Sterling Bond

To see the full digital edition of the IFR Review of the Year, please click here.Citigroup created a niche for itself by consistently coming up with solutions that led to a number of companies awarding it mandates solely for its expertise rather than just its balance sheet. It was the bookrunner on most of the landmark trades of the year and on innovative consent solicitations to strip out replacement capital covenants embedded in old hybrids.Consent solicitation trades were Citigroup’s liability management specialty. In one week in April it was bookrunner on two of the most high profile such trades of the year, for The Hartford and Prudential.The Hartford deal, led by Citigroup and Goldman Sachs, involved a simultaneous consent solicitation for a replacement capital covenant, senior unsecured issuance and the redemption of an old hybrid Hartford sold to Allianz in 2008 when it needed emergency crisis funding.In the same week Citigroup led Prudential’s consent solicitation to strip unwanted RCCs attached to 6.625% 2037s, which were originally executed in connection with old junior subordinated notes due 2068. Citigroup was able to get a 95% participation rate from bondholders, at a price of just one point, freeing Pru up to repurchase the junior subordinated notes.In August, Citigroup was bookrunner on a creative waterfall tender structure for Altria, which took advantage of investors’ willingness to give up Altria bonds trading at very high dollar prices – albeit with coupons of as high as 10.2% in return for bonds sold close to par. The tender involved US$8.3bn of old bonds with coupons ranging between 9.25% and 10.2% and maturities between 2019 and 2039.“There was an acceptance priority assigned to each bond, such that if the aggregate amount of securities tendered exceeded a tender cap, the first priority securities would be accepted ahead of the second priority securities,” said Peter Aherne, Citigroup’s head of North American capital markets, syndicate and new products.The entire exercise reduced a US$5.3bn maturity tower Altria had by US$2bn, increased the average life of its debt portfolio by more than two years and reduced its average coupon.Citigroup was involved in AIG’s restructuring on a number of different levels in the investment grade loan and bond markets.The bank also strengthened its relationship with key clients in the high-yield markets by effectively managing their balance sheets.One major client was Energy Future Holdings, which is considered to have one of the most complicated capital structures in the leveraged markets. Citigroup has led a number of transactions for the energy giant following its US$45bn LBO in 2007, which was the largest buyout in history.The high-yield team priced a US$850m two-part first and second-lien senior secured offering for Energy Future Intermediate Holdings, with proceeds being used to pay a dividend to Energy Future Holdings, which then used the proceeds to pay the outstanding balance of inter-company demand notes.“These transactions really impressed me. They were very clever and subtle tweakings of Energy Future’s capital structure to successfully raise money,” said one investor. “They raised new money and quietly subordinated existing bonds and forced existing major bondholders to participate.”Also during the year, the leveraged finance team led three of the top four DIP financings, which included Kodak, Patriot Coal and Houghton Mifflin Harcourt.“Those companies that wind up defaulting tend to be the most troubled financings,” said Tom Cole, co-head of leveraged finance at Citigroup. “It is confidence in our own ability to structure and distribute that leads us to be able to commit to these difficult situations.”

