Americas Liability Management House

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. It takes some nerve to bring a US$14.7bn deal to market in the midst of chaos in the wake of a hurricane, not to mention a day before a crucial presidential election. Yet doing such a large deal amid a financial capital market devastated by a hurricane and in the face of potential post-election volatility paled in comparison to the biggest challenge of all for AbbVie. That was striking the perfect balance between offering enough in price to ensure an oversubscription investors associate with success, without by leaving too much on the table. While that’s the objective of every issuer, pricing truly had to come close to perfection for a deal close to US$15bn. A few basis points too tight and a disastrous unravelling of the book could occur; while a tad too much left on the table could blow out AbbVie’s funding costs. “This was not just ’a big deal’,” said Paul Spivack, head of syndicate at Morgan Stanley, Abbott’s adviser on the spin-off, sole lead on the 10-year and the only firm to have a bookrunner position on all six tranches of the deal. “There’s a material difference in the way you do a US$5bn or even a US$10bn deal and one of this size. With a US$14.7bn transaction you don’t have the luxury of presuming that if you get the three to five of the largest investors on board that the deal should work.” AbbVie understood the reality of the situation, which was to get to multiple oversubscription levels meant accepting investors’ varying valuation methodologies, including buyers beyond those who would put in orders at what it considered fair value. At the core of the deal’s pricing was the 10-year tranche, with spread added or subtracted for the other tranches ranging from three to 30 years. The differing views among so many investors was enormous, ranging from 125bp–170bp on the 10-year, because of the different comparables and pricing methodologies they each used and the kind of cushion they each required for the size. But after seeing more than 75 accounts on a non-deal roadshow, AbbVie gained enough reverse enquiry to set whispered levels at what would secure its minimum size. “Reverse enquiry from the non-deal roadshow gave us an understanding of the methodologies investors were using, the depth of demand and the shape of the curve,” said Spivack. Morgan Stanley settled on a 150bp whispered level on the 10-year and from there it and the other the leads – Barclays, Bank of America Merrill Lynch, JP Morgan, BNP Paribas, Royal Bank of Scotland, Deutsche Bank and Societe Generale – nailed down initial price thoughts of 185bp for the 30 year, 120bp for the five year and 95bp for the three year. At 150bp the whispered level on the 10-year enticed investors with a very generous 35bp–40bp pick-up over Amgen. But by casting the net wide from the outset, AbbVie attracted a whopping US$41bn book and a momentum that enabled leads to ratchet in pricing by as much as 25bp tighter than initial thoughts. Ultimately it priced US$500m of three-year floaters at three-month Libor plus 76bp; US$3.5bn of 1.20% 2015s at Treasuries plus 85bp; a US$4bn 1.75% five year at 110bp; a US$1bn 2.00% six year maturing in 2018 at 140bp – a tranche added during the bookbuilding phase to avoid a maturity spike in the fifth year – US$3.1bn 2.90% 10-year notes at 130bp and a US$2.6bn 4.40% 30 year at 160bp. The tranches all traded tighter by 15bp–20bp across the curve, in line with the average performance of other US$5bn-plus deals, and provided AbbVie with an impressive weighted average cost of just over 2%.

