Equity House

IFR Review of the Year 2012
12 min read
Owen Wild, Robert Sherwood

Achieving the American dream: Deutsche Bank has tried for years to turn its US ECM business into a market leader like its operations in Europe and Asia – and this year it succeeded. Deutsche led major IPOs, took on tough risk positions (especially in Europe) and became one of the preferred banks of the US Treasury – as well as IFR’s Equity House of the Year.

For Deutsche Bank, 2012 has been a runaway success. While many of its rivals suffered another year of disappointing volumes, the German house increased its market share once again, as its build-out in the US was completed in style.

The bank was a bookrunner on 10 of the top 20 equity and equity-linked deals globally in the IFR award year, ahead of its peers, with Goldman Sachs next best placed with eight. On only one of those transactions was Deutsche passive – the disastrous Facebook IPO.

Region by region, the deal roster is a picture of consistency. In Europe, the bank led five of the top 10 deals, including high-risk rights issues for UniCredit (to raise €7.5bn) and Banco Popular Espanol (€2.5bn).

In Asia-Pacific it was on five of the top 10 (six including the league table ineligible Bank of Communications follow-on), with three IPOs among them.

In the Americas, roles on the IPOs of Facebook and Santander Mexico, as well as the smaller the of two Kinder Morgan follow-ons, helped the bank to claim spots on six of the top 10.

But the transactions that defined Deutsche Bank’s year – and cemented its status as a US ECM house – were the three government selldowns in AIG.

Deutsche was not involved in the first poorly executed sale in March, which showed just how hard it was to sell when the market expected sales and knew the government’s entry price.

Brought on board for the next deal in May, however, Deutsche and co-active lead Goldman Sachs used some strategy to execute the US$5.8bn sale over a weekend – taking the short-and-cover tactic out of play.

Deutsche was also hired for the following two AIG sales. The next deal in August – again for US$5.8bn – was launched during trading hours.

The crescendo was the US$20.7bn sale in September, the largest common stock offering in US history. Deutsche was not just one of the four joint global co-ordinators leading a syndicate of 11 joint bookrunners – it also replaced Goldman Sachs as the sole stabilisation agent. In such a large syndicate, that cherished role is a clear indication of seniority.

“When Anshu Jain joined Deutsche Bank in the mid-1990s, Goldman Sachs led the IPO of Deutsche Telekom in Germany,” said Mark Hantho, Deutsche’s global head of ECM. “In the year he became co-CEO, Deutsche led the biggest AIG follow-on.”

Deutsche forged its US Treasury relationship by developing the idea of TARP warrant auctions. Since 2009, Deutsche has led 24 TARP warrant auctions that have recovered US$5.4bn of bailout capital for US taxpayers.

The only non-US bank active in the AIG process, Deutsche demonstrated the ability to uncover pockets of demand globally – on AIG’s sales of AIA, as well – which was instrumental in facilitating the Treasury’s exit at a profit for taxpayers.

The AIG process epitomised Deutsche’s ECM approach in 2012, as the bank looked to tap global pools of capital and used non-deal roadshows to get the message out to investors.

“If you look at the sizeable transactions that need to get done, like AIG, it is irresponsible if you are not looking outside of the US for these differentiated pools of capital,” said Brad Miller, co-head of global syndicate. “Failure to do so will impact both the style of execution and ultimately the valuation.”

Hantho highlighted that 23% of the US$20.7bn AIG sale was placed in Europe.

All across America

Overall, Deutsche ranked eighth in the US league tables, with 127 pricings for US$14.4bn and a 7.1% market share. But as always, the league tables do not tell the whole story. Deutsche moves into third behind Goldman Sachs and Morgan Stanley when results are recut based on active books. This method notably sees the US commercial banks fall away.

While the AIG transaction brought the bank attention, Deutsche has been gradually building itself into a serious US ECM player in recent years. The team is led by New York-based Hantho, after London-based co-head Chris Whitman moved back into DCM. Deutsche’s regional US ECM managers are meanwhile increasingly taking on global roles.

“Five years ago, most of the global roles were in London,” said Hantho. “That 50% or more of these global roles are now sitting in the US directly reflects the bank’s transition.”

Deutsche was the second most active underwriter for financial institutions and technology issuers, the most active US ECM sectors based on number of deals.

Technology has always been a strong space for Deutsche. Although it was passive on Facebook, Deutsche was the second most active tech underwriter in US ECM, raising US$19bn for 22 clients during the period under review. The bank was active on ServiceNow and Kayak Software, the first two technology IPOs priced in the wake of Facebook.

Deutsche demonstrated leadership as an underwriter of high-yielding equity, with 26 bookrun transactions on behalf of high-yield mortgage REITs. The bank single-handedly transformed Armour Residential REIT’s investor base through leadership on six transactions in the year.

