Issuer of the Year/FIG Issuer of the Year

IFR Review of the Year 2012
8 min read
Shankar Ramakrishnan

Tapping markets the smart way: Wells Fargo taught its FIG peers a lesson or two in fundraising in 2012 as it flawlessly executed a series of transactions in multiple markets and currencies that earned the US financial firm all-round praise and respect. For an outstanding fundraising effort through 2012, Wells Fargo is IFR’s FIG Issuer and Issuer of the Year.

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Wells Fargo, the fourth-biggest US bank by assets and largest by market capitalisation, approaches the task of meeting its funding requirements with sound logic. It borrows little when funding costs are high but pounces when they are low, taking advantage of any opportunity to reduce debt stress on its balance sheet.

This strategy, simple as it sounds, is what all banks strive to achieve and Wells Fargo showed it can be done with a disciplined funding strategy in 2011 and 2012.

“The way the business is structured, we can afford to be opportunistic with our funding programme because we are not entirely reliant on capital markets,” said Paul R Ackerman, executive vice president and Treasurer at Wells Fargo. “Our businesses are sitting on cash as commercial loan demand is still low so we are not as reliant on capital markets as some of our peers.”

Ackerman said that deposits comprised about 70% of the bank’s overall funding while 10% comes from equity and 20% is sourced out of debt capital markets.

“These funding needs are modest compared to other institutions,” he said. “Funding does not drive the business so that means we can choose when to enter the markets.”

In 2011, for example, in a climate of uncertainty with spreads widening and funding costs rising, Wells Fargo raised a modest US$8.6bn from capital markets and focused heavily on liability management, redeeming about US$9bn in trust preferred securities.

The bank reversed that approach in 2012, going all out with issuance totalling about US$26bn and liability management activity limited to about US$6bn.

The environment was ideal. The Federal Reserve’s quantitative easing programme ensured issuer-friendly conditions in the US bond markets and though some FIG issuers were treated with caution, investors were more than welcoming of a stable bank with a solid credit profile like Wells Fargo.

“We used the low spread environment to adapt to changing regulatory conditions through qualifying capital transactions, and incremental LCR bank liquidity,” said head of global funding Barbara S Brett, referring to Basel III’s liquidity coverage ratio rules.

“We also optimised our balance sheet by tendering for multiple securities and calling several trust preferred securities. All this was done while achieving diversification on our funding mix through issuance of different products in various markets and currencies.”

Touring the world

Wells Fargo certainly spread its wings this year. It raised funds by issuing in Canadian dollars, euros, sterling, yen, Australian and US dollars – one of very few FIG issuers in the world to have done so.

It continued to raise funds through structured product transactions, extendible bank notes and private placements to achieve diversity across product type. Private placements and structured product issuance totalled US$8.7bn in 2012, all of which were bespoke transactions built to investor requirements.

This diversified funding mix and a solid international marketing effort brought Wells Fargo a whole new investor base, something that will hold it in good stead when it next needs the market’s support.

The bank issued a number of benchmark transactions that averaged 173 investors per deal.

On average, order books were a sensible 2.2 times oversubscribed which meant they were not unnecessarily inflated. The deals performed well in secondary markets in both risk-on and risk-off markets – to the delight of investors.

Wells Fargo used the conditions to establish a balanced issuance of US dollar benchmarks across tenors. At the same time, it deliberately did not reopen benchmark offerings to ensure it continued to support secondary performance.

The bank tapped the preferred market when retail investors were starved of paper given massive trust preferred redemptions. The bank issued US$750m of perpetual preferred stock on August 9 and followed that with a similarly structured US$650m upsized transaction on November 13.

The August transaction was a US$25 par deal with guidance at just 5.2%, an impressive 42bp tighter than a similar deal by top regional lender BB&T just two weeks earlier. This August deal set the record for the lowest bank preferred coupon, creating a new wave of interest towards preferred issuance.

On November 13, it reset the all-time low coupon record by pricing US$650m of US$25 par perpetual non-call five-year at 5.125%.

Back in sterling

In September, Wells Fargo became the first FIG issuer to access the coveted “longer than 10-year” sterling bond buying base. It priced a £500m (US$800.7m) 17-year issue that drew an order book of around £2bn and tightened 4bp in the secondary market from its day earlier Gilts plus 150bp reoffer level. Timing and execution was close to perfect considering it was the bank’s first deal in sterling since 2007.

The deal was marketed at initial guidance of Gilts plus 155bp–160bp but the majority of accounts remained in the book despite tightened talk, in large part due to the 3.5% coupon.

Wells Fargo had a month earlier made its first venture into the euro bond market since 2008, pricing a 10-year deal through the critical mid-swaps plus 100bp threshold.

The bank’s €1.5bn 10-year senior unsecured trade drew a book of €5.5bn from 300 investors, confirming the huge appetite of investors for strong names. The bonds priced with a spread of 85bp over mid-swaps and when free to trade were quoted at 74bp–71bp.

Up north

The bank, through Wells Fargo Canada, raised C$3bn from two transactions that made it the largest Canadian dollar issuer in 2012. Its first C$1.5bn deal in February was the second-largest single tranche offering ever. Bonds were allocated across 71 accounts, including 34 buyers that had participated in the bank’s March 2011 offering and 11 new buyers. The bonds paid a coupon of 2.774% which represented the lowest five-year coupon for Wells Fargo Canada.

In July, it raised a similar amount but with a seven-year. The July deal had 83 unique buyers and represented the second-largest seven-year buyer count and fourth largest of all time in Canada. The bonds paid a coupon of 2.944% which was the lowest coupon for a seven-year in Canada.

In the US where most of Wells Fargo’s capital market transactions were concentrated, the bank issued US$1.5bn of five-year notes in December 2011 with a coupon of 2.625% that attracted an order book of US$2.5bn and priced about 75bp through estimated new issue levels of its closest peers.

The bank followed this with a US$2bn three-year in February; a US$2.5bn 10-year in March; and a US$2.75bn three-year in June. All had impressive order books.

“We showed a disciplined approach in benchmark domestic markets by balancing maturities and issuing into strong investor demand,” said Ackerman. “Our liability management strategies also took advantage of dislocated markets and we raised capital and increased bank liquidity with structures that incorporate the changing regulatory requirements.”

Tapping markets the smart way