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. It is always a difficult task to differentiate yourself in a market in which you have long held a prominent position. There is only so much more that you can offer and rivals will be forever be snapping at your heels with a view to seizing your crown. BNP Paribas rose to that challenge in 2012, however, carving out a dominant position for itself across the diverse asset classes and structures within the euro sector and offering both buyside and sellside solutions. “Our three watchwords were diligence, vigilance and excellence,” said Martin Egan, global head of primary markets and origination. “And we’ve delivered on all counts.” The bank has long been viewed as being at the forefront of the corporate market and it continued to be a go-to house in a year that saw issuance double as bank lending lines gave way to bond market solutions. A natural fit for French issuers, which again dominated with more than 20% of supply, BNPP still managed to grab around two-thirds of the mandates on offer, a notable achievement no matter what a bank’s provenance. It was energy and power providers such as EDF and GDF Suez that really drove volumes in the sector, the latter pricing a €3bn three-tranche offering in May that took advantage of the low-rate environment and the company’s tight credit spreads to secure ultra-fine pricing but still attract a €7bn order book as investors looked for quality paper in uncertain times. That deal ranked as the largest in euros since Merck’s €3.2bn transaction from March 2010 (also BNP Paribas-led).Automotives coming to the fore German borrowers also played a central role as far as issuance was concerned, at some 17% of overall supply. Here it was the automotive sector that came to the fore with BMW, Daimler and Volkswagen among the most active and BNPP led benchmark deals for all three. In addition to this, though, the year marked the return of rarer credits such as BASF and Deutsche Boerse and the French bank was once again on hand to execute transactions. BNPP also helped Swiss issuers like Roche and Nestle take advantage of investors’ desire for some safe-haven paper in their portfolios while Philip Morris made its first appearance in the currency since March 2009 via a BNPP-led €1.35bn two-part seven and 12-year transaction that secured the lowest coupon rates in these maturities for a corporate issuer. UK companies similarly took advantage of the distribution diversification on offer, with BNPP bringing a variety of deals to market, from the reintroduction of Compass to the hybrid offerings from BG and SSE. On the M&A front, the bank helped AB InBev pre-finance its US$14bn acquisition of Grupo Mondelo with a €2.25bn three-trancher (the first since GDF), while also playing a key role in Glencore’s euro and sterling dual transaction. BNPP was instrumental in organising an update call to apprise investors on the company’s plans regarding Xstrata and Viterra, while also advising on the use of a sub-investment grade step-up as well as a 50bp step were the Xstrata merger not completed prior to the first coupon date. This approach calmed investor nerves and ensured a successful exercise.Peripheral Europe action But it was perhaps peripheral Europe that attracted most headlines and BNPP Paribas was as active in this sphere as any other. “It was nothing if not a crunch time for Europe,” said Christopher Marks, BNPP’s global head of debt capital markets. “It was largely played out through the market and we were able to offer neutral and unbiased advice.” The bank lead-managed deals for Repsol, Iberdrola, Telefonica, Fiat, Telecom Italia, Snam, Eni, Enel and Portugal Telecom, to name b

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Portugal’s largest utility started marketing a five-year transaction in the 6.25% area on Friday, September 14. European non-financial corporate debt issuance had already reached more than US$20.5bn-equivalent that week, so it would have come as no surprise if it met muted investor demand. But the opposite was the case. After less than 45 minutes of bookbuilding, orders had already surpassed the €5bn mark, enabling the leads (Barclays, Banco Espirito Santo, BNP Paribas, Credit Suisse, ING, Millennium BCP, Mizuho and Societe Generale) to tighten guidance to the 6% area, plus or minus an eighth, for a deal tipped to be between €500m and €750m in size. Even when the final spread was set at 5.875%, or mid-swaps plus 478.2bp, for a €750m transaction, the bookbuilding momentum barely slowed, reflecting just how impeccable the execution timing was. When the books finally did shut on the Ba1/BB+/BBB– rated bond, orders had topped €7.5bn courtesy of about 475 accounts. The deal priced in the early afternoon at a cash price of 99.472 and the spread tightened by 2bp immediately on the break, outperforming the market. In the subsequent days, this contraction continued. By late November, the paper was trading at a cash price of 104.5, equating to a spread tightening of more than 80bp. Bookrunners on the trade were ecstatic with the outcome, with one person involved describing it as a highlight of a very busy week and “the cherry on top of a multi-tiered cake”. Syndicate officials away from the deal also praised it and said it had opened up the market for higher-yielding peripheral names – a forecast that proved accurate. Just a week later Portuguese toll road operator Brisa Concessao Rodoviaria, rated Ba2 by Moody’s and BBB by Fitch, priced an April 2018 €300m deal, at the tighter end of price talk at 6.875%. In early October, Portugal Telecom became the second corporate from the debt-stricken country to follow suit. Excluding retail deals sold to domestic investors, EDP’s offering was the first transaction from a Portuguese corporate since January 2011. Although the market had seen a swathe of peripheral corporates away from Portugal over the previous fortnight, this deal also marked the first from a Crossover credit. Market participants agreed that the issuer’s and syndicate groups’ sense of timing was particularly crucial in ensuring the deal’s success. Propelled by the launch of a new monetary stimulus programme from the US Federal Reserve, the iTraxx index was trading almost 10bp tighter on the morning of the deal, while the Crossover had contracted by almost 35bp. Between the start of September and the launch date, both indices had tightened by more than 16%. The issuance also came on the back of a relatively strong set of corporate results. EDP posted a smaller than expected 4% drop in first-half net profits, showing progress in weathering the eurozone crisis. Based on the group’s outstanding paper and comparable bonds from other peripheral issuers of a similar rating, the new paper paid a premium of around 20bp over implied secondaries. “Bearing in mind that the deal was 10 times subscribed, that concession was really very appropriate,” said one syndicate banker away from the deal. He said this transaction had been the one bond this year that he most regretted not being involved in.

