sections

Friday, 24 November 2017

Structured Equity House: Deutsche Bank

  • Print
  • Share
  • Save

Nicely structured

Deutsche Bank pushed issuers and investors alike with a mix of structuring nous and pricing perfection. The bank led two award-winning deals thanks to an approach to client solutions unmatched by its rivals. Along the way it also picked up a two-thirds increase in market share. Deutsche Bank is IFR’s Structured Equity House of the Year.

The US$6.6bn jumbo exchangeable for SoftBank into Alibaba and the US$3bn 10-year convertible from Dish Network had two things in common. They were both award-winning deals in their respective regions – and both were run by Deutsche Bank.

Working with just one other bank on Softbank – and being alone on Dish – underlined just how much Deutsche was valued purely for its advice. In a year that saw relatively muted M&A activity, the German bank was able to focus on its clients’ particular needs.

“We got a little lucky,” said Andrew Yaeger, head of structuring in the Americas, displaying some of the humility that made the bank an appealing choice for a wide range of issuers. “We got good problems to solve.”

Deutsche’s success stemmed from a keen understanding of the unique dynamics of the equity-linked universe and knowing how to refine structures to take best advantage of them. In short, it was true structured equity work.

Investors were starved of new investment opportunities, and most banks sought to exploit that by using familiar structures – and squeezing pricing compared with previous deals. But Deutsche’s more elegant approach was to get the buyside to take on what Yaeger called “unnatural positions”.

“Dish issued its convertible bonds on the back of spectrum,” Yaeger said. “There was no cashflow for that spectrum. No business plan for that spectrum. And yet we sold – as sole bookrunner – US$3bn of 10-year paper,” he said.

“We got the market to buy something that is really financing against a hard asset, which is not what convert investors are used to doing. But we identified the fact that convertible investors are willing to accommodate risks and structures that they otherwise wouldn’t stomach, because there is nothing else to buy. That insight has driven our success.”

And the bank had success aplenty.

The combined equity and exchangeable bond by Airbus in Dassault Aviation saw a 23.6% holding, for example, representing more than 600 days of average trading volume. It sold in a matter of hours.

The €784m equity leg came at a 2.1% discount, while the €1.1bn exchangeable secured a yield-to-maturity of –0.73% and a 37.5% premium. A €1.64bn equity-only trade the previous year had come at a 17% discount.

“The credit quality of Airbus, equity funds that loved the Dassault story, and strength of the equity-linked market meant it could be done with no short-selling,” said Xavier Lagache, who runs Deutsche’s EMEA team.

Deutsche showed it knew how to push investors because it was selling them not just convertibles and exchangeables on an agency basis, but also bringing them in to share principal risk by hedging call spreads and selling margin loans to CB investors.

“We get to know how they think and what they can stomach,” said Paul Stowell, co-head of equity-linked in the Americas.

The SoftBank/Alibaba arrangement might otherwise have been handled with a collar and loan, but the market solution better met the company’s objectives and left the risk in the hands of those keen to buy it, rather than weighing on the bank’s balance sheet.

And as for Deutsche’s financial strength, there was speculation all year about whether the merest gust of wind would knock the bank over. Even so, issuers repeatedly engaged in protracted plans with Deutsche – another sign that what the bank had to offer was unique.

Expert work

In 2016, selling bonds was the easy bit. Winning mandates and convincing issuers to try something different was the greater challenge – and one that Deutsche was well suited to.

“Converts and derivatives were combined here many years ago, and that has given us much greater breadth in conversation with clients,” said Keyvan Zolfaghari, Deutsche’s former head of structured equity in EMEA, who now covers Asia-Pacific. “We are organised to structure the most interesting deals, not necessarily the most number of deals.”

In the case of Softbank, the many years of expertise in different jurisdictions were crucial to finding a workable deal.

“When there is such complexity around jurisdiction of a company based in Japan that owns a position based in China, held through a Singapore SPV, has founder stock and wants to do something in the US markets – you really need to bring a unique expertise to bear,” said Faiz Khan, co-head of equity-linked in the Americas with Stowell.

One meeting between Deutsche and Softbank included a 40-page presentation. There was a different idea on every page.

Investors in Asia hadn’t seen a mandatory trust issue since 2010. But the deal was covered in Asia hours, while tax lawyers were drafted in to get a European investor comfortable with withholding tax treatment on a US mandatory convertible. The effort meant two-thirds could be placed with outright investors.

“A limited supply is where we separate ourselves because the deals that are big and interesting require a different approach,” said Yaeger. “And that’s what we are set up for.”

To see the digital version of this review, please click here.

To purchase printed copies or a PDF of this review, please email gloria.balbastro@tr.com

  • Print
  • Share
  • Save