To see the full digital edition of the IFR Review of the Year, please click here.Ally Financial sought bankruptcy protection for its sub-prime mortgage unit Residential Capital on May 14 after months of carefully choreographed negotiations. Among the most important steps was locking up financing that would keep ResCap from triggering defaults on its mortgage servicing contracts – defaults which would have allowed trustees to snatch lucrative servicing pacts, setting off an all-out war among creditors.Barclays stepped in to underwrite a US$1.45bn debtor-in-possession facility for ResCap, but the deal wasn’t so simple. Indeed, the UK bank had to navigate a labyrinth of potential conflicts and pitfalls in order to make the DIP work.ResCap’s collapse meant it was cut off from the capital markets and faced a mountain of debt and a larger mountain of mortgages being put back to it from Ginnie Mae and private investors on representation and warranty claims. At the same time, the company’s cost of operations was ballooning as mortgage defaults rose. The biggest drain on liquidity was meeting obligations to make advances to cover certain shortfalls to investors in mortgage pools.As Barclays stepped in those advances became the key to a new financing package. The bank was already sole lender on an existing US$468m facility and comfortable lending against the assets, which are repaid on a priority basis, making loans against the stream – up to a percentage – relatively safe.ResCap chief financial officer Jim Whitlinger said the company met with multiple advisers and the financing approach proposed by Barclays was the most beneficial to the estate by far. “It was the most creative and the least cumbersome solution,” Whitlinger said.The resulting DIP – a US$200m revolver, a US$1.06bn A1 Tranche and a US$200m A2 Tranche – was a hybrid that combined a leveraged loan using securitisation technology on an asset class that is barely understood, for a company that is facing intense regulatory scrutiny around its mortgage business. Both tranches flexed tighter. “We were able to get comfortable with the cost of financing – other banks we looked to bring in were not,” said Mark Shapiro, Barclays’ head of global restructuring and finance.Barclays was able to get ResCap a liquidity lifeline at funding cost of roughly 6% – 300bp better than other deals the company looked at.“These are somewhat esoteric assets,” Shapiro said. “This was not your traditional inventory receivables ABL-type lending.” To complete the loan, Barclays would draw on the resources of its leveraged finance team, its syndicate desk, its securitised product group and the FIG team.In addition to the private label servicing advance rights, the DIP is backed by a portfolio of whole loans.Barclays decided to structure the loan as a leveraged loan and not a securitisation one because of where the natural buyer is for this type of product. It was able to bring in both leveraged loan investors that were getting access to investment-grade collateral, which they do not normally have, and some high-grade investors that typically never buy DIP paper but crossed over for this deal – more than 100 in all.Barclays’ previous position was taken out with the new DIP, as was a US$250m repo facility. The collateral freed up from repaying the facilities became part of a US$1.67bn first-lien collateral package. The DIP, which sat along five secured DIP-like facilities in ResCap’s capital structure, would take a second lien on another US$1.47bn in collateral, bringing the total collateral package to US$3.14bn. With the DIP, including the US$200m revolver, ResCap had access to more than US$1.1bn.The highly structured DIP has 40 different events of default. Part of the package of protection Barclays offered investors in the DIP was to guarantee that a sales process would take place and a buyer would be in place before the first draw.That made it effectively a bridge loan that gave ResCap breathing room to

To see the full digital edition of the IFR Review of the Year, please click here.When Volkswagen launched its €2.5bn mandatory convertible bond issue after market close on November 5, there had not been a similar deal in Europe for three years. Even then, Adecco raised just SFr900m (US$962m today), although the transaction also broke a 15-month drought.Such deals fell out of favour because a large chunk of their audience is hedge funds, whose strategy is to immediately place the delta when faced with a mandatory. That means that, suddenly, there is not one deal but two – the leads have to corral interest in the equity, typically totalling 75% or more of the bond issue, and this inevitably puts pressure on the share price.Yet, as the US market for similarly structured mandatories is dramatically different with an outright buyer base and no need for a delta placement, the combination of advice from banks and adviser Rothschild was deceptively simple: launch a 144a transaction into the US to soak up the outright demand.The logic was clear, but the unknown was whether US investors would buy. VW is a global name with production sites in every region of the globe, but the company has no US listing.US demand was crucial as the more hedge fund involvement, the larger the delta placement and the lower the chance of success. To complicate matters further, a VW equity offering was bound to be tough, with the stock up nearly 44% year to-date and some equity investors beginning to fret that the industry faced more headwinds in the near future. The planned use of proceeds was also vague.“If hedge funds know that the other holders aren’t just five like-minded funds but a long list of outrights then it changes their behaviour,” said Frank Heitmann, European head of equity-linked at Credit Suisse. “In the US, mandatories sold to outrights price about a coupon point tighter than Europe. VW priced somewhere between the two and then traded tighter.”The banks talked a good game so VW and Rothschild made them deliver with bookrunner roles awarded to Bank of America Merrill Lynch, Credit Suisse and Deutsche Bank following an auction based on the coupon and minimum pricing for the delta placing. Six banks had pitched ideas to VW and each was also asked for their placement strategy on the bonds and the delta.It was the adviser that pushed for the Monday night launch, fearing markets could trade off following the US presidential election the next day. It was a judicious move – and one banks holding risk were unlikely to make unprompted – as markets did just that as the fiscal cliff moved into focus.The plan worked with a bond book of just over 150 accounts and the deal increased to €2.5bn from a €2bn base. Pricing came at the best terms for investors with a coupon of 5.5%, but considering the auction this was not over-generous.Half of the demand came from the US, plus US$500m from VW shareholder Qatar Holding. Just 13.3% of the bonds were allocated to funds wanting to hedge the full delta, taking the equity placement to €618m – a hedge of 24.7% compared to the theoretical delta of 75%.But a funky product and strong demand is nothing if the accounting treatment isn’t right. Auditors are not familiar with the structure and Bayer, which was previously the benchmark transaction in Europe, found its mandatory treated as debt by its auditors.Bankers worked with VW’s auditors from the start and ensured €2.18bn of the proceeds was recognised as equity. It is the treatment of benchmark transactions that tend to determine subsequent auditor behaviour, so the deal not only has redefined the distribution and pricing of mandatories, but as importantly, whether it is worth companies issuing them.

