And they shall reap the whirlwind…

  • 25 Apr 2007
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The events of 2002 served as a wake-up call to investors worldwide. WorldCom took centre stage in a year when Standard & Poor’s recorded more than $150bn of defaults. Meanwhile, Iran raised Eu500m despite being named in President Bush’s "axis of evil" and US investors developed an appetite for dollar globals from European SSAs.
Neil Day reports.

his was the worst credit market in my experience, which would go back to 1986, the worst by a long stretch, because there was no place to hide."

The verdict of John Burger, head of corporate investment grade total return at Merrill Lynch Investment Managers at the end of 2002 was typical of an investor base that had that year learned that it was safer to sell first and ask questions later.

While the international bond markets had initially succumbed neither to the Enronitis of 2001 nor the terrorist attacks of 9/11, the weight of problems that had been stored up in the excesses of the previous years finally hit home in 2002.

Accounting restatements at WorldCom turned into a criminal investigation and the company defaulted on $31.9bn of debt — more than five times Enron. CFO Scott Sullivan and chief controller David Meyers were paraded in front of the world’s media in handcuffs in August and it was revealed that former CEO Bernie Ebbers had "borrowed" $400m from the company.

Unfortunately WorldCom was no one-off. Standard & Poor’s recorded more than $150bn of defaults in 2002, more than the previous record of 2001.

From wearing rose tinted spectacles for too long, investors were quick to fear the worst. In early February reports in the weekend press that triple-A General Electric Capital Corp’s long term performance were simply "too good to be true" caused its share price to fall 5% and its bonds to widen up to 20bp.

The spread on the 30 year tranche of the $11bn bond GECC launched in March, the largest ever dollar corporate bond, then widened 17bp after Pimco's Bill Gross and Moody’s both raised questions about the company’s reliance on the CP market. But GECC rose to the challenge and raised a record $85bn in bonds that year, paying down some $37bn of CP in the process.

Corporate borrowers suffer

Other credits had a similarly turbulent time. A Eu5bn deal for Deutsche Telekom in May was the most chaotic issue, the telco having to ride out news that WorldCom had mislaid $3.8bn and downgrades from Moody’s and Fitch while trying to squeeze its issue in between European and US holidays and its AGM.

Ford Motor Credit Co’s decline accelerated and its bonds followed suit. Five year dollar bonds sold by the carmaker in March at 240bp over had blown out to 685bp over by October and were being quoted on a cash price.

The volatility proved too much for many companies which either postponed new issues, pulled them or did not attempt to launch them at all. Investors also found conditions impossible.

"There is not a secondary market out there at the moment as investment banks are getting hurt badly," said Tim Webb, a senior credit portfolio manager at Barclays Global Investors at the height of the market’s crisis in October. "We asked for a quote yesterday and were quoted an offer of 220bp. When we said that we wanted a bid, we were quoted 550bp."

Indeed, the travails of the fixed income market were the last thing that investment banks needed after the bursting of the dotcom bubble and lack of equity or M&A revenues. The Centre of Economics & Business Research, a London based think-tank, estimated that 10% of the City of London’s workforce faced the chop as a result of the slowdown.

The volatility, which according to the VIX index peaked on July 24, was not, however, anathema to everyone. Hedge funds were increasingly taking advantage of the credit default swaps market to profit from the turbulence.

"Its use as a tool for shorting markets exacerbated the price volatility and pain in the market and contributed to fears that the structure of the markets was breaking down," said Bill Cunningham, chief credit strategist at JP Morgan.

Small wonder that overall bond issuance was down in 2002.

The tide turns

But it was not all bad news in 2002. In the last weeks of the year the corporate bond market mounted a fightback, with $20bn of high grade supply being priced in one week in November, including issuance from telcos and carmakers.

That week — November 18-22 — can now be seen as the one in which the tide turned and since then the bond markets haven’t looked back.

The Latin American bond markets have also come a long way since the dark days of 2002. Back then, Argentina was still shut out of the market and Brazil had to seek a $30bn loan from the International Monetary Fund ahead of the presidential elections that Luiz Inácio Lula da Silva won in October.

Elsewhere in emerging markets, Russian companies were cementing their acceptance among fixed income investors, Turkey timed capital markets visits carefully, and Iran raised Eu500m of five year funds in its international debut bond issue despite being named by George W Bush in January as being part of a so-called "axis of evil" that included Iraq and North Korea.

