The Royal Bank of Scotland is one of Europe's most popular issuers in dollars, euros and of course sterling. Seb Boyd talks to the group's head of capital raising, Ron Huggett, about its own favourite funding techniques.
The Royal Bank of Scotland is not only a regular visitor to the capital markets, it is also one of the most impressive.
"We have lower funding requirements than some of our peers and are consistently voted a top 10 issuer both in straight debt and structured finance," Ron Huggett, head of capital raising, tells EuroWeek.
"Last month, Fitch increased our rating and Standard & Poor's has us on positive watch. We have been steadily outperforming the market."
As a borrower the bank has a clear and flexible strategy, making full use of the retail markets and issuing in euros, dollars and sterling.
"We use the major markets and try to align our capital account to our risk profile and the majority of our business is done in sterling, euros or dollars," adds Huggett. "We have very strong customer deposits, wholesale and retail, which accounts for the vast majority of our funding. Our asset side is growing faster than our liability side, so we are beginning to use the wholesale market more."
RBS's main reason for issuing is to bring in capital. "So far in 2003 we have raised about £2.3bn in tier one, upper tier two and lower tier two in the three major markets," says Huggett. "We also have a very active £14bn MTN programme."
Already this year RBS has issued over £2.5bn in medium term notes in half a dozen currencies. There are eight dealers on the programme, but due to reverse inquiry close to 30 are actually involved.
"This year we have done at least 350 trades," Huggett says. "Some were very small - $5m-$10m - and some up to $100m. It is very good funding for us and it helps us get longer dated liabilities."
In the last few years the bank has reinforced its debt marketing effort. Because it is a regular, though not frequent, visitor to the market, RBS says it takes in careful account how it is received - and perceived - by investors.
"We try to price our deals well," says Huggett. "When we do our roadshows, for example, we take investor feedback very seriously." Earlier this year, Huggett and group finance director Fred Watt visited the US for the first time since the NatWest merger.
"We have a $7bn shelf registration in the US," Huggett says. "We have been registered with the SEC since 1989, so we can draw down from the shelf as we require funds."
The shelf registration is under the name of Royal Bank of Scotland Group, the holding company, while the MTN programme is for Royal Bank of Scotland plc, the operating company, which is one notch better rated.
RBS, which owns Citizens and RBS Greenwich Capital Markets, has capital liabilities in dollars, but most of its equity tier one and capital reserves are in sterling. That is why so much of its tier one issuance is in dollars.
"We try to raise capital in the currency that we require it in to avoid FX risk to our ratios," Huggett says.
"We try to get a balance between sterling, dollars and euros.
"In dollars we issued $850m of tier one aimed at the institutional market and $850m of upper tier two aimed at the retail market. The institutional paper had a coupon of 4.709%, which I understand is the lowest tier one coupon in the market. The 5.75% coupon on the retail deal is also one of the lowest."
The 4.709% deal was priced in a rallying Treasury market. Bookrunners Lehman Brothers and Merrill Lynch gave price talk at 120bp on the Wednesday, May 14. On Monday of that week, the Treasury's 10 year line was at 3.69%. By the Wednesday it had reached 3.59% and rallied to 3.51% as the RBS bond was being priced.
The order book was $1.45bn for a target size of $750m, and the deal was increased to $850m. The issuer was RBS Capital Trust 1, a Delaware special purpose vehicle guaranteed by the Royal Bank of Scotland Group.
Because the bank has other sources of sterling tier one funds, it is not a big player in that market and is not involved in the fall-out from the Financial Services Authority's wavering on the Tons structure.
"We issue a lot of upper tier two in sterling," Huggett says, "because it is the most competitive market. We have very good links with the UK investment community and our paper trades well to our peers, though we have issued upper tier two in dollars as well. Lower tier two tends to be in dollars and euros, which is also for diversification."
Issuance in other currencies may be an option if it can be priced competitively, and helps diversify the RBS investor base. "You also have to bear in mind, though, that with the size of our balance sheet, some deals make little difference to our ratios," Huggett points out. "Raising £250m adds 0.1% to our capital."
Not all RBS's issuance is capital. In March it priced a Eu1bn 18 month floating rate note at 4bp over Euribor, and a $500m 12 month tranche at Libor flat. "Our holding company needed some cash and that was the most efficient method," Huggett says.
RBS has a $10bn CP and a Eu10bn EuroCP programme, which are predominantly tools for the money market desk.
"In the context of a £400bn balance sheet, a $10bn CP programme is not very large," Huggett says. "And if you take the whole of the dollar and euro CP markets, we probably have about $10bn outstanding - we never draw the facilities down fully - which is a very small part of a £400bn balance sheet.
"But, as with all our decision making, we like having the optionality."