Thursday, 20 September 2018

Spare a thought for Actavis investors

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Anthony Peters on the pharma firm’s mega multi, quants and the return of the boutique.

Anything Verizon can do, Actavis can do just as well.

Not that yesterday’s US$21bn 10-tranche bond deal for the latter could, in size, hold a candle to the former’s barnstorming US$49bn 8-tranche show-stopper of September 2013, but in terms of execution it seemed, to me at least, to have been a smoother process.

Actavis, apparently soon to rename itself Allergan after the company, the US$66bn purchase of which prompted this mega deal, can be pleased.

Funding itself across the curve from 2 years to 30 years, it achieved some stunning results with each tranche pricing between 15bp and 30bp tighter than initial price guidance. Even then, the whole shooting match tightened a further 20-30bp in early trade. This is a satisfying performance and did not, at the expense of shareholders, end up as quite the same give-away as did the Verizon complex.

European investors are again howling that they got short-changed, but for once I have to side with Wall Street syndicate desks. It’s an American company (albeit with an Irish passport) buying another American company and there was more than enough eager money in America to fund the deal. The state of the market was reflected in there being next to no bonds available in the aftermarket. Whoever got something is hanging on to it for dear life.

That said, Actavis is a BBB- credit which is, let’s face it, in cross-over space and only one notch above speculative grade. To get US$4bn 10-year, US$2.5bn 20-year and US$2.5bn 30-year bonds away – +175bp, +190bp and +210bp respectively – is impressive. To have them close the first day’s trading at +149bp, +170bp and +187bp respectively is breath taking. Whether, in all honesty, I’d want to be owning a 30-year bond in a credit which is one notch above junk at a yield of 4.6% is a different matter entirely.

Ratings reflect nothing other than an alphanumerical probability of default. Historical default statistics are currently of little value as (see above) cross-over borrowers can find 30-year fixed money at just over 4½%. Fifteen years ago, they’d have struggled to borrow a five-year at twice that coupon.

The refinancing risk for highly leveraged companies is currently remarkably low, so who can criticise them for taking the money and running. I’m more concerned for the investors who are lending at 30 years for less than 2% over Libor. Am I glad that most of this deal belongs to American pensions funds and not to mine.

RBS pullout

The FT shines this morning with a report that RBS is about to turn its global investment bank into a local boutique. It talks of the bank pulling out of 25 countries and laying off 14,000 people over the next five years. Four or five years or so ago, during the depth of the crisis, I wrote a column for the Daily Telegraph in which I postulated that there was no need to hang, draw and quarter investment bankers for the industry had blown its top, and that it would be sensible to simply let Darwin do the work.

I saw no reason for over-regulation, using of course the analogy of generals always preparing to fight the last war, as I envisaged the natural decline of the industry. On one hand, the move away from overcapitalised banking behemoths back to fleet-of-foot boutiques has been accelerated by the increasing regulatory cost bound up with often ludicrous capital reserve requirements, but on the other hand it has been slowed by most banks still trying to see who can hold their breath the longest.

Citing falling revenues in the investment banking divisions is no reason to cut them to the bone or even to close them down. Reducing staffing costs is the key. This was never going to happen overnight but it is sadly easier to fire a banker than to cut his comp package.

Of the 14,000 to be laid off, RBS will probably find itself hiring half that number back again in the residual commercial bank but, alas, on commercial banking salaries. Whether these will be the same people or not is a different matter entirely.

In the 50s it was all about advertising (think of Mad Men), in the 60s it was television. The 70s were about design. In the 80s, marketing was all the rage. In the 90s banking began to emerge from being the last resort – other than the army or the church – for those who couldn’t get a proper job to being the hot spot as the developing derivative markets began to attract people with imaginative brains. The “naughties” saw the lunatics take over the asylum. Those nerds who were totally convinced that lending was a quant game and that if one “did the Greeks” one could reduce the risk to zero (or below) began to control the banks. We all know what happened.

Banking was blown up and now these unutterably clever people mostly seem to be sitting on the buy-side. It’s that very same bunch of quants who now determines that BBB- 30-year credit at +187 is a great risk and screaming buy. Warren Buffett holds a Masters in economics from Columbia but has never been near an MBA or a CFA, let alone a PhD in theoretical physics. I once shared a desk with one of those but I fortunately recovered with no signs of lasting damage.

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