Anyone who believes there’s strength in numbers hasn’t spoken to an investment banker in Asia of late.
“A football team of banks on deals? It’s bullshit,” one senior debt banker at an Asian bank tells Asiamoney. “The breakdown of fees and coordination – nobody likes it.”
The number of participants in deal syndicates, or the collection of banks hired to arrange and distribute equity and bond issues, has been on the rise for some time. But it hit new heights in November 2012 when the People’s Insurance Company of China (PICC) launched a HKD21 billion (US$2.71 billion) initial public offering (IPO) with a record 17 bookrunners.
Chinese issuers Galaxy Securities and Sinopec Engineering followed PICC, hiring 21 and 16 bookrunners for their respective May 21 and May 23 Hong Kong trading debuts.
The inflation of bookrunners has the traditional investment-bank powerhouses frustrated.
“This is a problem that has been developing over the years. We may very well see more bookrunners on future deals, but ultimately, it’s the three or four lead banks that control and execute the deals,” says a head of equity capital markets (ECM) in Asia at a US bank.
Worse, from the perspective of these bankers, the enlarged syndicates have not had an obvious impact on deal quality. PICC issued its shares in a notably choppy environment, yet they traded up 6.9% by the end of their first trading day and continued rising to HKD4.17 by May 15 versus their HKD3.48 debut. Galaxy’s stocks rose more than 7% in the week following the deal, and while Sinopec Engineering’s shares closed below a debut price of HKD10.46 at the end of its first trading day on May 23, but still outperformed the broader Hong Kong market.
It’s a similar story in Asia’s international bond market. Sinopec Capital hired 12 bookrunners for its US$3.5 billion bond issue on April 18, while Citic Securities used 12 banks on its US$800 million five-year international bond debut a week later.
Between January and May 15, four Asian deals worth a combined US$10.24 billion were arranged by syndicates with 10 bookrunners or more, according to Dealogic. Only one such deal was done over the same period in 2012.
There’s a simple reason behind the antipathy of investment bankers to the enlargement of syndicates: fees. Equity issuers typically pay their syndicate group about 1%-3.5% of a deal’s value, while a company pays its bond syndicate roughly 50 basis points (bp) to 60bp of total value for smaller deals and 90bp-100bp for larger ones. Those amounts are split across the syndicate, so the more members there are the less each individual firm earns.
Bankers admit to this self-interest, but also claim a more altruistic motive for their hostility. Having too many bookrunners on a deal weakens the ability of the syndicate to be responsive and form a consensus. This, they argue, could prove damaging for a deal’s prospects if market conditions rapidly turn for the worse.
“There are key drawbacks to having more banks on deals, and sooner or later there will be deals which perform very, very badly where an issuer will end up listening to the weakest guy of 10 bookrunners rather than the better judgement of a few advisers. It could be a disaster,” says the head of debt capital markets (DCM) at an international bank. “Maybe they should have considered fewer banks with voices.”
But issuers that appoint large syndicates disagree. They believe that including more banks increases the chance of a deal’s success. Syndicate positions can also be used to repay banks with which they have long relationships.
So far the facts support the issuers. There is no evidence that deals with big syndicates perform worse than those with fewer bookrunners. Perhaps most tellingly, investors say there is little to no difference in the end communication on deals.
Rather than rail against the commoditisation of Asian ECM and DCM, international investment bankers need to better demonstrate why they deserve major positions on Asia’s benchmark deals.
Global dis-coordination
A key claim of bankers unhappy with the inflation of syndicates is that multiple bookrunners can easily lose focus and coordination.
This is where global coordinators come in, or the banks selected to coordinate syndicates to ensure key investors are reached. Bankers argue that two global coordinators are sufficient to arrange deals worth US$200 million-US$500 million, and no more than three are required for larger deals. Global coordinators typically get paid a larger slice of the fee pool than bookrunners.