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Japan has started to open up to foreign issuers again. Besides Tokyo hosting the annual IMF meeting for the first time in almost 40 years, several landmark transactions got executed in yen in 2012. The first transaction from a Middle Eastern credit and the first Euroyen deal from a Latin American financial institution are just a couple of key Mizuho deals which made headlines in Japan this year. As Japanese investors moved into uncharted territory, Mizuho was one of their foremost guides. In 2012, the bank not only leveraged the prestige that goes with being a primary dealer in Japanese government bonds, but also showed that it could execute unusual and difficult trades. A good part of that ability comes from the bank’s strong research team and its leading position as a trader in the credit markets. That finger on the pulse helped Mizuho identify some of the unfolding trends before they had fully materialised. For instance, early in the year, Mizuho realised that the Japanese market was ready for Middle Eastern credits after the Republic of Turkey generated strong demand for its ¥90bn 10-year deal, which the Japan Bank for International Cooperation guaranteed. Even though Mizuho was not involved in the Turkish transaction, it jumped on the opportunity and worked with Qatar Petroleum (Aa2/AA) to bring the first Middle Eastern credit to fund in yen. To ensure that conservative regional accounts would participate, the company chose to add a JBIC guarantee, even though it is rated above the policy lender, which has Aa3/AA– ratings. JBIC’s guarantee of around 95% meant that the deal was far from a pure Middle Eastern credit, but it provided a shortcut through all the formalities of a yen deal. The wrap was the key component in getting major Japanese investors to accept a debut deal from a relatively unfamiliar issuer. Mizuho was a bookrunner alongside Daiwa, Mitsubishi UFJ Morgan Stanley, Nomura and SMBC Nikko.*Trying circumstances Earlier in the year, Mizuho had already demonstrated its distribution expertise in the most trying of circumstances. Its work on Nordea’s ¥120bn multi-tranche bond was both savvy and sensible. The transaction came at a challenging time, shortly after Eksportfinans had been downgraded, which tarnished the image of Nordic banks among Japanese investors. However, with careful timing, investor education and by leveraging its regional distribution capability, Mizuho pulled it off along with Bank of America Merrill Lynch and Nomura. Far from being only a Samurai house, Mizuho played key roles on some of the year’s most important Euroyen transactions as well. When Brazil’s Banco do Brasil (Baa2/BBB/BBB) returned to the yen market after a 17-year absence, Mizuho joint led the ¥24.7bn three-year Euroyen trade, along with Bank of America Merrill Lynch, BB Securities, JP Morgan and SMBC Nikko. While strictly anything other than a local law-based Samurai transaction is a private placement in Japan, the deal was as close as it gets to a widely marketed offering. In fact, the only Samurais to come out of Brazil are the government and the quasi-sovereign BNDES. There has been not a single Samurai from a Latin American commercial bank. “The importance of this deal is that it has the potential to change the trend in the yen market, in the same way the US FIG issuers in the old days brought the European and the Australian banks to the Samurai market. The same analogy can be applied here with BdB attracting more emerging market names in the future,” said Takao Okubo, head of the global capital markets promotion department at Mizuho. The deal, carrying an attractive 1.8% coupon, was also priced us

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Japanese investors are famously conservative and highly sensitive to downgrades so the fact that Nordea got one the year’s largest Samurai’s done just two weeks after being downgraded speaks to its quality. The deal also showed that the Japanese market was open for the whole sector. Nordea’s ¥120.2bn (US$1.48bn) multi-tranche bond priced in early June at what looked like a bad time for the borrower and an even trickier one for the sector. On May 25, Moody’s had downgraded the bank a notch to Aa3, along with its compatriot Handelsbanken. While the two Nordic banks still had good ratings, the move came six just months after Norway’s partly state-owned Eksportfinans was downgraded several notches to junk status, sparking a fire sale of its bonds. In fact, Nordea was originally looking to tap the market in