While the Iranian issue might have been off limits for US investors, they proved more willing than ever to buy dollar globals issued by sovereigns, supranationals and non-US agencies. The European Investment Bank, KfW and the Republic of Italy made their biggest strides into the US market in 2002, selling between one third and one half of $2bn-$3bn benchmarks to US investors. However, Depfa’s similar ambitions were rebuffed when weaker than expected demand from the US forced it to cut a dollar benchmark in October from $3bn to $2bn.

Somewhat surprisingly, in the loan markets the most exciting growth came in the LBO sector. This made up for the drop off in M&A activity, which had hit the loan market hard. Arrangers did, however, benefit from using the credit market turmoil to demand more attractive terms from weaker companies, even if their scramble for safe names resulted in thinner margins on such loans.


Nobody laughs at George Dubya

"Even seven thousand miles away, across oceans and continents, on mountain tops and in caves, you will not escape the justice of this nation."

His gaffes are well known, but nobody who understood its full meaning was laughing when George W Bush delivered his State of the Union address four months after 9/11 in January 2002, least of all the "axis of evil" of Iran, Iraq and North Korea.

Buoyed by an unexpectedly rapid military campaign in Afghanistan, the president sought out his next target in the war on terror and throughout 2002 it became clear he had Iraq in his sights. Brushing aside all objections, the US went to war in Iraq in 2003, only to discover there were no weapons of mass destruction. Since then, four years of violence and civil unrest have drained support for the 43rd US president. North Korea is around the negotiating table, but it remains to be seen whether or not he will pull the trigger on Iran before his second term ends.

MAKING THE NEWS — Eliot Spitzer

Going after the untouchables

In April 2002 the combined forces of the SEC, the New York Attorney General, NASD, NASAA, NYSE and state regulators in the US launched an investigation into conflicts of interest between brokerage firms’ equity research and investment banking arms, otherwise known as "spinning". No one, however, went after the untouchables of Wall Street with more zeal than New York State Attorney General Eliot Spitzer.

And just as his namesake from the prohibition era, Eliot Ness, successfully took down Al Capone, Spitzer collared Salomon Smith Barney’s Jack Grubman

and Merrill Lynch's Henry Blodget, as well as securing a $1.4bn payout from 10 Wall Street firms.

This, as well as other successfully prosecuted investigations into practices such as late trading and market timing, and contingent commissions in the insurance industry, proved a springboard for Spitzer’s run for New York state governor in 2006. He was sworn in as governor at the beginning of 2007.

turning point

Sarbanes-Oxley: good for the US capital markets?

"This law says to every dishonest corporate leader: you will be exposed and punished; the era of low standards and false profits is over; no boardroom in America is above or beyond the law."

George W Bush was more than happy to jump on the Sarbanes-Oxley bandwagon and sign their eponymous act in July 2002.

That Senator Paul Sarbanes and Congressman Mike Oxley, representing different sides of the US political system and from different political parties, should have felt driven to push for the Public Company Accounting Reform and Investor Protection Act at the same time showed what a politically astute thing it was to do, post-Enron. Sarbanes and Oxley were only mirroring on a Federal level the sentiments that had driven Spitzer to pursue Wall Street bankers drunk on the excesses of the dotcom era (see Spitzer box).

However, they should have been more aware of the consequences of their actions on the international competitiveness of the US, and in particular New York as a financial centre. As John Langton, chief executive and secretary general of the International Securities Market Association, told the European Financial Markets Convention a year later around the 40th anniversary of Autostrade’s groundbreaking deal: "We should of course always be mindful of the fact that it was regulation, in the form of President John F Kennedy’s introduction of the Interest Equalisation Tax (IET) in 1963, which precipitated the birth of the Eurobond market by forcing a wholesale shift of the US dollar denominated debt business from the USA to Europe."

Sarbanes-Oxley threatened to be as much of a handicap as the IET, especially for equity markets, and its effects are still being felt today.

Only last month (March 2007), SEC commissioner Roel Campos was reported to have called the London Stock Exchange’s AIM market a "casino", with reference to how new companies listing on AIM can come and go within a year (quite what Campos, who became a commissioner in August 2002, would have made of the Nasdaq pre-March 2000, is anyone’s guess). Campos said his comments were taken out of context, but even the qualification of his remarks were critical of London, merely echoing New York Stock Exchange chief executive John Thain’s remark in January that AIM "did not have any standards at all and anyone could list."

Anything you can do...

The fight between the exchanges is a microcosm of a larger battle between London and New York that is played out on every level. "Tell me," I was asked by a cab driver in New York on my last visit, "which is more expensive: New York or London?"

It is easy to be biased in one’s analysis of the attractions of the two cities. While London’s West End being turned into Hollywood-on-Thames by Gwyneth Paltrow and Kevin Spacey is seen as a compliment to the city, the success of Spamalot on Broadway could be viewed as further confirmation that the Yanks just love us Brits.

