IFR European ECM Roundtable 2015: Part 3
IFR: So is there any room for the product that’s basically disappeared, the marketed follow-on?
Hargunani, Citigroup: Well it hasn’t disappeared. It has disappeared from public awareness. What I mean by that is many of the deals that have been coming to market this year have been wall-crossed, so the marketing has actually been happening in private ahead of the announcement.
The marketed follow-on was designed to educate institutions on the stock and also to give time for people to respond. UBS were part of a syndicate earlier this year that blew the theory out of the water in terms of how much you can raise an accelerated deal, when they did [a €7.5bn overnight for] Santander, and Sam can probably speak more to that.
But ultimately a lot of the marketing on deals is done on a wall-cross basis. So if the two reasons are to educate, it gives time to educate if need be; and two, to make people be able to react – which is quite important because a lot of long-onlys are still not set up to react in that short time window – as long as they’re amenable to wall crossing and targeting is appropriate, marketing is done beforehand.
Hence the lack of marketed follow-ons, because the vendor is avoiding taking the price risk in the market. So you will still see some, but the reason why we have many fewer is because a lot of that marketing is being done on a wall-cross basis.
Kendall, UBS: The marketed follow-on in the US is still highly prevalent. The rule of thumb is you do the IPO, you do two marketed follow-ons, and the third one’s a block. Some of that comes from the fact that there is no pre-deal research in the US IPO, so it is about education so people understand the company. I think in Europe, I agree with Suneel, the wall-cross is us adapting to what’s going on in the markets. I think if it’s a big deal, if it was an M&A deal that needed capital it’s probably done as a rights issue. I think you might see the marketed follow-on come back if people don’t want to do the rights issue, but they still want to raise a significant amount of money and need to explain the story. So I think it’s a little too early to call the death of the marketed follow-on. I think it makes a great headline, right. You could probably get a full page out of it in the magazine, but I think you’ll be writing that the marketed follow-on makes a comeback at some stage.
IFR: On that note, rights issue volumes have been disappointing. Even though M&A has picked up, equity has made up a pretty small proportion of financing that. Plus FIG recaps haven’t been quite so necessary, though we’ve got a few new CEOs coming in to banks at the moment [Deutsche Bank, Standard Chartered, Credit Suisse, Barclays], so do you think there’s a chance of M&A-driven or recap rights issues picking up?
Vaz Pinto, SG: I think actually M&A is much talked about but if you look at the completion rate of deals, certainly last year, there were a lot of announcements but very few completions, particularly in Europe. We keep hoping for them because they’re big tickets, and obviously they’re great deals, but we haven’t actually seen that many in the market and I think this year it’s been no different.
The fact that debt is so easily raised has also played a part in those few deals that have managed to get through actually finding themselves more on the debt side than on the equity side.
So the thorny question about banks. Bank consolidation is a very difficult topic because it’s still an issue where you do have national champions. Whereas in any other industry you would say, “Okay, well company A in Germany will take over company B in Italy or in France”, in the banking sector that has become much more difficult. The second thing is that, in terms of the regulation, there are so many still moving parts in terms of where we are going to end up, that makes it very uncertain to go and calculate the benefits of actually doing a cross-border banking deal. So, certainly my view is that we’re looking more at regional consolidation which, for competition reasons, means we are going to be looking at smaller rather than larger transactions.
Then you’ve mentioned the possibility of banks doing rights issues, and I think yes, there’s a new wave of CEOs that might have fresh eyes, and might decide to start with a clean slate. As you pointed out, when a new CEO comes in that’s a good way to start and blame everything on the predecessor.
IFR: Time is pressing so there’s one thing I particularly wanted to ask which is on the equity-linked side. You can give people 70% premiums, you can give them negative yields. What more can you possibly do to convince people to issue convertible or exchangeable bonds?