November 2011 but decided to postpone the deal because of Eksportfinans’s downgrading. By early 2012, however, the bank was again looking at coming to market. The timing made sense because another Nordic bank, DNB, had managed to push a ¥60bn five-year Samurai over the finish line. That deal was not broadly distributed and the issuer achieved only slim savings over its dollar funding costs. However, it served as a green light for Nordea. “Nordea did not rush the deal. They took their time, they listened to the feedback,” before pulling the trigger, said Richard Tarn, executive director of DCM in Europe for Mizuho, which was a lead on the deal alongside Bank of America Merrill Lynch and Nomura. Patience paid off. When Nordea finally did its debut Samurai, the result was an astounding ¥120.2bn transaction. Only Rabobank’s ¥160bn deal later in the year topped it for size but Rabobank is a frequent borrower in Japan, well-known and prized. Nordea also managed to print all the tranches it offered. Samurai bankers often float as many as five or six tranches but end up actually selling only a couple. “This was a rare instance in which we got all tranches done just because demand was so strong,” Tarn said. The Samurai came out split into a ¥15.9bn 0.96% three-year tranche at yen offer-side swaps plus 55bp (85bp over JGBs); a ¥8.5bn four-year floater at 70bp over three-month Libor; a ¥85.3bn 1.2% five-year note at plus 72bp (96.5bp over); a ¥4.9bn five-year FRN paying 87bp over; and a ¥5.6bn 1.75% 10-year tranche printed at plus 82bp (86bp over). The deal was seen pricing around where a new euro benchmark offering would have come, said bankers, when assuming a 10bp–20bp new issue premium in the uncertain environment at the time. A large core investor is said to have taken a big chunk of the deal, followed by other large city banks and regional financials. Life insurers, casualty insurers and pension funds participated too. More than 100 investors placed orders. Nordea was understandably thrilled with the result and the profile it gave the bank as an issuer. “The success of the Samurai offering has been instrumental in raising Nordea’s profile in the Japanese market,” said Fanny Borgstroem, head of group funding at Nordea. “At the time of execution, volatility in the European and US credit markets was high, investor concerns vis-a-vis European banking credits were certainly not to be ignored, and to achieve this result in that kind of environment is a true testimony of the global appeal of the Nordea credit story and brand.”

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. It proved to be a groundbreaking year for the Islamic bond market. Not only did primary issuance volumes hit a record high, but more significantly the market at last moved beyond the US$500m five-year transaction from a financial institution that had become the stereotype in the international arena. Sure, there had been some groundbreaking transactions in the past, such as when Saxony-Anhalt or GE Capital issued sukuk or when the likes of Indonesia printed blockbuster deals, but 2012 was the year the asset class came of age. Tenors were pushed out, a more diverse issuer base sought sukuk funding, and pricing dynamics for much of the year was more favourable than in the conventional market. There were plenty of notable deals, including those by Saudi Electricity, Banque Saudi Fransi, General Authority of Civil Aviation, Jafza, Qatar and Turkey and Development Bank of Kazakhstan, as well as some interesting domestic issuance in Malaysia. But one deal stood out, one that more than any other illustrates just how fast the sukuk market is evolving – Abu Dhabi Islamic Bank’s US$1bn hybrid Tier 1 non-call perpetual sukuk note, which was printed in early November. Bank capital has been a big theme in the emerging markets over the past year and new structures had already been evident in Brazil and Russia. But in a conservative market such as sukuk, this transaction was akin to Felix Baumgartner’s jump from space. It was the first Sharia-compliant Tier 1 instrument. It was also the first publicly targeted Tier 1 out of the MENA region ahead of the expected Basel III implementation in the UAE. To be precise, the deal is Basel II compliant with future Basel III eligibility when the UAE introduces the latest rules. Despite the terminology, the structure was deliberately designed to be kept as simple as possible. The instrument was compared with preferred shares hybrid Tier 1 deals done by US banks. As preferred shares are accounted for as equity rather