But inflation is also taking place among global coordinator roles. China Galaxy Securities had five global coordinators on its deal; Astro Malaysia had six on its IPO in October 2012; and Citic Securities had five bookrunners on its bond issue.
“Someone needs to coordinate the coordinators,” says a mergers and acquisitions banker.
The inflation is far worse among the bookrunners, whose key job is to gain investor orders. In the modern market any decent investment bank knows who the main institutional investors and hedge funds are, so adding another bookrunner will rarely bring new accounts. This often leads to bookrunners approaching the same investors multiple times.
The more bookrunners, the greater the potential for conflict too. Banks employed in a bookrunner position as a reward for previous services may criticise pricing put forward by global coordinators, particularly if they wanted the more senior role. The issuer could then argue that its deal pricing should be tighter, putting the lead banks in a difficult position.
Likewise, banks that gain good syndicate positions by dint of their relationship with the issuer in other areas may offer advice to demonstrate their seriousness, only for this to conflict with other managers. This can mean hours on conference calls and meetings to resolve the situation.
“The very fact that so many of our deals price so late at night is frustrating... There are always so many different perspectives that just delay the deal,” says one debt syndicate source. “If we have to have a consensus on line 200 in our orders to go through, and each of the 12 banks must go through, it’s a difficult process. This is why non-global coordinators are sometimes shut out of that process, to speed things up.”
The key gripe of international bankers is about money. Put simply, the more banks that participate, the less each one makes.
“In China Construction Bank’s IPO [in 2005] we made US$100 million of fees on that deal. With the Galaxy Securities IPO, [participating syndicate] banks will make US$1 million-US$2 million,” says a head of ECM syndicate in Asia at a European bank who worked on both deals.
Inevitably, banks place more of their best resources where they feel they will return the most money.
“With markets at the moment [being so] busy, no bank has enough resources to put every senior banker on every single deal,” says the DCM head. “That means teams will effectively work for those clients that give the most trust and the ones who give us all their faith to do a better job for them. We have to prioritise where we’ll be more accountable for delivering.”
Advantage issuer
Yet for all the umbrage of bankers, the data to date suggests that large syndicates work.
PICC’s deal succeeded with a big syndicate, as did that of Galaxy Securities, which ended its first trading day up 6% and continued rising during its first trading week, trading from HKD5.30 per share on May 21 and ending at HKD5.70 by May 28. Meanwhile Zoetis, the company that employed the highest number of bookrunners for its IPO outside of Asia this year, saw its shares consistently trade up a minimal percentage for the four days after its IPO, and then rise more aggressively.
On the bond front, the deals of Sinopec, Citic Securities and CNPC were each trading at cash prices of HKD95-HKD98.5 by May 30 – below par, yet still better than the overall market, bankers explain. COSL, the bond with the largest number of bookrunners in Asia by May 2012, was also trading at HKD95. Its price also tightened after its debut, and widened more recently in line with Treasury movements.
In addition to decent post-pricing performance, issuers see several advantages in employing a big syndicate.
“The last deal that we did was 18 months ago. Between the coordinators, bookrunners and co-managers there were eight banks in total. The next one we do will have more than 10 in the syndicate, for the relationships,” says Peter Leung, deputy chief executive and chief financial officer of Industrial & Commercial Bank of China (ICBC) Asia. “I don’t think that streaming down the number of syndicates has any meaningful value. Rather, it saves us the difficulty of choosing who within our relationship banks needs to be cut.”
Issuers often add non-traditional banks to a deal syndicate as a form of repayment for other services rendered, such as loans, trade products, hedging and swapping currencies at competitive rates or helping the issuer reach out to new client bases.
Bank issuers in particular see these mandates as a quid pro quo. UBS, for example, sold a US dollar bond on May 15 with 13 bookrunners that included banks such as BBVA, Mizuho International and Santander on its deal, in the belief that it would raise its chances of being appointed a bookrunner on bond issues from these banks in the future.
Adding banks can help ensure a captive set of buyers too.