To see the full digital edition of the IFR Review of the Year, please click here.Japanese telecoms operator KDDI’s jumbo ¥200bn (US$2.6bn) four-year zero-coupon convertible bond was a rarity in Asia-Pacific equity-linked. Given the four-month lull in Japanese issuance any deal was remarkable, especially one that (until Sony’s ¥150bn CB in November) was more than twice the size of any other Asia-Pacific trade in the awards period.Even more amazingly, one rival not involved described the execution as “unbelievably perfect” despite the anguish of missing out on the largest sole bookrun Japanese CB in five years.“The deal was done in very difficult conditions when very few people expected a convertible bond issuance by KDDI,” said Yoshifumi Otsuka, managing director of ECM at sole bookrunner Daiwa Capital Markets. “Market participants were surprised but the offering was absorbed smoothly and paved the way for other issuers in Asia to come to the CB market afterwards.”The lack of other new issues and reasonable pricing ensured Daiwa found strong demand and ended with a book close to twice covered, two-thirds of which came from investors in Europe.“Market conditions in late November 2011, when the deal was launched were far from ideal,” said Takao Asaka, director of ECM at Daiwa. “All stock indices in Japan, the US and Europe had been sluggish because of the US credit downgrade and the flooding in Thailand. In particular, the Nikkei index hit a low for the year just before the KDDI deal was launched and investor sentiment in the credit market was weak because of the European situation.”Timing was essential, however, as the Euroyen deal was to finance the purchase of Tokyo Electric Power Co’s ¥186bn 8% stake in KDDI. The electricity utility was reeling from the liabilities resulting from the multiple meltdowns at the Fukushima Dai-ichi nuclear power station that followed the March 11 earthquake and tsunami and needed to monetise assets rapidly.With the threat of a block sale of such a large portion of its shares, “KDDI had to find the best possible way to minimise the impact on its existing shareholders and the markets and that is why KDDI chose to issue a CB to finance the share buyback”, said Asaka.News of the deal surprised the market. With ¥137bn of cash on its balance sheet at the end of March 2011, KDDI could have financed a share buyback without a major new fundraising.The funds raised were used to buy Tepco’s 357,541 shares, which at the time were worth about ¥186bn. Additional proceeds took the total buyback to 424,126 shares.The deal was launched off the ¥521,000 close on November 28 2011, with guidance of 5%–15% for the premium. Bonds were offered at 103 against a 100.5 issue price. The modest premium range reflected the high proceeds target, where the base deal was ¥190bn. Pricing came at 10% to give an initial conversion price of ¥573,100.At final pricing Daiwa gave an implied volatility of 19.27 and bond floor of 95.89.Outrights saw a low premium in a large company – a rare investment-grade issuer in Japan – with a growth story. Hedge funds saw a sensible price and the ready availability of cheap asset swap to hedge the credit. Around 20% of the deal was allocated to Asian accounts, 61% to Europe and 20% to US offshore accounts.Competitors had only compliments for the trade as it was not pre-sounded and traded flat at 103 in the aftermarket – all the more impressive as the lack of issuance meant earlier deals had struggled to find the sweet spot on pricing. The ¥10bn greenshoe was exercised before the end of the week.Mizuho, Morgan Stanley and Nomura were co-managers.