than as liabilities, they do not have to include loss-absorption provisions at the point of non-viability. Basel III only requires this type of loss absorption feature (either conversion into equity or principal write-down) if the instruments are accounted for as liabilities, which is the case in Europe. It was this simplicity that allowed investors to concentrate on the credit’s strengths and the pricing. And while the traditional sukuk investor largely kept away from the deal as they have limited scope to buy other banks’ capital instruments, the transaction still generated a US$15bn order book from 330 orders. Demand was largely driven by Asian private banks, though asset managers, especially European funds but also offshore US accounts, were keen to get a good allocation – testimony to the deal’s broad appeal. Some bankers away from the deal were a little critical about the execution process as pricing was aggressively tightened from the 7% area to a final level of 6.375%. But given the uniqueness of the transaction, there was always going to be an element of price discovery about the process. Part of the challenge for the leads was the wide range of investor views during the roadshow, with one account arguing that the notes should come at low to mid-5% at one extreme, while others sought 8% at the wide end. The structure was also perfectly attuned with Sharia principles, given that the flexibility to cancel coupons and the perpetual maturity provided equity-like features to the instrument. The bonds, which priced at par, were trading at 103.25 a week later, suggesting healthy demand in the aftermarket as investors still sought the opportunity to buy a Gulf secu

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. BNP Paribas has been involved in the execution of more than 140 investment-grade bonds across the EMEA region, including trades from 15 jurisdictions and more than 80 issuers. Of those, 15 were inaugural offerings and over a dozen consisted of more than one tranche, enabling the bank to secure its place at the crest of the supply wave. The lender embraced major changes in market dynamics, which saw corporates swinging to bonds from loans, as capital regulations tightened their grip on the markets. It tailored its approach to winning mandates accordingly, collaborating efficiently with fellow bookrunners and co-leads. At the same time, the bank was able to reap the benefits of corporate institutions making up a relatively stable asset class, especially compared with their financial and sovereign counterparts. “The interconnectivity of banks and sovereigns created a negative circle,” said Anthony Bryson, BNPP’s European head of corporate debt capital markets. “In contrast, by the time sovereign solvency issues came to the fore, corporates had reacted to the 2008 crisis and improved their balance sheets and stability.”Currency challenge In euros, highlights included a dual-tranche 2018 €1.25bn and 2022 £300m bond for commodity trade Glencore, executed in March, that included step-up clauses relating to the developing Xstrata merger. In May, BNPP ushered Philip Morris into the market, with its first euro transaction in over two years, before guiding Eni spin-off Snam into the market in July, with the inaugural tranche of what ended up being a €6bn financing operation. Stellar trades for AB InBev, GDF Suez, Sanofi and Carlsberg Breweries also confirmed the bank’s status as bookrunner of choice across geographies, sectors and ratings classes. Trades for British American Tobacco and the Irish Electricity Supply Board at the end of the awards period provided the icing on the cake. As well as being the most active non-domestic underwriter for Swiss franc deals, BNP Paribas also reared its head in the fast-developing renminbi market, pricing a Rmb1bn 3.8% November 2015 bond for Swedish truckmaker Volvo. The offering was not only the first of its kind for Volvo, but the first corporate Dim Sum transaction ever to come out of the Nordic region. BNPP consistently built on its sterling franchise throughout the period too. Aside from the aforementioned Glencore sterling tranche, the bank was instrumental in opening the market at the beginning of the year, with an unusually large (£750m) 20-year bond for Dong Energy. In September, it accompanied engineering conglomerate Siemens into the market with a 13-year and 30-year sterling offering that both outperformed two euro tranches, priced simultaneously. In the Swiss market, BNP’s transaction highlights included a SFr250m 3% 2017 offering for Spanish