The CEEMEA sovereign bond fees endgame
DMOs to ask banks 'what have you done for me lately?' but what will that do for the economics of the market?
CEEMEA bond market bankers for many years have railed against a problem of their own making — issuers paying nothing in fees for their bond issuance. But an end to their dilemma is in sight.
It is less common than it was for banks to work on a bond issue for free. A decade ago the accusation was regularly levelled that particular banks, which were high in the CEEMEA leagues tables, attained their status by working for minimal fees. If that helped them win mandates, then, the argument went, their status in those markets would rise allowing them to make more money elsewhere.
But over the last few years, starting with the Russian annexation of Crimea in 2014, some of the banks that saw value in winning business in that way stepped back from the market. Some of the influential heads of CEEMEA debt capital markets that favoured the approach have also left the business.
Simultaneously Citi and JP Morgan emerged with an almost duopoly on the CEEMEA business. Neither bank has a reputation for being keen to work without being paid. That has forced issuers, which pay all banks on a mandate the same, to pay more for bond placement services if they wanted at least one of the two biggest banks in the market on board.
The progress in earning fees has also been down to educating borrowers. When the trend for zero fee business was strong, CEEMEA sovereign debt funding teams themselves were still in their infancy. If a bank offered them a deal for free, it was a tough offer to refuse. Rival bankers may have been patiently but despairingly explaining to anyone who would listen why such deals could do a sovereign harm — for example, a sales team that was less motivated to move the bonds and less liquidity in the secondary market — but while big, well-respected houses continued to offer free or almost free deals to bolster their league table positions, issuers received a mixed message.
With time, and perhaps with more experience, and as more DCM bankers moved to become funding officials — Zoltán Kurali from Deutsche Bank to Hungary's AKK for example, or Odilbek Iskaov from HSBC to Uzbekistan’s ministry of finance — the main message from the banks has been winning out.
GlobalCapital hears from some government funding officials that zero fee pitches now cause annoyance as they have to spend time and credibility explaining why they want to pay fees to someone higher up the food chain but with less experience in debt markets.
Nonetheless, zero fee deals are becoming fewer.
That said, holdouts exist. Croatia for example last week told GlobalCapital that it expects to pay minimal or zero fees to banks to arrange its bonds this year. That is its right to choose, but the practice clearly continues for some issuers, no doubt to the mild annoyance of banks who deep down feel they should be paid for their work, no matter what they are pitching on paper.
As long as borrowers with big funding requirements that do pay fees continue to look at how banks perform in broader regional underwriting league tables as a factor in awarding their mandates, the activity of boosting league table positions by printing some bonds for free will remain.
But there are signs that even that approach is changing. Marjan Divjak, director general at Slovenia’s Ministry of Finance, told GlobalCapital that it has changed how it awards mandates which means that it no longer cares about broader regional league table positions at all.
It looks only at what a bank will do for Slovenia and how active it is in trading its debt. Divjak indicated that he was already pleased with the changes from banks this had prompted, with some already stepping up their activity in a way that benefits the country.
If that message spreads, more sovereigns may follow suit with their own criteria for mandates that have little to do with what a bank did for a neighbouring country. And if that happens, the focus on the CEEMEA league table, or whatever league table a sovereign was previously using, to assess a bank’s competency in a region will drift away. So then will the last of the zero fee deals.
Of course, there is a twist. Slovenia's approach mirrors what many traditional developed market debt management offices do when awarding mandates. And yet banks frequently complain about how much they spend on their primary dealerships in those markets, meaning the business is subsidised.
The reward in those markets is, of course, a place as a bookrunner on a fee paying syndication. One way or another, banks will have to pay to play in sovereign debt markets in CEEMEA or Western Europe. But at least there are signs that one part of the business will start to become a reliable source of revenue.