, can take heart from the way in which dramas have turned not only into crises, but also opportunities for the bond markets.

The rise and fall and rise of Russia since it threw off the communist straitjacket at the beginning of the 1990s is a prime example of how quickly and dramatically sentiment can change.

From the Russian Federation's landmark $1bn issue of 1996 via JP Morgan and SBC Warburg to the height of its crisis in August 1998, and on to the rush into the country's assets taking place again today, nowhere has the bond market's ability to turn around quickly been more amply demonstrated - even if the question of whether this is due to efficiency or very short memories may never be answered.

Latin America, the Tequila crisis, Argentina's mid-1990s issuance, and its recent collapse. Japan's decade of deflation, the rise of the Tiger economies, the Asian crisis, and China's entry into the international debt markets. Rising then falling then rising government supply. The US economic boom of the 1990s, the dotcom bubble, and today the spectre of deflation. Even Y2K, withholding tax and e-bonds. Watching the market evolve since 1990 has been exhilarating.

It is too early for somebody writing today to give a final verdict on the most recent years of the market's life. As eminent historian Eric Hobsbawm writes in his short history of the 20th century, The Age of Extremes: "Nobody can write about his or her lifetime as one can (and must) write about a period known only from the outside."

  • 20 Jun 2003

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 JPMorgan 317,793.98 1355 8.72%
2 Citi 301,114.13 1092 8.26%
3 Barclays 259,580.63 846 7.12%
4 Bank of America Merrill Lynch 258,842.43 934 7.10%
5 HSBC 224,273.23 905 6.15%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 32,854.00 58 6.73%
2 BNP Paribas 31,678.29 142 6.49%
3 UniCredit 31,604.22 138 6.47%
4 HSBC 25,798.87 114 5.29%
5 ING 21,769.65 121 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 14,633.71 80 10.23%
2 Goldman Sachs 11,731.14 63 8.20%
3 Morgan Stanley 9,435.23 48 6.60%
4 Bank of America Merrill Lynch 9,229.95 42 6.45%
5 UBS 8,781.68 42 6.14%