When Deutsche Bank recently broke with borrower Volkswagen by refusing at the last minute to sign up to a low yielding credit facility, did it open a new chapter in the way banks and clients manage their relationships? Was it a masterstroke by Deutsche, or a re-assertion of clients' rights by Volkswagen? Neil Day reports.
When Deutsche Bank in May pulled out of Volkswagen's Eu10bn revolving credit facility without warning the day before syndication was about to start, the move created a sensation in the European debt capital markets.
Talk of "tying" low margin lending to lucrative capital markets business has become the mantra of commercial banks, but rarely had the consequences of the new paradigm been brought into such sharp relief, either in the manner in which it was played out or in the magnitude of the loan and its participants.
"This was the most high profile example yet," says one head of debt capital markets. "Arguably they left it very late in the day, but when Deutsche Bank turns down a loan facility from VW, it's probably quite difficult to do it on the quiet."
Deutsche's rationale for pulling out of the low margin facility is not hard to understand. Despite being one of VW's traditional relationship banks, Germany's largest bank - also the number one bookrunner of both all international bonds and euro corporate bonds - had not lead managed a deal for the auto-maker since January 2002.
Even that transaction did not prove to be easy money; VW Financial Services had to revise pricing on its Eu2bn three and 10 year package to get the deal away.
And in the past 12 months Deutsche had missed out on two Eu1.5bn issues for VW Financial Services and the final straw is thought to have been its exclusion from a lead management group of five banks for VW's Eu4.5bn deal in mid-May.
Even ING, which had not signed up to VW's $15bn revolving credit facility in July 2002 and stands at 25th in EuroWeek's international bond league table, was able to win a position on the top line of the jumbo issue - apparently for having worked with the auto-maker in emerging currencies.
The only other mandated lead arranger not to have led one of the trio of VW issues is ABN Amro, but even the Dutch bank had led a public issue for the auto-maker - a Eu1bn car lease securitisation in February 2002 - since Deutsche's last.
While Deutsche's move came as a shock when it was announced, the possibility of such a decision had been flagged - although not with reference to VW's name. A Deutsche loan banker told EuroWeek in March that such relationships were being reappraised.
"In the old days the big banks did every big deal to get their hands on ancillary business," he said. "In many cases the ancillary business never came through. Now the banks are re-evaluating relationships."
Having turned down a role in the loan, Deutsche's next VW mandate is unlikely to be awarded any time soon. Rutbert Reisch, Volkswagen's CFO, made this much clear when he told EuroWeek about his reaction to Deutsche's decision. "I do not want to categorically say that if a bank does not join our credit facility it will forever miss out on our capital markets mandates," he said. "But there is clearly a link - it would be naive to think otherwise.
"If Volkswagen were to issue a bond tomorrow would Deutsche Bank be appointed bookrunner? No comment," added Reisch. "You must draw your own conclusion. But if somebody pulls at the last minute then that bank is at a competitive disadvantage when it comes to awarding a mandate in the future. Since they pulled out only the day before syndication was due to begin, I would have to feel very generous to invite them back for a future mandate."
This will come as no surprise to Deutsche. Indeed, when asked by EuroWeek last September what factors influenced his choice of lead managers for his benchmark issues, Reisch's response was more blunt: "Those banks who do not lend us their balance sheet need not apply."
VW had already shown early this year that it had firm ideas about how it expects its relationship banks to behave. BNP Paribas was forced to withdraw from its position as joint bookrunner on VW Financial Services' Eu1.5bn seven year bond in January when the auto maker was uncomfortable with the bank simultaneously lead managing a Eu1.5bn five year deal for Ford Motor Credit Co - which had set the tying ball rolling on the borrower side in the US.
Given the large difference in credit quality and trading levels of the two auto-makers, bankers were surprised at VW's move.
However, in that case BNP Paribas was forgiven and the bank went on to win a lead role in VW's later Eu4.5bn jumbo - despite being a bookrunner on a Eu750m seven year for Renault just eight days earlier.