The situation is further complicated by London’s position as the leading European financial centre, but one that sits outside the euro zone (although that subject is best left for another column).

Returning to the bond and equity markets, analysts at Goldman Sachs in February said that the growth of capital markets outside the US is "a natural consequence of economic growth and market maturation elsewhere" and that the US "has in fact been losing market share for several decades".

But in his first major speech since becoming US Treasury Secretary ex-Goldman Sachs, chairman Hank Paulson said in November that he would review how Sarbanes-Oxley is being enforced. In addition the SEC and the Public Company Accounting Oversight Board, which the act created, in December put forward a series of amendments to it.

Movers and Shakers — SG Warburg

Warburg’s final farewell

In November 2002 UBS took the decision to part company with one of the most famous names in the Euromarkets: Warburg. The Swiss bank announced that its investment banking arm would become simply UBS in 2003, 40 years after Sir Siegmund Warburg had led the $15m Autostrade deal that opened the Euromarkets.

In the meantime SG Warburg — originally not an investment bank, but a merchant bank — had been subsumed into Swiss Bank Corp in 1995, then Warburg Dillon Read, before becoming UBS Warburg when the two Swiss banks merged in late 1997. However, by the 1990s the bank had long lost the leading position it enjoyed in the 1950s, 1960s and 1970s.

Ironically, the decision came as the bank was widely viewed as regaining some of its former swagger in the capital markets, especially since John Costas had been promoted to chairman as well as CEO of the investment bank in May that year.

Movers and Shakers — Rob Joliffe

RBS ready for take-off

"Why did Rob Joliffe leave the hallowed halls of Goldman Sachs to join Royal Bank of Scotland?" wondered Ian Kerr on the occasion of the Welsh rugby fan and former head of syndicate’s move in July 2002. "When we rang the supremely buxom Slapper Alice, head barmaid at the Dog & Puddle saloon near Finsbury Square, she said that dozens of her customers had asked whether this wasn’t like downgrading from Concorde to easyJet or Aeroflot."

Goldman Sachs has by no means suffered the fate of the supersonic airliner — even if there are questions over whether or not its primary markets business is anything other than a symbolic flagship — but just look at the share price performance of easyJet versus British Airways in the past couple of years.

Back in 2001 RBS was 24th in the bond league table with less than 1% of the market and Goldman eighth. Last year Goldman was 15th and RBS eighth. Joliffe’s hire showed the ambition by RBS that the reversal of bond fortunes reflects.

timeline 2002
January 1 Single European currency introduced in 11 of the 15 EU member states.
January 22 Kmart Corp, the large US retailer, files for bankruptcy.
January 24 President Bush delivers his "Axis of Evil" speech, lumping together Iran, Iraq and North Korea.
February 21 The Federal Bureau of Investigation confirms that Daniel Pearl, of the Wall Street Journal, is dead. He had been murdered in Karachi, Pakistan following his kidnapping by a millitant group in January.
March 13 Robert Mugabe wins rigged general election in Zimbabwe.
July 3 Jean-Marie Messier resigns as CEO from Vivendi Universal as the company is weighed down by debts
of about $11bn.
July 21 WorldCom files for Chapter 11 bankruptcy making it the largest US bankruptcy ever.
September 6 The IMF approves a $30bn loan to bailout Brazil’s economy.
September 10 Switzerland joins the UN, after a long history of neutrality.
October 12 Bali bomb, blamed on al-Qaeda, kills 202 people.
October 23-26 Chechen rebels take 763 hostages in Moscow theatre. State forces stormed the theatre resulting in the death of 116 hostages.
November 21 Nato expands by accepting nine central and eastern European countries.
December 6 Paul O’Neill resigns as US Treasury Secretary.

  • 25 Apr 2007

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 415,838.72 1590 9.03%
2 JPMorgan 379,647.36 1732 8.25%
3 Bank of America Merrill Lynch 359,324.90 1302 7.81%
4 Goldman Sachs 267,102.04 920 5.80%
5 Barclays 266,010.35 1070 5.78%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 45,073.36 191 6.67%
2 Deutsche Bank 37,312.62 138 5.52%
3 BNP Paribas 36,204.20 208 5.36%
4 JPMorgan 34,040.23 112 5.04%
5 Bank of America Merrill Lynch 32,958.96 107 4.88%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 22,398.41 104 8.67%
2 Morgan Stanley 19,092.40 102 7.39%
3 Citi 17,768.49 110 6.88%
4 UBS 17,693.89 71 6.85%
5 Goldman Sachs 17,256.05 98 6.68%