One of the hot topics in the market is league table business: who does it and how much do they do? Very few banks will go on the record to admit that they subsidize their private placements, but all are certain that everyone else is doing it. Of the eight Euro-MTN trading desks interviewed for this feature, six say they do subsidize trades to varying degrees. Gavin Eddy, head of the Euro-MTN trading desk at UBS Warburg, says: "I would say that virtually every one of the top 10 firms does it." Other traders tell much the same story. One trader at a top US firm says: "I don't believe that anyone doesn't do it." Another says: "If people tell you they are not doing it, they are probably lying. Everyone knows it's being done, but no one wants to talk about it." The extent to which a bank subsidizes its deals varies. Some dealers claim that less than 2% of their business is subsidized, while others say they do as much as 10%. But all dealers estimate that their competitors are subsidizing a lot more than they will admit to. Chris Jones is head of Deutsche Bank's trading desk and he says: "Year-to-date Deutsche Bank has subsidized less than 1% of its business. Although it cannot be the backbone of any bank's MTN business, some houses do up to 10% or 15%." Dealers agree that considerable amounts of trades are subsidized and this usually happens towards the end of the year. This means they are either bought outright, or in other cases, trades are underwritten but are not successfully placed with an investor. They then remain on the bank's balance sheet or are placed at a loss. Although this is sometimes due to an error in gauging the forward spreads of the issuer, it is often down to dealers being eager to push through deals that are eligible for league tables. Much of this funding is as short dated as possible because it is expensive to subsidize a longer dated trade. But for the trade to be included as part of the bank's volumes in both the MTNWeek and the International Financing Review (IFR) league tables, the term needs to be longer than 18 months. MTNWeek's back page league table excludes deals with a maturity less than 365 days, while IFR's MTN league table excludes deals with a tenor under 18 months and one day. Much of the so-called league table business therefore falls into the 18-month to two-year category and is done simply to boost a bank's position in these tables. Last year when IFR changed the minimum maturity eligible for its league table from one year to 18 months and one day there was an immediate shift in volumes. Dealogic's MTNWare database supports this. In a volume table of private placements with a tenor between 18 months and two years (see volume table) the quarterly trading volumes see a huge jump at the beginning of 2001. This was the date when IFR's maturity limit of private MTNs was increased, suggesting that much of the short-end volume is done purely for the benefit of the league tables. One dealer calls for league tables to raise the minimum maturity criteria to two or three years, to avoid the shorter dated league table notes. Apart from tenor, another characteristic of subsidized deals is the issuer profile and coinciding issue and maturity dates. One trader explains: "Bonds that have exactly the same issue date and maturity date, from similarly rated entities (usually single-A or double-A banking issuers) are often league table trades." In a league table of issuers in the 18-month to two-year sector, five out of the top 10 are landesbanks. Dealers agree that this sector often achieves cheaper funding through subsidized business, even though they risk having to pay wider spreads in future. One trader says: "The landesbanks will be very different in three years' time. They don't have to be forward thinking because they will have a lower rating when their guarantees are taken away." Dealers benefit from appearing in the top 10, especially when marketing for future bond mandates. And many feel that this end justifies the expense of buying short-end trades. One trader at a top 10 MTN trading desk says: "Subsidizing business is a pure cash loss, but people consider it to be an investment. If you know there is a big deal about to be mandated, you improve your profile with the issuer." One of the desks that claims not to subsidize its private placement business is HSBC and head of desk, Fergus Kiely, says: "Subsidized business gives you placement in league tables, but the counter-argument is that it is not a true reflection of your distribution strengths." He adds: "It is a very short-term view. We prefer to rely on our distribution strengths and trade at tight spreads, but the right spreads." Mizuho is not interested in subsidizing its business either. David Roberts-Jones, a trader on Mizuho's primary and structured finance desk, says: "Not all of the trades we do go into the league tables in any case, so as you can imagine, doing trades specifically for a league-table boost would be very much against the grain for us." There are detrimental effects on the market too. Jones, at Deutsche Bank, says: "It is very unhealthy for the market. League table trades are the least pleasant practice in the EMTN market and may even contravene FSA regulations on creating a false market." There are several disadvantages for the market. It leads to distortion in the 18-month to two-year sector and it projects false levels for some issuers in the market. Eddy, at UBS Warburg, says: "If it is being done just to get up the league tables it distorts the short end of the market. You can end up with the strange situation where double-A landesbank paper trades at cheaper levels than single-A paper." Eddy adds: "Issuers have to be careful about getting a reputation for whoring themselves and just looking for low levels. The issuer loses credibility if it just wants the best price." And Jones, at Deutsche Bank, says: "It is probably here to stay. The business is becoming more competitive and banks are willing to throw money at one area in order to gain business elsewhere."
March 01, 2002
