Bank of the Year, Australia/New Zealand Securitisation House, Derivatives House
In a year that was defined by crisis and multi-billion dollar losses in investment banking, Deutsche thrived in the region, with income almost doubling for Asia (ex-Japan, ex-Australia) in 2007. For excellent profitability and growth in a difficult year, and for being far smarter than its massive size would suggest, Deutsche Bank is IFR Asia’s Bank of the Year, Derivatives House of the Year and Australia/New Zealand Securitisation House of the Year.
Typically, the giant universal banks find themselves in a bind. The bigger they grow, the more unwieldy and bureaucratised they become. They’ll milk their economies of scale, their enormous multi-asset, multi-geography banking platforms, but they’ll leave it to their smaller, nimbler rivals to do the truly clever trades.
The universals find themselves having to trade off brainpower for brawn; dexterity and speed for scale.
But Deutsche Bank has demonstrated that big does not have to mean dim. It has grown spectacularly over the past five years. In gross league table terms, across all assets (bonds, loans, equity and equity-linked), across Asia Pacific ex-Japan, the bank has seen dealflow rise 2-1/2 times since 2002.
With all that growth has come a lot of hiring. Deutsche over the years has absorbed an ever-swelling army of MD-level bankers from rival shops, each of which has imported the culture and orientation of the old firm. The result is that the Deutsche is disjointed. The bank has the feel of a teeming immigrant city – its Asian franchise has not gelled around a strong corporate identity.
A lot of strong personalities and political agendas have filled that void. Deutsche’s various business lines are often more associated with the people that run them than they are with the Deutsche brand.
But we come to praise Deutsche not to bury it. The bank has thrived despite its chaotic office culture and despite the political machinations of its managers. Indeed, it seems to draw strength from it.
Deutsche’s diversity creates dynamism. Ideas get tried out. Strategies are launched. Even the intensity of its politics – while a tremendous distraction for people involved – give the bank an energy that is often distinctly lacking at the big houses.
Bigger, better
Deutsche likes to point to the giant private business that underlies its public markets franchise. It maintains 16 trading floors across Asia-Pacific. It is present in every asset and market of significance in the region. It has built a massive foundation of cash and derivatives trading and brokerage.
This non-public business is the sub-structure and scaffolding for its more visible capital markets deal-making. And, it is this sphere that Deutsche demonstrates on a daily basis the potency of a big shop that can act smart.
“The private space is 90% of our revenue profile,” said Colin Grassie, Deutsche Bank’s CEO, Asia-Pacific. “In that space there is an enormous machine in our offshore hubs in equities, fixed income, rates . . . it’s a massive volume machine.”
Deutsche’s derivatives business illustrates well that point. Judging from the end of year awards pitches, the most dramatic increase in investment banking in 2007 has been in derivatives, both in the number of counterparts and also in terms of the size of the market.
At best guess, volumes more than doubled in 2007, with the expansion in private wealth, the massive growth of the asset management and hedge funds sector in the region (including the sovereign wealth funds), the adoption of innovative liability hedging techniques by corporates, and the popular use of structured products in the private financing space all contributing to greater acceptance of risk during the year – at least during the first half.
Another feature has been the speed at which new ideas are embraced and products brought to market. Likewise, the trend to blend across asset classes is bringing with it the next generation of structured products.
Deutsche Bank’s derivatives team – led by David Lynne in rates, Said Avid in credit and commodities and Denis McCarthy in equity – was well positioned to take advantage of these developments.
The real vig in the equity derivatives industry lies in the retail/private banking market. What ultimately lands on institutions’ desk is the slimmed downed, commoditised version of the risk that was originated through retail customers.
Deutsche does well on the institutional side of the equation – it has the skills and coverage levels one would expect of a big universal bank. It will make a market on a vast array of products, its sales people will get on the phone with a price, and it will have the kind of top-level read of the market that Asia’s biggest derivatives brokerage could be expected to have.
However, it is in the retail sector that Deutsche has proven itself to be surprisingly nimble. In spring 2007, for example, it became the first bank to distribute structured equity products to China through a domestic partner. It launched target redemption notes that were linked to a basket of red chips, and sold to mainland Chinese.
