Joining the Euro-MTN market can be like entering battle for a new borrower. And the only weapons it has are an assortment of professionals all offering different advice. The end product is a water-tight legal document, a Euro-MTN programme. But it can take months or even years to get it right. Often, the most difficult part can be where to start. But most issuers begin with a rating. Tony Assender, director, in the corporate ratings group at Standard & Poor's, says: "An issuer entering the market without a rating is restricting itself to its domestic market, because it will be reliant on name recognition only. A lack of a rating can cost an issuer 10 to 15 basis points due to lack of liquidity." This is especially true in the private market where a credit rating is a passport to a new investor base. If an issuer has an existing rating all it has to do is pick up a phone and the agencies can usually supply it with an MTN rating in 48 hours. And this is where the first of many expenses is incurred. Andrew Moorfield, director, corporate finance and capital markets at Diageo, says: "The rating agencies charged a separate fee for assigning us an MTN rating. It wasn't an in-your-face amount, more of a small administration fee." Unrated corporates commonly ask a bank's rating advisory department to help them get a rating. It is usually at this stage that an issuer meets its future arranger. Deborah Loades, head of Euro-MTN and Euro-CP origination, Morgan Stanley Dean Witter (MSDW), says: "It is a minority of people who use us as their ratings advisor and then go and use another arranger. Ratings advisory and MTN arranging usually go hand-in-hand." Finding an arranger is perhaps the single most important decision for a new issuer. Some banks have specialist product managers for Euro-MTNs, and not surprisingly it is these houses that tend to head the MTNWeek arrangership league table. But being a specialist is no guarantee of winning mandates. Most arrangerships are decided on existing banking relationships. Julia Ward, director, head of Euro-MTN and Euro-CP origination, Lehman Brothers (Lehman), explains: "Banks that get the mandate usually know the borrower quite well. Unless there has been some form of dialogue, it is unrealistic to expect the mandate simply by having one meeting and waving around your credentials." Scott Church, managing director, capital market services, Merrill Lynch, has been in debt markets for 13 years. He admits that competition is now fiercer than ever. He says: "I can count on the fingers of one hand the times in the last couple of years when we didn't need some form of formal pitch for a mandate." Some arrangers think that competition is getting too intense. Ward, at Lehman, says: "Arrangers always used to charge a fee. But unfortunately that's changed. Commercial banks who are trying to build up their business can be very pushy and competition is fierce - some will often pick up all the fees for the issuer." Church, at Merrill Lynch, agrees: "Unfortunately some arrangers are picking up some of the third party costs such as printers', lawyers' and IPAs' fees. It's a very aggressive tactic and a trend I don't like to see." Deutsche Bank is singled out by some arrangers as being one of the most aggressive competitors. But Robert Mohamed, director, head of transaction management at Deutsche Bank (Deutsche), is quick to quash such accusations. He says: "It is totally untrue that we pick up third party fees on behalf of the issuer. We're in the business of making money. And though arranging programmes does not make money, the value added is a money-making business: the debut transaction and the delivery going forward." And this is one of the main reasons why arrangerships are so competitive. Invariably the arranger, in lieu of fee, will insist that it acts as the bookrunner on the issuer's inaugural deal. Ward, at Lehman, explains: "If you spend two or three months with an issuer setting up a programme you generate a certain amount of goodwill. If you don't win the inaugural deal you would expect some other form of business from them. Arranging a programme is a time consuming process and we would hope to be paid for that in some way or another." All arrangers deny that they ever tie in the inaugural with the arrangership mandate. But 75the 134 issuers that signed in 1999 and launched an inaugural used their arranger as lead manager off their debut deal. Choosing a lawyer can be less fraught for the issuer but equally important. The lawyer acts on its behalf in the negotiations with the arranger about how the programme documents are put together. Options such as 144a, sub debt, overseas jurisdictions are decided at this stage. But these negotiations take time. Robert MacVicar is a partner in Clifford Chance's securities group. He says: "The process can take 12 to 16 weeks. And within that, the key areas are disclosure and writing a business description. This tends to be the part that takes the longest time. If it is a new company, or one that has never been in the international capital markets, or in a far-flung jurisdiction then it can be very challenging." Jean-Marc Doucet is Lafarge's treasurer. He helped set up its Euro1.5 billion ($1.43 billion) Euro-MTN programme in June 1999. Although