Halperin, Barclays: I think the exchangeable product has been a good development and it continues to add a lot of flexibility to monetise positions, whether that’s stock-settled principal repayments at maturity because premiums are so high, or cash settlements later, or over-collateralised exchangeables, I think that’s been a welcome addition. Exchangeables are something like two-thirds of the volume this year, so it’s a big driver. The high premiums and the negative yields, help on the margin, and it can pull an issue like Telecom Italia to the market to to take a large amount of debt out, where their debt capacity wasn’t as deep, given their rating. It’s going to pull an issue in here or there, but it’s not going to be a tremendous driver of activity while we still have the rate environment that we have, and we still have investment-grade issuers that can access very cheap debt. But it will pull in the Ingenico’s of this world who can obviously tap a deeper market. [Un-rated Ingenico raised €500m in June through the issue of zero-coupon, seven-year bonds with a 55% premium while including a high threshold for dividend adjustment.]
So I think it’s on us as bankers as the market’s being incredibly co-operative to continue to innovate, whether that’s to tweak structures so they work for every situation, or continue to push the bounds of pricing to encourage issuers in this zero-yield environment. That will continue, although it will still always compete with the straight debt markets, and rates will put a lid, in the medium term, on the amount of issuance we can attract.
Voss, Commerzbank: I think it has been less attractive for issuing converts because the coupon difference [to straight debt] has shrunk to a certain extent. You don’t get the same attractive pricing for negative yield instruments than you do get for a normal, straight convertible, and therefore the advantage in terms of coupon for any convert issuer has been affected by that, and they would rather issue straight debt at an already very attractive coupon level. So rather than exchangeables having had a great uplift, it’s rather that converts have been going down in terms of issue volumes.
IFR: So how much do you need rates to move before that picture starts to change?
Halperin, Barclays: It’s always rear-view mirror syndrome. So before people would have thought 3% straight debt is fantastic, but then they’ve been looking at 1% straight debt for so long in euros that actually 3% will feel expensive. So your question’s right, it’s not about absolute level, it is about moves. Right now debt new issue premiums are at the 30–40 basis points. Within 100 basis points people don’t really change their course of action, but as you approach 200 basis points that’s material when you’re talking about deal sizes and the interest costs, so I think that starts to move perception in either direction.
Vaz Pinto, SG: We talked about Greece at the beginning. I think with people suddenly seeing their screens going in the opposite direction, we’ve certainly had a lot more traction with our pitches and reverse enquiries over the last month than we had at the beginning of the year where people were just like, “Look, it’s not a subject for us”.
The two products have very different dynamics. The exchangeable is very relevant with share prices being high, and for CBs it’s no surprise the market is down 42% in volume terms, but that may change.
IFR: And on the exchangeable side do you think we could see more issues from governments? The headline numbers for them are particularly attractive and matter most.
Halperin, Barclays: I think it’s tough because there is so much just going on politically in a lot of these nations and on the macro side, that governments aren’t acting as quickly to the opportunity to benefit from those terms, and I think they’re finding other things to do with assets or they’re holding assets and waiting for the political dynamic to stabilise a bit before they consider acting. So I don’t, at least in the short to medium term, expect a lot more sort of government issuance.
Kendall, UBS: I was with a government entity last week and these guys were just starting a round of privatisations and they were looking at blocks and exchangeables, and they were absolutely going to go the exchangeable route because with all the political uncertainty in this country they didn’t want to be back traded, so if they could sell something at a premium, versus a discount, they felt pretty comfortable they were going to keep their job.
So at the right time governments will continue to do this because it’s someone trying to make a decision around a discount versus a premium and I’m trying to get the best possible price for my country, for the people, for the taxpayers etc and so I think it will continue to be an instrument that governments will use for those reasons. If you’re selling something at a premium that’s very defendable when there’s a political inquiry as to what price you sold it at.
Hargunani, Citigroup: Yes it’s the exact reason why we have seen more dribble-outs as well, be it the UKFI with Lloyds, and recently the French government for Engie [formerly GDF Suez], for that exact reason. “We sold it at market over a period, so we can’t be criticised”. There’s a lot of political dynamic…
IFR: Particularly in the UK where they will be very sensitive to that after the amount of time discussing Royal Mail in front of endless committees.
Hargunani, Citigroup: Political agenda often is more important than the economic one.
