Banks face increased competition
It used to be the most prestigious business in the Euromarkets.
The top originators would cover the supranationals - possessors of
some of the largest funding programmes, developers of the global
bond and other benchmark issues, and providers of the fees that go
Every lead manager has tried to muscle in on the act. And as
issuers diversify into new markets, and shift away from benchmark
issuers, supranational mandates now go to the many rather than the
With more frequent issuers in the international markets than five
years ago, are banks cutting back on the service that they provide
On the surface, all is sweetness and light. Publicly, treasurers
enthuse about bank coverage of supranationals. "They have been very
helpful in identifying new opportunities," says René Karsenti,
director general of finance at the European Investment Bank
Bankers return the compliment by arguing vigorously that supranationals remain their most valued clients.
"In the end," says Gumersindo Oliveros, head of capital markets at the World Bank, "shared expectations lead to mutual satisfaction."
Beneath the surface, the satisfaction is not as great as you might expect. Privately, bankers complain that supranationals are over demanding, quixotic and mercenary in their approach towards banks. "All they are interested in is finding the cheapest deal possible. Relationships do not come into it. They do not seem to understand that covering supranationals is not a profitable business," complains one.
"I am fed up with flying out to see treasurers time after time without ever coming back with even a sniff of a mandate," fumes another.
Meanwhile, at least one supranational reports a lower level of coverage from the leading underwriters. "They are much less willing to spend time looking at what we really want," says one treasurer.
Why the strife? Part of the problem is that supranational deals are not as glamorous as once they were. In the past, banks were willing to accept lower returns on supranational issues in the expectation that they would lead to more business in the corporate and bank bond markets.
As treasurers at corporate issuers have become more sophisticated, they have begun to rely less on league tables and more on direct experience of the banks involved. This has made it less attractive for banks to allocate huge amounts of resources to supranationals.
Supranationals themselves have also become increasingly price oriented, and with the arrival of new players ready to undercut existing rates, long standing market leaders have found themselves frozen out from their traditional clients.
Some borrowers, such as the World Bank, use more than 50 different lead managers for debt issuance during a single year. "Competition for mandates has risen dramatically since 1992-1993," says one MTN originator. "You often hear rumours that people are doing deals for nothing, although you can never prove it."
Lurking unspoken is the fear that supranationals may in time be able to do away with bookrunners altogether by selling bonds direct to investors, as sovereigns do through auctions. Most treasurers remain adamant that this is unlikely to happen.
"The added value of accessing investors directly would be minimal," says the treasurer of one European supranational institution. "What does it cost to get someone to intermediate for you? A couple of basis points. I do not really want to take the time to go around 100 investors finding buyers."
For larger borrowers with established investor bases, such as the World Bank and the EIB, it could make more sense. "It is possible that when we have large volumes of euro issuance, we could access investors directly," says Karsenti at the EIB. "But we are not working on it at the moment."
The World Bank's Oliveros points out that disintermediation requires very heavy issuance, but adds: "Technology is changing and may lead to more opportunities for direct linkage."
Over the past 12 months, there has been a sea change in the way in which many supranationals raise capital, with a dramatic reduction in the issuance of large high-publicity benchmark deals and a corresponding increase in private, opportunistic funding in the high coupon, structured and emerging currency markets. Out go the regular $1bn landmarks, and in come R50m zero coupons and equity linked peseta deals.
These deals tend to be less profitable than the jumbo benchmarks. Highly structured deals involving options offer rich pickings. But bankers report that they rarely make money on arbitrage-driven deals where swaps often need to be subsidised to secure the mandate.
Moreover, because many of these deals are relatively small in size, the number of banks required to sell them has fallen. Some borrowers, and in particular the World Bank, have begun to grant exclusive mandates to banks.
The impact of these changes can be seen in the league tables of bookrunners on supranational issuers so far this year. Firms with stronger European client bases, such as SBC Warburg, Credit Suisse First Boston and Deutsche Morgan Grenfell, have done well.
US investment banks such as Morgan Stanley, Goldman Sachs, Salomon Brothers and Merrill Lynch are having a tougher time. Between them, they have won only 18 mandates this year - half the number secured by Hambros.