“The fact is that there are bookrunners who will be willing to put their own capital in if they’re in [a deal] syndicate, and that’s a way to increase certainty of success in the deal,” says Chris Cheong Thard Hoong, managing director of Far East Consortium International, which issued an offshore renminbi-denominated bond in February 2013 with six bookrunners. “In this capacity, it’s actually unfair to say that just a few banks have full coverage of the universe. There are some banks willing to go above and beyond.”
In addition, banks participating on an equity deal are obliged to write research about it. The more syndicate participants, the more that gets written. That can offer smaller deals extra market attention.
Including lower-ranked banks in a syndicate can confer advantage to an issuer: guaranteed capital. Some institutions are willing to commit their balance sheets to buy their way onto a deal, or they promise cornerstone investors who will do it for them.
This greatly irks the most active banks, which do much of the hard work on documents, conversations and relationship-building exercises months before a deal reaches the market. But banks that are willing to use their balance sheet or personal connections to get investors to support a deal deserve to be rewarded for doing so.
Rivals that are unwilling or unable to offer similar services must instead demonstrate their relevance through other means, whether that means triple-checking paperwork or pounding the pavement speaking to investors and other bankers.
Investor indifference
Fund managers, meanwhile, appear agnostic about larger syndicates. Most institutional investors that Asiamoney spoke to say there is no difference in communication between banks with deals that have larger syndicates and those that don’t.
“Right now the message is quite clear – we know what the price will be on these deals and we give our investor feedback to the bookrunners and our feedback gets passed on quite clearly… I don’t see any discrepancy between the bankers,” says Gordon Tsui, deputy chief investment officer at Hang Seng Investment Management.
“We are quite indifferent; if the number of bookrunners is growing, it wouldn’t necessarily reduce or increase the efficiency of the deal. It’s just that more people want a hand in part of the business,” adds Kai He, head of fixed income at Bosera Asset Management International.
When pressed on the diverging messages between investors, issuers and banks, bankers say that while a large syndicate raises the propensity for mistakes to occur, responsible banks behave professionally and do everything in their power to prevent snafus from disrupting deals – even if this means slogging through more paperwork and more late-night conference calls.
“We’re all professionals. We’ll get the job done, but it erodes the incentive to get the job done,” says an ECM banker at a US bank.
The lack of evidence will do little to sway issuers to the bankers’ case. Yet it would be foolish to entirely dismiss claims that larger syndicates come with potential negative consequences.
So far such transactions have all been high profile, conducted by well-known names. These factors have helped ensure their success. Not all issuers will be able to claim such credentials.
And it’s hard to argue with the point that the more people there are involved in a deal, the more viewpoints need addressing and the more complex the execution. It’s telling that some of the world’s most mature equity and debt issuers believe that it’s sometimes an advantage to use smaller crowds of bookrunners.
“The value of a large syndicate comes when there is a lot of uncertainty in the market or the complexity of the product is high, then you want that commitment from underwriters. Other than that, you would probably want to reduce that number to reduce the risk,” says Sven Lautenschlaeger, head of international refinancing at L-Bank, which issues debt several times annually with a team of approximately three to four banks.
Many of Asia’s most sophisticated bond issuers seem to agree. Temasek Financial’s most recent deal, a dual-tranche bond transaction sold in July 2012, had four banks, and its previous deal, a 40-year Singapore-dollar bond sold in July 2010, had two. Hutchison Whampoa International and Hutchison Whampoa Europe Finance’s bonds, sold in 2012 and 2013, had between two to four bookrunners each.
“We do notice [when there are more bookrunners on a deal], but whether the performance of these instruments is related to the size of their syndicates is difficult to assess,” says Bryan Collins, a fixed income portfolio manager at Fidelity Worldwide Investment. “But too few banks leading deals poses problems too, mainly about secondary-market liquidity…You need a number that is just right that can alleviate these considerations.”
A commoditised space
That’s all well and good for established issuers, but it’s a different situation for many of this region’s companies.