New issues of blind pool mortgage REITs are notoriously difficult exercises, but Deutsche oversaw two such offerings: Javelin Investment and Western Asset Mortgage Capital. The US$206m Wamco debut used an innovative framework designed to negate fee leakage (loss of investible proceeds due to underwriting fees), while the US$145m Javelin deal was a more traditional pricing.

While investor demand for yield product drove mortgage REIT issuance in 2012, it was also a banner year for high-yielding master limited partnerships. Energy remains an area where Deutsche has room for improvement, but progress has been made. A joint bookrunner assignment to Kinder Morgan’s US$2bn block with Barclays in September signified the bank’s increased commitment to the energy sector.

Making the difficult decisions

The rolling eurozone crisis continued to cast a shadow over ECM issuance this year. Not only did the crisis depress activity in Europe, it also inevitably shaped the deals that did happen, with financials in southern Europe particularly active in fundraising.

While some top US banks were repeatedly absent from these trades, Deutsche was frequently front and centre in taking on the difficult risk.

UniCredit’s €7.5bn rights issue headed the list of tricky deals. Banks signed up for the transaction in late 2011, with execution in 2012. At the time there was real concern about Italy and Italian banks, which caused Goldman Sachs, Morgan Stanley and JP Morgan to walk away from the situation (though JP Morgan later changed its mind).

The Unipol/Fondiaria SAI transaction was one of the most complicated of the year, as the two companies raised €1.1bn each in concurrent rights issues. The capital increases were to effect a four-way merger to create the second-largest insurer in Italy, a process not helped by attempts to block the transaction and lengthy debates between firms about the ownership ratio.

Risk for the banks was high – the capital increases completed in September 2012, though shareholders will not vote to approve the merger until April 2013. Underwriters realised both issues would end undersubscribed, and it would be hard to offload stock at a profit ahead of the merger completing.

“What we are most proud of is the business we have done on mission-critical stuff, rather than just helping a private equity firm liquidating its position”

Rather than walk away, the banks worked backwards from best and worst case outcomes to calculate the necessary reward for the risk. Final fees were understood to be four times those originally outlined.

Again, US banks were absent from the underwriting syndicate, though Goldman Sachs and Morgan Stanley had been involved in the process.

“In the periphery FIG area we have shown our mettle, leading BCP, Sabadell, and being one of the bookrunners on UniCredit – these are all sizeable deals,” said co-head of global syndicate Ed Sankey. “We are still deep in the trenches on Banco Popular, and did Unipol/FondSAI deals when a number of the US banks wouldn’t go near it with a barge pole. But we take a calculated risk on these things.”

Deutsche earned praise for its mature approach from the head of ECM at a firm that worked alongside the bank on some of those risky transactions. No other top-tier bank appeared on southern European financial rights issues as frequently as Deutsche Bank.

“What we are most proud of is the business we have done on mission-critical stuff, rather than just helping a private equity firm liquidating its position,” said Hantho. “When it is a critical deal, nine times out of 10 we are involved in a substantial way. That is what we are doing in the States, Asia and Europe.”

The future’s bright

IPOs continued to be tough in 2012, but a bank needs to lead floats around the world to be a credible global equity house – as well as to build a future client base. In addition to leading deals in the most active sectors in the US, Deutsche was involved in the largest deal in Latin America, helping Santander float its Mexican operations in a US$4.1bn domestic and NYSE IPO.

While it missed the Japan Airlines IPO, Deutsche was on the second, third, fourth and fifth largest trades in Asia-Pacific for Felda Global, IHH, Chow Tai Fook and New China Life Insurance. In Europe, activity was limited to just one US$1bn-plus IPO in the first half of 2012 – for Dutch cable firm Ziggo, where Deutsche was a bookrunner.

“We deliver more than league table credentials. We deliver sensibly priced, well structured deals that offer alpha”

Ziggo and Swiss firm DKSH, which priced its US$991.1m IPO 24 hours earlier with Deutsche at the helm, came to market in March and were the first tests of demand for marketed IPOs in the year. At launch, neither could be assured of success, yet both attracted huge demand and saw banks massively cut back investors to focus stock in the hands of the best quality accounts. On DKSH, half of the 800 orders were zeroed.

The allocation process worked – and both stocks traded well. Ziggo’s IPO is IFR’s EMEA Equity Issue of the Year, and the positive trading performance allowed for two sales by the private equity owners before the year was out.

When investors lack flows into their funds, it is especially critical to lead deals that offer positive return. In Europe, buying a new deal often involved investors selling something else in their portfolio – and a series of Deutsche-led transactions (RWE, Linde and Fresenius, in addition to DKSH and Ziggo) provided that alpha.

“We deliver more than league table credentials. We deliver sensibly priced, well structured deals that offer alpha,” said Deutsche’s Sankey. “This year we have re-cemented what we already had in this time-zone, and it is part of a global ECM push which has paid off in spades.”

Achieving the American dream
Growing market share