The product was launched in June 2007, and it was the first to take advantage of QDII liberalisations that were announced in May 2007. The liberalisations allowed PRC nationals to buy Hong Kong shares for the first time, including structured products linked to Hong Kong shares.
The product resonated with domestic mainland investors, who believed in the A/H-share convergence story (that H shares will eventually trade in line with their more expensive, non-fungible A-share counterparts) but were wary of the downside risks of the notoriously volatile Greater China equities market. Judging by the heavy flow of similar QDII structured products that followed from the other banks, the concept was a hit in the domestic PRC market.
Deutsche late in 2007 also moved into the Indian retail market. It asked for, and received, a non-banking financial company (NBFC) licence, becoming the first bank in two years to get such a licence.
More significantly, it was the first foreign bank to understand that it could use that licence to distribute structured rupee-denominated instruments in India. The licence allows Deutsche to do more onshore business and obtain locally registered status with local exchanges and regulators.
That arrangement in turn lets Deutsche manage the risk onshore, which makes the hedging process simpler. Deutsche will be able to find exact matches to hedge the underlying (rather than closely correlated equivalent hedges in an offshore structure). The licence also broadens the bank’s Indian investor base as a large number of fund managers can only deal with a locally registered institution.
Simply, Deutsche discovered a big regulatory advantage with the licence that had not been understood by its competitors. They undoubtedly will follow Deutsche into this market using the NBFC route.
“Our global market teams bury themselves into their local markets,” said McCarthy. “We have spent a lot of time with local regulators to get them comfortable with structures – that’s what we’ve done really well.”
Improved ratings
The Deutsche platform works for the other asset classes, with rates leading the way in many jurisdictions. Its commitment to local markets over the years has placed it in good stead to offer offshore products to local clients, to cope with foreign demand for access products and to assist in the hedging requirements innate in a region of huge intercontinental trade flows and multiple currencies.
“Years of investment: in people, relationships, local markets and a hub-based derivatives platform have paid off,” said Grassie. “We’re the number one house in flow.”
Already a force in nine of Asia’s countries, this formidable footprint expanded over the past 12 months to include onshore trading capability in four new markets – China, Pakistan, Sri Lanka and Vietnam. As well as working with regulators to establish these nascent markets, Deutsche has been at the forefront of establishing new product.
China’s onshore swap market has experienced a tremendous increase in volumes traded and Deutsche reckons it already has a 25%–35% market share. Growth in this market is assured as foreign banks become locally incorporated and as more domestic players get involved. It promises to be huge.
“As rates become more volatile, the domestic banks will need to hedge their massive interest rate exposure,” said Lynne. “We’re already doing swap tickets of US$200m.”
Offshore, the non-deliverable IRS Rmb market offers even more liquidity and reflects the potential of the onshore market, as this is where banks and hedge funds get to participate. Deutsche claims to own 30%–40% of the hedge fund business and 25%–30% of the overall market.
It has been at the cutting edge of introducing new product to these markets and the ones in which it is already established. This year, breakthroughs were notable in non-deliverable interest rate caps and floors and range accruals in China. Its close work with the regulator in India should also soon bear fruit, as the market makes way for single-name credit default trading.
“We’ve already got one credit trader in India in anticipation [of the regulatory changes] and we’re already lined up to go in quarter one 2008,” said Avid.
The growth in Asia’s private wealth in staggering, and goes hand in hand with demand for structured products from the private banking hubs as well as the retail networks around the region.
Innovation, such as the 10-year US Treasury accumulator – in which investors buy bonds on a forward basis at a discount to spot, subject to them trading between the strike and a knock-out price – proved popular with this client base. Likewise, its currency carry trade product Harvest penetrated the markets of Singapore, South Korea and Taiwan.
Late in the year, it also launched a regional carry trade product designed to capture the de facto monetary policy convergence behaviour of Asian central bankers.