he believes the documentation is not complex, he says: "What may be complicated is to prepare your back office to deal with all the administrative issues and procedures inherent to the issue of global notes, temporary notes, structured products, pricing supplement." Dealers are usually chosen after the arranger has been mandated, with a panel comprising those houses which pitched and failed to win the arrangership. But often the panel is chosen after the documents have been drawn up. Moorfield, at Diageo, explains that he set four parameters for choosing his arranger and dealers in 1998. He says: "One, the quality and consistency of their capital markets dialogue; two, their quality of fixed income credit coverage; three, their secondary trading of our bonds; four, the ability to distribute bonds in our key investor markets. We judged the banks solely on those criteria and took no account of whether they were specialist arrangers." Doucet, at Lafarge, also drew up a strict set of criteria to measure banks' experience in the capital markets but did take account of houses with reputations as specialist arrangers. He says: "We also looked at league tables - MTNWeek's, IFR's and Bondware's - to see who came top in arrangership and dealership polls." Once the documents are completed the arranger sends copies to all the dealers in the selected panel. IPMA recommends that the dealers are given 10 days to read and make comments before giving the documents back to the arranger. However, they are often allowed less time. One house in particular is accused by many arrangers of causing problems at this stage. A leading arranger says: "JP Morgan has a tendency to always question the documents when 99market participants are happy to accept everything. We know what is right and what is wrong and we get the best deal for the dealers." Though no arranger was willing to be named, almost all the top houses agreed that this was the case. JP Morgan is quite happy with its approach. Paul Hearn, managing director, head of European capital markets, JP Morgan, says: "We are more rigorous than most houses. And we are not ashamed of that. We read the documents which is more than can be said for many." And Mary Hustings, who heads the transaction execution department at JP Morgan, says that though they often complain about the standard of auditors' comfort letters, this is an issue that all market players are not happy about. But once all the dealers are happy it is time to launch the programme. Ward, at Lehman, recommends the tried and tested route of a public deal. She says: "Investors are more willing to do the credit work to open lines if there is a specific issue to be purchased." But MSDW's Loades warns that this approach is not suitable for everyone. She says: "The minimum amount for a public inaugural benchmark has changed. It used to be $250 million to $300 million but is now $500 million. Not all issuers will want to do so much issuance in one year." If a roadshow is decided on, Mohamed, at Deutsche, stresses how important it is to target potential investors and have plenty of one-on-one meetings. He says: "You want a mixture of attendees at a roadshow. If only two people turn up it is a disaster. A successful roadshow is where you attract as many investors as possible with a view to them buying. If they subsequently do not buy then that is not your fault." All arrangers have put together programmes that issuers have failed to use. This can be frustrating after all the work involved. Twenty seven issuers signed between January 1998 and July 1999 and have yet to issue any debt, including Czech Republic and Schipol Group. Cadbury Schweppes signed 10 months ago via Deutsche and has yet to use its programme. Terry Bird, group treasury manager, Cadbury Schweppes, says: "We haven't needed the money but we anticipated that there was a chance that we might. However, we are totally happy that we set up the programme. We still hope to use it. " But he admits that the facility has to be used for it to save the company money. He says: "We reckon that we need to issue two or three times a year to justify the set-up costs." And MSDW's Loades points out how expensive it can be for an issuer not to use its programme. "The annual update can cost anything between $20,000 and $50,000 for an issuer if it has to update its business description, change its dealer group and re-print its information memorandum. That is a significant cost to justify to your board," she says. Experienced arrangers and lawyers all stress that an issuer needs to have a clear idea of what it wants from a programme, before it sets one up. But Doucet, at Lafarge, believes all the hard work can be worth it. He says: "My advice to new borrowers is set up the programme as quickly as possible to gain access to the market's deep and broad investor base. The sooner you get it operational, the sooner your signature is in the market. It is important to select a perfect arranger. And your documentation must be perfect. If it is too restrictive you will not only be an inflexible issuer but also your annual updates will cause you problems. Bad documentation can mean that the update takes two months to complete. That is a loss of time and a loss of money."
August 04, 2000