"Frankly, you would have thought VW would have considered there to have been more of a conflict with the Renault deal," says one head of European corporate DCM. "They are both European and, more importantly, trade at much closer levels."
Had the two issues been launched even more closely together, believes the banker, BNP Paribas might have found itself on the wrong end of a call from VW once more.
However, while DCM bankers say that Reisch can be one of the more hard-headed borrowers - "If you end up on the wrong side of Reisch, it's not a fun place to be," says one - they point out that other corporates have displayed similar views through their behaviour. Deutsche Telekom, for example, prohibited the bookrunners of its Eu5bn equivalent issue in May 2002 from simultaneously leading an issue for any other DAX corporate or European telco, which contributed to the fiasco surrounding its launch.
The prevalence of corporates wishing to dictate the terms of their syndicated loan and other capital markets activity is even more widespread. One DCM banker says that he was recently told by a corporate treasurer: "To hell with tying by the banks. I do the tying around here."
How to win
One DCM official acknowledges that corporate treasurers have given more power as the market has developed. "First of all you had fragmented markets in Europe, and there were the investment banks and the commercial banks," he says.
"Then JP Morgan Chase and Citigroup/Salomon were created and the theory said that if you used a lot of balance sheet muscle you could get a ticket into the inner circle of relationship banks and be immediately shortlisted for the more lucrative business. People learned to play this better and better and banks such as BNP Paribas raised their game.
"But now, you have seven or eight banks that are all doing the same thing, so that is not going to differentiate you anymore."
Some DCM bankers say that winning business on such a level playing field is once again purely a question of your expertise in the bond markets. "It's a return to fundamentals," says one banker. "Excellence in execution, distribution and secondary trading."
However, the return of greater competition has only forced banks to look at their lending even more closely. "Some people used their balance sheet to muscle in on the action and probably put too much balance sheet in play," says one head of DCM. "But we don't use the balance sheet lightly. It's very tough to make a case internally to use the balance sheet."
Other DCM officials echo this view. "If you make a large subsidised loan against which you have the right to match the best bid to win a bond issue," says one, "that's not really a particularly good piece of business. We are therefore being a lot more scientific in the way in which we allocate balance sheet."
In VW's case, Deutsche's hurdles were clearly too high for the auto-maker. "The relationship has been strained because Deutsche has been uncompetitive on price," said Reisch, "and they have started to pick out certain risks and they started to put product managers ahead of the relationship banker, and we cannot accept that."
It is clear that not every bank makes its calculations in the same way as Deutsche. In VW's case, Deutsche's loss was Commerzbank's, Crédit Agricole Indosuez's and Dresdner Kleinwort Wasserstein's potential gain, as the three stepped in to fill the hole left by Deutsche.
Such was their willingness to participate in the facility that the trio took less than two hours to come back with credit approvals.
But the real winners in the story may be Deutsche's shareholders, who will be delighted to see the bank pulling out of the kind of cosy traditional relationship that is at the heart of so many of Germany's economic problems. And while some banks were happy to try to fill Deutsche's shoes, others applauded its decision.
"You have to admire their stand," said one banker involved in the deal. "It's always good to see your competitor fall out with one of its best clients, but Deutsche is actually doing what so many of us should be doing but are not. Some of us probably don't have the guts to stand up to such a big client and turn them down on such an important but low yielding facility."
Most importantly for Deutsche, the decision to turn down VW may allow it to leverage more out of its other relationships. After seeing Deutsche flex its muscles in its dealings with such a high profile client, lesser corporates might think twice before leaving Deutsche out of their bond issues.
"I think that it is one of the cleverest things that Deutsche has done," says one DCM head. "If you're a CFO or treasurer deciding who to give a lucrative piece of business to, they'll be saying: 'If Deutsche is prepared to do this to VW when they aren't included, what are they prepared to do to us?'"