The attraction of booming growth and gradual deregulation in Asia has been a major attraction for asset managers and hedge funds. Assets under management in Asia exceed US$2trn and Asia’s long-term mutual fund flows have surpassed those of Europe.
Bonds gone wild
Deutsche’s abilities in derivatives translate into strength in the public markets. The business gives it a credibility and dialogue with hedge funds that other banks often lack. That made for another strong year for Deutsche in G3 bonds, where the bank ranked second in league table terms for the period under review.
Although 2007 was a record-breaking year in terms of Asian G3 issuance, with US$52bn of deals, it was, in the words of Mark Leahy, Deutsche’s head of debt syndicate, “hard to pinpoint an overarching theme over the past year”.
Indeed, as the year started with immense promise in the form of jumbo issuance from ICICI and a wave of Indian bank capital raisings, and built to a crescendo of high-yield issuance, principally from the PRC real estate sector, the wheels definitively fell off when the sub-prime crisis emerged in late July.
“We saw a series of short-lived trends, each coming with a ferocious burst, and often closing just as abruptly. What was needed in these circumstances was the ability to read investor appetite in volatile conditions,” said Leahy.
Perhaps the clearest marker of that skill-set was the flamboyant and daring reopening of the G3 public bond market in September with ICICI’s US$2bn five-year global bond, which represented the largest five-year fixed-rate deal ever from an Asian issuer and underlined Deutsche’s close relationship with what has become Asia’s most prolific borrower, with the German bank having participated in all of ICICI’s public deals this year.
Indeed, Deutsche owns the Asia FIG/bank capital space, having brought US$4.08bn of deals in 2007 through 22 issues in FIG and US$1.45bn of bank capital transactions. This was achieved from a broad geographical split embracing India, Singapore and South Korea, and including all G3 currencies as well as sterling plus product prints across the entire bank capital structure (Tier 1, Upper Tier 2 and Lower Tier 2).
Meanwhile, Deutsche can rightfully argue that it played its cards with more nous than any of the bulge-bracket competition in the work it did in July for True Move and Neo China Group, deals that defied sub-prime turbulence and brought with it some handy innovation.
True Move priced a US$225m seven-year in four weeks from the start of marketing to execution – pretty snappy for a challenging Thai high-yield name. That was followed by a US$400m seven-year for Neo-China Group, which set in motion the bonds-with-warrants trend that emerged in response to sub-prime, with investors demanding internal rates of return of anything up to 17%.
In the context of a ream of deals pulled or postponed thanks to sub-prime – for Kia Motors, Azgard 9, Cikarang Listrindo, Hong Long and Mobile 8 – Deutsche’s lack of a pulled deal in the review period was something of an achievement.
CB powerhouse
Thanks in large part to its strengths in credit and derivatives, Deutsche consistently ranks as one of three banks that dominate the Asian equity-linked market. The Deutsche theme is again prevalent in this business: the bank achieves a lot in league table terms, but it gets there by doing different, more interesting types of deals than are usually cranked out in the converts arena.
Deutsche’s equity-linked business often crosses over into private equity and structured equity operations, resulting in some creative and highly profitable trades.
The bank brought at least two public CBs last year – for India’s Suzlon Energy and China’s TCL Multimedia Technologies – on which it subscribed to a substantial portion of the bond.
The Suzlon bond was a particularly ambitious bit of banking. Deutsche in May 2007 closed a US$300m CB for the wind-power turbine maker. It bought US$200m of the deal and distributed the other US$100m.
Deutsche underwrote the deal weeks or months prior to pricing, to give Suzlon certainty of funding for its bid for REpower, a German rival valued at US$1.6bn.
Suzlon was heavily geared when it brought its CB, with a 2007 net debt/equity ratio of 114% at the time of it bidding, and its bid for REpower would greatly add to that debt load.
The uncertainty of Suzlon’s bid at the time of the CB pricing and the pace of growth it has seen over the past two years gave a flavour of risk to the high-premium, five-year, zero-coupon deal. The company was in a massive state of flux, which made it difficult to price such a technical instrument such as a CB.
