Fees for debt origination in emerging markets seem to be finally stabilizing this year after years of decline. The fall has been widely reported, but bankers are now optimistic that emerging markets might finally come to resemble the US high-yield market where fees are relatively stable. Five years ago, fees north of 50 basis points were common on benchmark emerging markets deals, but 30bp to 45bp are now more typical.
This stabilization is linked to a number of factors, say investment bankers. In an increasingly commoditized business environment, emerging markets issuers are looking for value. David Zezza, global head of emerging markets at Deutsche Bank, says that this means an emphasis on picking global banks with a committed local presence, good origination, distribution and trading capabilities and those intangible but critical ingredients of commitment and reputation. This has tended to favour the big universal banks such as Citigroup, Deutsche and JP Morgan, who dominate the league tables.
Zezza sees fees stabilizing rather than heading back up. He argues part of the reason fees declined in the first place is that emerging market bonds resemble Eurobonds in structure and history rather than US high-yield debt, and notes that fees across the board on Eurobond mandates have suffered. Furthermore, the prestigious nature of sovereign mandates has traditionally encouraged intense competition in emerging markets.
Also banks with full-service offerings in local markets may be prepared to forego fees to build local reputation and market share. And even though he believes that 2004 will mark the bottom of the cycle for fees, he cautions that technology and transparency are driving greater efficiencies that place a limit on how high fees will go.
Enrique Bustamante, head of Latin America corporate finance and origination at Dresdner Kleinwort Wasserstein in New York, has already seen the first signs of fee stabilization. He believes that some of the very low fees seen on deals earlier this year were driven by wholesale banks looking to maintain reputation and market share in smaller markets such as Central America. These are the exceptions rather than the rule, he adds, and fees from bigger issuers are already proving more stable.