IFR: So in terms of the rest of the year, it seems we don’t need to worry about Greece, any other potential road bumps that could damage what’s been an attractive market?
Halperin, Barclays: I wouldn’t say we’re not worried about Greece although it continues to loom over the market and hasn’t affected this wave of issuance, it may affect the next wave of issuance. It is causing indecision, and I think it will cause an early start to the summer slow-down, because whatever’s not in the market, or ready on a day-to-day basis, is getting postponed to post the summer. It’s crazy to think that there isn’t at least a medium-term resolution by the time we get to September, but what if there isn’t? And if there isn’t then it will really loom over activity and really create a lot of concern among investors. So I think it is a looming concern for the future pipeline, but the base assumption is it doesn’t affect us post the summer break.
Hargunani, Citigroup: I think political landscape is obviously something to be sensitive of, we saw it in the UK and there are Spanish elections towards year end. We also saw in Turkey a lot of the issuance was front-loaded because of the elections coming up, so you think about political events around timing.
Halperin, Barclays: And Fed lift-off, whether or not we have a hike in September will cause some angst in the market. If we do there will be some carry-on effects to currencies, and may impact deals and sentiment. Everyone keeps saying it’s well telegraphed although nobody really knows whether there will be a hike in September, or not. So there’s uncertainty out there that could weigh on the markets depending on what the Fed does and how well prepared the market actually is for it.
Voss, Commerzbank: And of course something that we can never really predict is if there is any geo-political events that may quickly unfold. We all witnessed it last autumn with Ukraine. It impacted the IPO pipeline immediately and not necessarily because a number of deals couldn’t have been still priced, but because of price sensitivity on both sides. And that is something that can always happen and probably to be kept in mind because we all know about quite a few political conflicts going on.
IFR: This year has been big for Spain and the Nordics, and relatively quiet so far in some of the more normal markets like Germany which is never so quiet. Is that going to change as we go through the rest of the year? Spain was obviously driven by a small number of big ticket deals.
Hargunani, Citigroup: I think there’s a few big-cap deals to come out of Germany related to corporate spin-offs. I think Spain benefited from big-cap deals but also if you look at a lot of the block issuance, just because of the interest in periphery and the growth, coupled with QE – plug in the drug in to Europe – Spain was a great way to play it. The UK was impacted by elections and there are numerous high-profile deals that are expected in the UK in the second half as well. So I think you’ll see the mix shift to what has historically been the dominant issuers, but I guess I’ll repeat it, we shouldn’t underestimate QE and the interest in, or the potential upside from, the periphery as a result.
IFR: One last question on a different topic. Your businesses employ far fewer people than you had a few years ago and we’ve said at great lengths how much more work they’re all being expected to do now. How challenging is it to manage your talent and make sure that they are sufficiently rewarded in order to retain them, and stop them looking outside of the industry?
Kendall, UBS: I think it’s the biggest single thing that we’ve all got to deal with, and not just in ECM but across the industry. I think when we were all juniors, you did as you were told and you worked a few all-nighters, and then you asked if you could do another one. It was a badge of honour.
That’s no longer the case, and I think people want engagement and interesting careers. I personally probably spend 30% of my time on people issues, and not just senior people, but junior people.
Andrea Orcel, CEO of UBS’ investment bank, had a partnership summit for all of our directors down to analysts globally, so in each region and this is a massive undertaking, he spent three days with all of the junior talent. In the same way as we have a senior leadership off-site, we took them out of the business and said we want to hear your problems, and we want to hear your aspirations as well.
So I think we need to engage with people and realise that they don’t want the careers that we had, and we need to make life interesting, and that probably means that we lose them out of equity capital markets, but let’s hope we don’t lose them out of the industry or out of the bank, and we can put them in to something new. I think we’d be making a mistake if we thought that these people want to do what we’ve done.
The biggest challenge is keeping people engaged and motivated, and also try to manage the headcount through the cycle. We’ve talked through the last few years where markets have been closed, you know they’re going to open so you can’t fire everyone to right-size your business. You know it’s going to come back, so people go from doing no work to too much work. You’ve got to manage that, and it’s a real problem and a challenge.