Nevertheless, Deutsche fully distributed the US$100m offer tranche, which traded to a high of 104 on its debut. Deutsche clearly made a killing on the deal, an idea reinforced by the fact that Suzlon succeeded in its bid for REpower (in May) and that Suzlon’s share price rose about 70% from the time of Deutsche’s deal to the end of 2007.
And because Deutsche committed to a ballsy underwriting for Suzlon, it has won a tremendous amount of goodwill from this up-and-comer. It was great banking all around.
A shrewd, selective lender
Deutsche is very selective in using its balance sheet for lending in Asia. It does, however, pop up on the more interesting, high-return structured transactions, particularly in Australia.
Deutsche was among the four leads on the NZ$1.325bn (US$1.04bn) senior facility in July 2007 backing the NZ$2.165bn leveraged buyout (LBO) of New Zealand directories business Yellow Pages by CCMP Capital Asia and Teachers’ Private Capital. The deal represented the largest ever sponsor-led LBO transaction in the New Zealand market, and at launch in March it was the most highly leveraged LBO in the Australasian market.
Deutsche was also one of four bookrunners on the A$2.5bn in senior debt backing Independent News & Media’s bid for APN News & Media. The bid collapsed in late May after the deal failed to pass a crucial shareholder vote.
The German bank has also, along with Credit Suisse, provided bridge facilities of some NZ$2.02bn to Auckland International Airport to refinance existing debt and to partly fund a NZ$2.6bn bid by Dubai Aerospace Enterprise for a 51%–60% controlling stake in the airport.
It had been mandated, along with Credit Suisse, on a high-yield bond takeout that formed the non-recourse financing for Tata Steel’s acquisition of Corus Steel. However, following Tata Steel’s decision to opt for a loan takeout instead of a high-yield bond, Deutsche joined the loan at the top as an MLA.
Deutsche’s biggest feather in its cap outside of Australasia was its role on the US$600m LBO backing the S$1bn (US$659m) acquisition of MMI Holdings by Kohlberg Kravis Roberts. Deutsche was one of three bookrunners on the LBO that at the time represented the largest public-to-private acquisition in Singapore.
The wizards of Oz securitisation
Not only did Deutsche Bank preside over the largest securitisation deal in Australia in 2007 during good times, it also stepped up when markets were in terrible shape when it reopened the country’s ABS sector in September. With almost double the market share of its nearest rival, no other bank came close to it.
The sound of the door slamming on the securitisation market in Australia in July and August 2007 because of the global liquidity crisis has echoed throughout the second half of the year. But it was the placement of the A$500m (US$431m) dual-tranche RMBS by Macquarie’s Puma vehicle and led by Deutsche Bank at the end of September that reopened the market.
It was the first securitisation out of the gate after the shut-down, and it reopened global RMBS.
“We were there and we led the price discovery,” said John Claudianos, joint head of the securitised products group at Deutsche Bank, with justifiable pride. Indeed, so significant was the deal that for the rest of the year the pricing for all other RMBS was referred to in terms of how Puma priced: 40bp over BBSW was the benchmark.
What allowed Deutsche Bank to come out of the gates running when the market reopened was its access to liquidity throughout the crisis. So much so, in fact, that it lent money to the Reserve Bank of Australia in the summer.
The reason its for liquidity? The bank was foresighted enough to buy money when it was cheap. “We took it from the market, when the market would give it,” said Claudianos.
Deutsche Bank set pricing benchmarks all through 2007. Its landmark securitisation for the first half of 2007 was Medallion Trust Series 2007-1G in February for the Commonwealth Bank of Australia. It was the largest securitisation deal of the year, raising a jaw-dropping A$7.1bn equivalent in Australian dollars, US dollars and euros, and priced incredibly tightly – which also set a new benchmark.
This was followed, almost immediately afterwards, by an A$1bn RMBS for Adelaide Bank. That, too, broke new ground. After an overwhelming response from domestic investors that saw the deal increased from A$800m, Deutsche Bank proved it had true international capabilities when it sold a third of the deal into the US. “We have broken the investor base to a greater extent than other banks,” said Claudianos.
IFR Asia editorial team