utility Iberdrola, a SFr450m 1.5% 2018 offering for Israel-headquartered Teva Pharmaceuticals, and a dual tranche SFr275m eight-year and SFr175m 12-year print for GDF Suez. “With this deal we helped GDF take advantage of a significant arbitrage opportunity,” said Rupert Lewis, the firm’s head of corporate syndicate.Beyond vanilla While repeatedly demonstrating their commitment to pricing plain vanilla bonds for corporates at the most attractive levels, BNPP also had a dominant presence in the re-emerging – and higher risk – hybrid bond market. Together with two other banks, BNPP was an active bookrunner on German utility RWE’s 7% 60-year US$500m Reg S hybrid, described by many as key in opening the market. The lender also shone as a structuring adviser on BG Energy’s hybrid capital programme, expertly timing the execution

To see the full digital edition of the IFR Review of the Year, please <a onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;" href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580">click here</a>. In a move to strengthen its capital structure, cement its credit rating and diversify its funding sources in the light of significant capex projects in Brazil and Australia, BG Group in mid-June priced a €500m, £600m and US$500m hybrid corporate bond. BG’s capital expenditure is expected to amount to US$11.5bn and US$12.5bn respectively in 2012 and 2013. The company and its structuring advisers, BNP Paribas and RBS, as well as leads, Barclays and Deutsche Bank, on June 18 started marketing a dual-tranche sterling and euro offering, following a four-day roadshow across Europe and Asia, and across three different time zones. Later in the day, both parts – maturing in 2072 – priced to offer a 6.5% coupon on the back of almost twice subscribed order books. Both trades tightened comfortably on the break, but rather than resting on its laurels, less than 48 hours later the company opened books on a Reg S US dollar tranche with the same maturity. That issue garnered an order book of US$4.5bn, allowing leads to fix the coupon in line with the other two tranches at just 6.5%, well inside of initial guidance in the 6.75%–7% area. BG Group’s head of funding and investments at the time, Charles Stewart, called the deal a “goldilocks transaction” and the three major ratings agencies also presented the offering with their seals of approval. Moody’s, for instance, noted that the company’s liquidity profile would benefit from the new notes. Observers highlighted that the spread had been favourable on these transactions relative to a range of senior bonds priced around that time. Fiat, for example, priced a €600m four-year deal just weeks later with a coupon of 7.78%. In the week prior to the BG deal, Telecom Italia, rated just one notch lower than BG by Moody’s and in line with BG from S&P and Fitch, priced a €750m December 2018 bond with a coupon of 6.125% – just 0.375% tighter than BG. Leads said that they had achieved their key objectives of securing 50% equity credit from each of the three major ratings agencies by balancing the requirements of each agency’s hybrid criteria. Investors likened the deal – then the first hybrid in the corporate space in almost three months – to previous similarly structured transactions, especially from German utility RWE. They maintained, however, that BG Group’s currency scope and timing had given it the edge over comparable deals priced in the awards period. Several market players correctly predicted when the deal arrived that BG’s ambitious hybrid operation would inspire other issuers to mimic the energy group. In September, SSE priced a €750m and a US$700m perpetual non-call five-year bond at 5.625%, also citing capex and ratings protection as the rationales. In the same month, crossover credit ArcelorMittal issued a US$650m 2072 non-call 5.5-year bond at 8.75%. BG’s notes also stand out from comparables, thanks to their secondary performance. All three tranches were trading at a cash price of between 107.5 and 110.25 at the time of writing, outperforming RWE’s, ArcelorMittal’s and SSE’s hybrid notes. Those were all trading of cash prices of between 102.25 and 108. Several syndicate officials concluded that BG’s transactions had helped hybrids become an integral piece of the capital markets furniture. “Now that investors understand the structure of these issues, it enables them to spend less time evaluating the terms and more time focusing on the rationale for the issue and the issuer’s underlying credit,” said Richard Tynan, head of CEEMEA syndicate at RBS.