Halperin, Barclays: Yes every bank is going through various initiatives, I mean we took Sam Dean who is a former head of ECM to be the head of a talent management programme, among other things. The fact is the jury is still out on it, we’re all trying to adapt and appeal to the next generation of people, and like we’re going through changes on balance sheet and business focus, and everything else, we’re going through changes in terms of retaining talent and their own career paths, and motivating them to stay a part of the business to grow up to be us. But I think we’re all figuring it out now and trying to adapt to the need to retain talent because it is a tremendous challenge for the future.
IFR: And is there an issue with losing senior people and losing the experience of going through cycles in markets?
Kendall, UBS: I think it is in the middle where we’ve lost experience. The way compensation structures are now, senior people are probably staying longer, so I think we’re fine at the senior level, we’re fine on the junior level, but it’s the director level and the VP that’s probably doing a lot of the work – we’re missing that.
That means senior people have to get more involved, which is a good thing. It means better advice for the client, and I think that’s probably leading to some of the better pricing decisions and discipline around deals and structures. It’s good for the junior people too as they have to stretch up in to some of that and take on more responsibility. But we’ll solve that because it’s amazing how juniors become not so junior anymore when the next bunch come in. So we’ll solve it. But we’ve lost a whole level of experience, and we’re never getting that back.
Voss, Commerzbank: You’re right it’s probably one of the very big challenges to how to deal with a significant slow-down and keep motivation through such a phase. Of course people do get experience very very quickly at the moment because we are all extremely busy. The big challenge is then what do you do when there is not enough business for everyone, and that will drag on motivation for sure.
IFR: Any questions from the audience?
Audience: We’ve seen Edita and Integrated Diagnostics from Egypt come to list here this year. What is your outlook on Middle-East, Africa and India issuance and IPOs coming to London?
Hargunani, Citigroup: Those are very good examples where there were some very high-quality investors involved and have performed well. I think there are sectors in the MENA region that are very in vogue at the moment, healthcare clearly being one of them. But the fact is there’s growth, and we’re starting to see more money looking at these regions, and more companies that are looking to IPO. So I’m positive on the outlook, but I would say it is only specific sectors where there’s demand rather than widespread demand. The key challenge for all of these companies when they’re listing in London is corporate governance. Why are you listing in London? To attract a broader investor base, but that broader investor base is going to be sceptical unless they’re comfortable with the corporate governance. But once they are, and I’ve got experience of IDH, the quality of the institutional investors in that was very very strong.
Audience: I have a quick question related to IPO advisers, because I guess that during the fallow period that we had in 2011, 2012 we saw something of a rise of IPO advisers giving companies and issuers some reassurance around the market. So now that you’re all more confident, do you think that right now there is a greater or lesser need for IPO advisers?
IFR: I’m going to guess the answer from everyone is, “There’s far less need”.
Hargunani, Citigroup: One thing that’s clear is they’re here to stay. Also different advisers provide different advice, and actually in certain IPOs, particularly when there’s a large syndicate, they play a very important role.
Is there a need? Bankers would say we were able to successfully execute IPOs before the proliferation of the advisers. But they have a powerful pitch to the corporate, that resonates, which is ultimately they are looking out for their intentions and they want to maximise distribution and maximise price, and therefore from a corporate’s perspective there is a need. I can understand that.
Kendall, UBS: I would echo that. If there wasn’t a need they would have disappeared. So they are clearly providing something that the marketplace wants. So shame on us for not providing that and allowing another market entrant. But people use them differently. I’ve seen private equity using them to do a lot of the heavy lifting around an IPO process where someone may not have the experience of doing an IPO and they want some help and advice. So I think there’s a role there.
The best ones find the middle ground and a level of trust with everyone, and the ones that don’t succeed are the ones that don’t find a way to add value. We’ve all got to add value in the process.
Ceccarelli, SIX Swiss Exchange: If I may add it depends on the transaction, ie, the readiness of the company, the complexity of the transaction, and the number of the parties involved. That’s something we are asked by potential issuers. It really depends, case by case it can be helpful.
IFR: Thank you all for joining us.