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Thursday, 23 November 2017

EMEA Equity House

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  • Innovate, dominate

Innovate, dominate: League tables are just one measure of a bank’s performance, but retaining the number one position in EMEA equities for three consecutive years does not happen by accident. For maintaining a leadership position while reducing risk and improving profitability, Goldman Sachs is IFR’s EMEA Equity House of the Year.

To see the full digital edition of the IFR Review of the Year, please click here.

Equity capital market volumes in Europe collapsed in the second half of 2011, with fourth-quarter volume a trickle at US$14.75bn. Equity and equity-related issuance in the whole of 2011 was just US$158bn and, as the second consecutive year of depressed activity (2010 totalled US$174bn), banks looked at reshaping their businesses to fit.

Goldman Sachs already ran a fairly lean team with 30 staff in cash ECM, which is about half that of five years ago. Cutting the workforce further could impact on coverage, so the focus was on rebalancing the business.

“Coming in to the year off a pretty challenging second half of 2011 it was clear that syndicate sizes would continue to increase while fees would fall,” said Alasdair Warren, European head of ECM at Goldman Sachs. “Looking at ECM it is difficult to predict where issuance will come from geographically, but predicting by product is far easier, and with structured issuance you can position yourself with a higher degree of confidence.”

For the third year running, Goldman Sachs ended the IFR awards period at the top of the EMEA league table. Previously, that league table position had been secured with large accelerated bookbuilds, usually involving the bank guaranteeing the seller a minimum price per share. This led to both spectacular successes and failures. Competitors argued the bank had bought its way to the top and quality was poor.

However, a closer look shows a dramatic difference in the approach to risk in this year’s flow.

“For profitability we needed to change the balance of our business,” said Warren. “In 2011, 75% of our accelerated business was on-risk. We felt in 2012 we could do it differently based on our leadership in the product, and look at structuring or derivative components to improve margins.”

From mid-November 2011 to early October, Goldman had completed US$11.9bn of accelerated bookbuilds, winning sole mandates on many of its 24 deals. In a dramatic change, which has passed under the radar of competitors, only 54% of that involved any risk for the bank and 46% was agency business.

On occasion Goldman was able to persuade clients to shift from risk transactions to agency before launch. “The risk is there if needed, but decisions are backed by advice and colour,” said Warren.

Beyond vanilla

Structural innovation was core to the theme of providing clients with products tailored for specific needs and dealing with short windows of opportunity. For example, in March the bank ran accelerated offerings in Seadrill, which included shares and puts, and in Erdemir, where warrants were packaged with the shares.

Goldman bankers argue that pricing was tighter than would have been achieved through straight equity sales.

Norwegian billionaire John Fredriksen wanted to sell 5% of Seadrill, but bankers were concerned about the reaction to him reducing his stake by US$1bn. The solution was to offer 90-day puts with the same strike as the equity sale, allowing pricing on the day at a premium. A fall in the oil price meant the puts were exercised so the 24m share sale was effectively reduced to 18m with an average price just below a 10% discount.

Considering this was the worst-case scenario the outcome was satisfactory, as shown by the sole mandate given to Goldman for Seadrill’s debut US$1bn international bond in September. The deal also ranks as one of the most profitable for the bank in the year.

The sale of 7% of Turkish flat steel producer Erdemir by ArcelorMittal may not have been possible without the warrants. Accounts indicated during bookbuilding that they would have wanted a discount of 20%. With the warrants bundled this became 11% to raise TL478.2m (US$268m). In the event Erdemir stock traded down and was well short of the effective purchase price on the warrants at July and October maturities, and looks set to be below the exercise price at the December 1 expiry.

The challenge of timing market windows was met through executing trades simultaneously or on successive days. Iberia’s €473m sell-down in Amadeus launched alongside Seadrill, while a sole-led €1.05bn dual tranche equity and convertible bond offering of Solidium into TeliaSonera was followed within 24 hours by another dual tranche transaction to raise US$1.035m for South African supermarket firm Shoprite.

IPO-lite

The one point where Goldman Sachs was not a significant feature was European IPOs. It took until Direct Line’s £905.6m float in October for the bank to complete an IPO in the region.

The deal faced huge pressure owing to the UK government’s large stake in owner RBS, plus many investors viewed RBS as a forced seller.

“Direct Line was a deal that had very little room for error,” said Warren. “It needed to come at a premium to tangible book value and it needed to tread a tightrope in the aftermarket, moving up enough for investors, but not so much that it embarrassed a government seen to be leaving too much on the table.”

Key to success was looking for demand away from the UK, where investors were keen to exploit the “forced seller”. Goldman and Morgan Stanley were joint global co-ordinators and switched the focus to US long-only accounts keen to allocate assets to Europe following ECB president Mario Draghi’s supportive statements over the summer. It worked. One US order was US$500m – and when the investor was asked to scale that back to what he really wanted the number was a still-impressive US$300m. This allowed the leads to price at a level that excluded the UK funds of two of the world’s largest asset managers and an Asian sovereign wealth fund.

A similarly fine balance had been achieved weeks earlier when Goldman was a joint bookrunner on the Russian government’s long-awaited US$5.2bn selldown in Sberbank. Collaboration was key to getting a previously difficult seller to listen to advice on timing and pricing, with the 6.24% discount proving acceptable to the seller and a market digesting a deal of such size.

“Failure on Sberbank and Direct Line could have broken two markets,” said Richard Cormack, head of emerging EMEA ECM.

The bank was also involved when companies that had considered the public markets sought funding while remaining private. This included the €500m investment by Ontario Teachers’ Pension Plan and Kirkbi into Danish cleaning and services business ISS, a company that had twice been frustrated in efforts to become public. Similar efforts were undertaken for Kion Group and Formula 1. Others that had given up on Europe were taken to the US to list, including Edwards and AVG.

Difficult sellers

The week that Direct Line priced, Goldman turned down the opportunity to score only its second IPO of the year in Europe when it quit as joint global co-ordinator for MegaFon.

The top line slot, alongside Morgan Stanley and later Sberbank, was a massive coup considering it was won against a gang of major lenders. Yet Goldman could not overcome concerns about the plan of major shareholder Alisher Usmanov to pool his assets (and those of two partners) into a holding company after the IPO.

The decision to quit was illustrative of the bank’s hard-line stance on discipline and control of risk, as seen with similar passes on jumbo capital increases in UniCredit and Banco Popular Espanol, missing out on a share of close to US$13bn of issuance.

Despite being largely absent from Southern Europe, the bank still priced deals for companies from 17 countries, second only to Deutsche and three up on the previous year.

“When you say no to a situation it is not just about this year’s business,” said Warren. “You have to stick to your principles.”

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