The reality is that Asian transactions have become more popular with international investors, while banks are falling over themselves to establish relations with fast-growing companies seeking to enter the capital markets, often for the first time. Meanwhile, improved communications and technology has commoditised ECM and DCM services.
The combination has made it a seller’s market. It’s never been easier to distribute and price deals, which increases competition for bookrunner slots and compresses fees. This is unlikely to change any time soon, if ever.
The only way the leading banks will get issuers to cut the size of syndicates is by refusing to participate in deals in which the number of players is too large and fees too low.
“You give us US$50,000? It’s not a suitable payback for our relationship – in fact, being one of 12 is an insult to a relationship, not a payback,” says the head of DCM in Asia at a European bank. “We’ve been there before and it was a massive waste of my time.”
Bankers at some of the most active debt houses say that they have begun turning down deals because the work isn’t worth it.
But it’s unlikely to happen all that much. Declining deals runs the risk of tainting client relationships: nobody wants to be turned down when he thinks he’s doing someone a favour.
The unwillingness of the leading investment banks to take a stand on this subject was amply demonstrated by the fact that no ECM or DCM banker that Asiamoney spoke to was willing to go on the record with their views. This is despite virtually every banker griping at length about this development.
Meanwhile their peers at less competitive banks are unlikely to reject deal opportunities because they want to foster stronger relationships and get more deal activity. If anything, they are more eager to clamour for a role, no matter how minor, so that they can demonstrate to their bosses that they’re getting onto some deals.
Most importantly, many full-service investment banks increasingly view capital-market deals as a means to facilitate other services with issuers, be it treasury-related hedging or private banking. This is especially important for nascent but growing Asian corporates.
Adapt or die
International investment banks may not like having to accept lower fees on large syndicate deals, but it’s a price they ultimately consider to be worth paying, at least for now.
What does it mean for deal syndicates? On the ECM front it’s likely that banks will press issuers to emulate deal hierarchies being used in the West.
This syndicate structure typically involves two global coordinators, and below them lead underwriters and arrangers. From there, underwriters and co-managers take the lower end of the deal, which also means lower fees.
The banks that conduct the brunt of the work – doing the heavy lifting in paperwork, ratings and generating a relevant relationship with the issuer in the equities or debt space – see most of the deals’ economics; there have been scenarios when a single bank walks away with 60% of the fee split. Others that are listed on the ticket as a favour to the issuer have no sway on the deal.
The bond market lacks any such consensus, which bankers attribute to the culture of bookrunners getting more balanced input into deals. But leading banks would be wise to suggest one because the competition for deals isn’t going to go away. In the future, DCM deals may end up looking more and more like loan syndications.
Instead of moaning about a market trend that they are unwilling to take a stand on, ECM and DCM bankers should focus on improving profits in the best ways they can.
For some, this means extending balance sheets to support deals. This activity may draw ire from some peers, but clients appreciate banks that put their own cash into a deal. It demonstrates confidence in the deal and the pricing it’s being offered. Done correctly, it can also be highly profitable for the banks.
Goldman Sachs reportedly earned millions as the sole underwriter for Malaysian investment fund 1Malaysia Development’s US$3 billion 10-year private placement on March 19, for example. This may also be the case with Alibaba, expected to be the biggest IPO of the year. Goldman Sachs, as well as nine other banks, have reportedly scrambled to get in on the company’s US$8 billion syndicated loan, which would position them well to play a part in Alibaba’s future mega deals.
Banks can emulate this relationship to earn cash on a private-placement basis, or manage ratings for burgeoning issuers.
Bookrunners that cannot buy into their deals can gain in the same ways that they developed relationships with issuers in the first place – by facilitating swaps on the deal or orchestrating billing and delivery. Any extra task will earn them more business and respect, and will make these deals more worthwhile.
International banks have had it relatively easy in Asian ECM and DCM for a long time. Rather than baulking about rising newcomer competition, they need to live up to what they claim to be good at: making money through their smarts.