Thanks to the surge in rand and Czech koruna issuance over the past 18 months, Hambros has had a spectacular year, rising from 30th position in the league table of bookrunners of supranationals in 1996 to fourth in the first nine months of this year.
Over 50% of its 35 deals have been in rand, but it has also led four New Zealand dollar deals, four Czech koruna deals, two Australian dollar transactions and one Canadian dollar and sterling deal respectively.
Meanwhile, the Japanese firms - in particular Nomura - continue to do well on the back of the continuing demand of Japanese investors for international credits.
For many investment banks, the shift in funding strategies away from the US to Europe and Asia has been painful. US banks, in particular, though strong in the US dollar market, have found it hard to win mandates on deals targeting European retail and offshore investors.
Goldman Sachs, for example, has done only five deals in the first nine months of the year, sending it down to 16th place in the league tables - a far cry from 1992 and 1993 when it was number one. Merrill Lynch has also had a quiet year on the supranational front, leading just four deals totalling $271m over the same period.
Some US banks are increasing investment in emerging currency sectors in order to catch up. JP Morgan, for example, has been lead manager on five rand, four lira, two Polish zloty and one French franc deal so far this year.
Citicorp has taken a leading position in the development of the Asian markets with the IFC's Ps2.6bn deal and the NIB's NT$4bn transaction. Elsewhere, many US banks have been half-hearted about expanding their expertise in emerging currency deals, offering to do deals when the market is booming, but little more.
One cannot blame them. The volume of business is low for the investment they would have to put in. And often they are not invited to do a repeat deal later on. "It is hard to make a profit when you only get one deal," says one London-based US banker.
As a result, several firms are believed to be reconsidering the level of resources they commit to supranational coverage. "I believe a number of banks have pulled back from covering supranationals," says Takeo Sumino, debt syndicate manager at Nomura in London.
Richard Tarn, head of syndicate at DKB International in London, says there is a change in relationships: "Banks are still keen to do supranational deals. But borrowers have a much keener eye on the bottom line than before."
Borrowers have noticed the decline in coverage too. "We have been surprised to see how some global houses have lagged in responding to the new market conditions that opened up over the past month, and have difficulties in thinking of business with the bank beyond global bonds," says Oliveros at the World Bank.
Things may change next year. If US investors decide to allocate more resources to emerging currency debt, this would give a boost to US houses.
They would also benefit if Latin American currency issues take off. US banks also tend to have the edge in heavily structured transactions, which have been less popular this year, but could easily return to favour in 1998. After 1999, the major competition for mandates will probably shift to the single European currency.
With the investment banking industry in the throes of a profound consolidation, underperforming units will come under increasing pressure - and that includes business areas such as supranational bond underwriting.
"Banks are going to have to make the choice between whether they want to cover all areas of the market including global bonds, structured notes and emerging currency deals, or to concentrate on developing a niche position in one area," predicts Greg Nottle, head of debt syndication at Hambros Bank in London. EW
|Bookrunners of supranational issues(1996)|
|Pos||Lead manager||Amount $||No of issues||Share%|
|2||SBC Warburg Dillon Read||3,072.45||15||5.55|
|4||ABN AMRO Hoare Govett||2,472.63||6||4.47|
|11||Deutsche Morgan Grenfell||1,598.54||17||2.89|
|12||Credit Suisse First Boston||1,581.09||6||2.86|
|17||Banca Nazionale del Lavoro||1,058.05||12||1.91|
|18||Banca Commerciale Italiana||1,043.90||12||1.89|
|Source: Capital Data/Euromoney Bondware|
|Bookrunners of supranational issues(1997)|
|Pos||Lead manager||Amount $||No of issues||Share%|
|2||SBC Warburg Dillon Read||2,827.80||15||5.83|
|5||Credit Suisse First Boston||2,218.36||10||4.57|
|6||ABN AMRO Hoare Govett||2,089.43||17||4.31|
|8||Deutsche Morgan Grenfell||1,924.69||51||3.97|
|18||Banca di Roma||1,132.48||5||2.33|
|23||Banca Nazionale del Lavoro||834.20||4||1.72|
|24||Banca Commerciale Italiana||764.80||5||1.58|
|Source: Capital Data/Euromoney Bondware|