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Bank of America Merrill Lynch has led the way in the US FIG market, quickly identifying the latest trends, including the willingness of US investors to go down the capital structure to buy subordinated, hybrid and non-common Tier 1 securities in the quest for yield. Part of the trend has been the resurgence in the US institutional and retail markets of perpetual preferred securities, a market that was decimated by the financial crisis. Perpetual preferred stock issuance soared to US$34.6bn in 2012 to the end of November, from US$10.5bn in the full-year 2011 – largely because banks replaced old Trust Preferred Securities with new non-cumulative perpetual preferred Tier 1 deals. Something like US$80bn of TruPS on banks’ balance sheets is likely to be replaced over the coming years by non-cumulative preferreds in Tier 1 capital. BofA Merrill’s efforts in 2011 to kick-start the pref underwriting business gave it a first-mover advantage. It was mandated twice as often as its nearest competitors in 2012, with 112 deals underwritten for a 17.7% market share by mid-November, compared with 43 deals for a 15% share from Morgan Stanley and Wells Fargo Securities’ 55 mandates for 13.4% share. JP Morgan, BofA Merrill’s biggest competitor in all other areas of the fixed-income markets, had an 8.2% share of perpetual preferred issuance. Wells Fargo chose BofA Merrill as bookrunner to lead its US$750m perp non-call five year 5.2% Tier 1 preferred in August, which broke the record for lowest dividend, as well as its November 13 US$600m perp that broke its old record with a dividend of 5.125%. BofA Merrill was also a joint bookrunner on Prudential Financial’s US$1bn 10-year non-call 30 hybrid, the first such structure since the firm plummeted from grace in the 2008 crisis. The bank also helped to reopen the market for European issuers in 2012, serving as a joint bookrunner on Rabobank’s US$2.5bn 3.375% five-year in January as well as BBVA’s US$2bn three-year Yankee in October, which reintroduced eurozone peripheral banks to the US dollar market. BofA Merrill led innovation in the US dollar covered bond market, where it is a dominant player. It was joint bookrunner with Barclays, Deutsche Bank and Morgan Stanley on the first ever seven-year covered bond in US dollars – the US$1.5bn 1.875% 2019s by Sweden’s Stadshypotek, the covered bond issuing entity of Svenska Handelsbanken. “This is the next step in the development of the covered bond market in the US,” said Dan Mead, head of FIG syndicate. “Hopefully more issuers will look to do longer maturities in dollars, which historically have only been available in the euro market.”Shining in Europe The past year presented another challenging market backdrop for FIG houses across Europe. The regulatory landscape continued to change under the feet of banks that were desperately seeking attractive market windows to prepare for the one change they knew for certain was coming – the necessity of holding more capital. BofA Merrill helped lead that charge. Although the firm is often considered to be a US-focused FIG house, the team in Europe have competed with peers and solidified an important position in the market. As a steady flow of capital insurance and reinsurance business carried through the year, BofA Merrill made sure it was best placed to help issuers Swiss Re and Zurich sell European hybrid transactions in the euro and sterling markets. Zurich relied on BofA Merrill to guide it as it sold an unsecured deal in June, representing the issuer’s first unsecured offering since 2009. The 10-year €500m transaction was a blowout, ending up with an order book that was eight times

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Buying European senior unsecured debt seemed a big enough gamble for US investors for much of 2012, so it was a significant leap of faith when UBS asked them to buy a deal in which they risked losing all principal if the bank’s Tier 1 common equity capital breaches a 5% threshold. No one had tested US appetite for such an aggressive structure, and few thought it possible. “This deal is toxic,” said one DCM head away from the trade before pricing. “Permanent write-downs are just a very difficult structure to do. Convertible into equity, yes. But write-downs? No.” Yet UBS’s subordinated Tier 2 write-down transaction not only attracted US$9bn of orders from more than 450 investors, but has since soared in price, enabling Barclays to follow up in November with an even more aggressively structured transaction in which the notes will be automatically written down to zero if Barclays’ Common Equity Tier 1 ratio falls below 7% (post-CRD4). “The UBS deal traded better than anyone thought it would,” said one banker when explaining why the Barclays trade was able to attract a US$17bn book. “It [the UBS deal] has gone up to US$110, which has prompted the market to take a good hard look at the product.” At the time of pricing, there was no reason to think that US investors would ever consider buying a bond that posed the risk of writing down principal, let alone one from a European bank. But when they saw the 8% whispered level on the UBS deal, investors responded with a resounding yes. Orders grew to about US$6bn on the day it was announced in New York, and attracted another US$3bn overnight. With a US$9bn global book, managers UBS (global co-ordinator), Bank of America Merrill Lynch, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, Royal Bank of Scotland and Wells Fargo Securities, were able to tighten pricing in to 7.625%. It was a yield that no one could dream of getting from capital securities issued by US banks and insurers. That point was driven home a week before the UBS deal when Wells Fargo issued a retail-targeted US$675m perpetual non-call five-year Tier 1 preferred at 5.2%, at the time a record low for the structure. Investors were even being offered Tier 1 capital securities by US financials more than 100bp inside of what UBS was offering. In late July, for instance, GECC set a low coupon record for pure institutional Tier 1 at 6.25%. The deal proved that European banks need not rely only on private Asian accounts to buy their US dollar-denominated Tier 2 CoCos, which some had done through Reg S. The offering ended up being allocated primarily to US accounts, who bought 58% and Europeans, who bought 34%. The remainder went to Asia. The book had a good mix of investor type, with 49% going to fund managers, 23% to private wealth investors, 10% to hedge funds, 6% to banks, 4% to insurance companies, 2% to corporates and another 6% to other buyers. With both the UBS and Barclays CoCos in the market, the hope is that a foundation has been laid for the product in the US, at least for Yankee issuers. Swiss banks have to issue CoCos because under the so-called Swiss finish – the country’s large banks must have a 19% total capital ratio by 2019, divided into 10% of Common Equity Tier 1 capital, 3% of high-trigger contingent capital and 6% of low-trigger contingent capital. Barclays’ US$3bn 7.625% 10-year CoCo gives bankers hope that others will follow suit once the structure is given formal global regulatory endorsement.

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Liability management has become an increasingly crucial part of the capital markets toolbox. Virtually every bank claims to have a creditable LM operation, and the growth of the sector has been such that there has been sufficient business for many of them to get a slice of the pie. But it takes more than just a decent bond franchise to get to the top of the pile in LM, and Deutsche has been honing these skills for more than a decade, boasting a team dedicated to the product that is able to react to any situation and come up with innovative and practicable solutions. “What is of the greatest importance is that you have people working together to get to the desired end,” said Duane Hebert, Deutsche’s head of LM for EMEA and Asia. And this does not just revolve around the technicians in the field. It also involves crucial input from the sales and trading desks and requires a thorough understanding of market dynamics. “You need to be able to advise strategically and then execute,” said Vinod Vasan, head of European FIG DCM. “You have to be innovative across all asset classes. In FIG, that means covered, ABS, senior and capital.” Deutsche’s understanding of the hybrid sector was underlined by its involvement in Lloyds’ £4.9bn-equivalent Tier 2 exchange in December 2011 across numerous currencies, which received a creditable 61% take-up as the issuer looked to switch investors into new LT2 notes with on-market coupons. It also demonstrated its versatility by following this up with two senior deals for the UK bank – for £13.8bn in June and £22bn in September – again across diverse jurisdictions. The former marked the first major repurchase of senior unsecured notes by a financial institution and was at the time the year’s largest non-sovereign LM transaction. The exercises saw a total of £8.6bn repurchased, taking advantage of Lloyds’ excess available liquidity, and their success led to other UK names such as RBS and Barclays following suit. Other noteworthy deals executed included Santander’s €7.5bn tender across 21 capital notes in August (capped at €2bn), many of which had been targeted in previous exercises. The use of an unmodified Dutch auction procedure was a novel approach and one that lent itself to the illiquid nature of the underlying bonds and led to a take-up of €1.2bn, or 60% of the targeted amount, creating €193m of Core Tier 1 capital for Santander. Again in the periphery, but this time in the ABS sector, Deutsche followed up its tender on behalf of Banco BPI (the first of its kind) with a €17bn exercise across 17 series for Bankia, which paved the way for a number of its compatriots to venture down the same route. But LM in 2012 was not all about FIG. By way of example – and a sizeable one at that – Deutsche was one of the banks nominated to be a closing agent for the €206bn debt restructuring for the Hellenic Republic that took place over a number of steps between February and April 2012. And while Europe lagged behind the US in terms of corporate LM exercises, Deutsche played its part in both the investment-grade and high-yield markets, working on deals for Deutsche Boerse, Elisa, International Power, Atlas Copco, TMD Friction, Atrium, Lecta, Delhaize and Atlantia, among others. Finnish paper and packaging outfit Stora Enso’s February tender on a series of 2014 notes and subsequent refinancing with 2019 paper was the first exercise out of the Nordic region and led to a number of follow-on deals, while the tender offer for Deutsche Boerse was the year’s only corporate hybrid LM exercise. “We pride ourselves on doing the landmark deals,” said Hebert. “It’s not just about volume.”