To see the full digital edition of the IFR Review of the Year, please click here.JP Morgan drew on its all-round strengths and pan-regional reach in 2012 to find opportunities even in a subdued year for primary equity-linked issuance. It completed deals for issuers from six countries and was active in a couple of successful restructurings, which was a major theme.Several of JP Morgan’s deals achieved notable firsts, such as a negative yield for Malaysian sovereign investment agency Khazanah’s exchangeable sukuk in March and the first call-spread overlay for an Asian issuer for travel agency Ctrip’s US$180m issue in September.The standout deal, though, came at the end of IFR’s awards period, as embattled consumer electronics giant Sony managed to tap the CB market led by JP Morgan as joint bookrunner with the largest economics.Make believeHopes of Sony bringing a deal had initially looked slim, as the firm teetered on the brink of a downgrade to junk status, and its stock price had halved in the previous eight months.The Japanese electronics sector as a whole was battling with falling prices, and Sony’s CDS were trading at around 450bp prior to the deal launch, which should have meant it would need to offer around a 1% coupon – unheard of for a large Japanese issuer.An undisclosed major Japanese bank provided asset swaps for around 80% of the deal at 190bp, enabling Sony to print a ¥150bn (US$1.8bn) zero-coupon CB with a 10% conversion premium. This meant investors could sell the credit exposure, leaving them effectively with a warrant at a 10% premium. The asset swap boosted the bond floor significantly, to 90 from around 79 without.“Sony is a landmark deal on multiple fronts, raising close to US$2bn amid a volatile phase for the company,” said Aloke Gupte, the bank’s head of equity-linked origination, Asia-Pacific. “As lead-left bookrunner, we worked very closely with Sony to devise an optimal issuance structure and strategy to achieve their objectives – the oversubscribed order book and aftermarket trading demonstrates that the CB was well executed and well received.”The deal was the largest in Asia-Pacific since KDDI (IFR’s Asia-Pacific Structured Equity Issue of the Year) printed a ¥200bn CB in November 2011. Sony had not issued a convertible since its ¥250bn zero-coupon five-year issue matured in 2008.The deal drew ¥300bn of demand from around 80 accounts and narrowed the issuer’s CDS spread by around 15% the following day.Khazanah’s US$358m exchangeable sukuk in March, on which JP Morgan was joint bookrunner, was another notable transaction. The seven-year deal with an investor put at the end of year three priced at the tight end of guidance for a 30% exchange premium, zero-coupon and a yield of minus 0.25% – the first US dollar equity-linked deal in Asia to come at a negative yield since 2009.The sukuk issue exchanges into shares of Chinese department store operator Parkson Retail Group and was issued by vehicle Pulai Capital. The deal attracted more than US$1.5bn of demand from over 100 accounts.Defying expectations, it printed tighter than Singapore state investment holding company Temasek’s two-year EB three months earlier, despite Temasek’s Triple A rating.For Chinese travel services firm Ctrip the aim was to boost the company’s share price on the Nasdaq. Its shares had fallen by 58% between January 2011 and the launch of the deal in September, close to its five-year low, as investors reacted to a series of governance scandals at other US-listed Chinese companies.The sole bookrun US$180m five-year put-three CB came with a call-spread overlay, raising the effective conversion premium to 50% to limit dilution to shareholders. The note priced with a coupon and yield of 0.5% and conversion premium of 10%.Alongside the CB, Ctrip bought back around US$40m of stock – the first time an issuer from Asia-Pacific had funded a share repurchase transaction with a CB. Management participation boosted investor confidence. The fina

To see the full digital edition of the IFR Review of the Year, please click here.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 security offering a decent yield.The bookrunners were ADIB, HSBC, Morgan Stanley, National Bank of Abu Dhabi and Standard Chartered.

To see the full digital edition of the IFR Review of the Year, please click here.In a market where players all-too quickly come and go, Societe Generale has proved to be the rare exception, resolutely placing the equity derivatives business at the heart of its investment banking operations come rain or shine.The strategy is one that some rivals questioned given the tough market backdrop of the last four years, but the French bank has proved it can deliver impressive results, innovative client solutions, and unparalleled liquidity provision even under the harshest conditions.And 2012 was a year as tough as any. Low-level volatility coupled with high levels of uncertainty saw listed volumes 20% down year-on-year and many over-the-counter products suffered heftier declines as forthcoming derivatives regulations began to pile pressure on bilateral transactions.Against that backdrop, the divide between those houses with long-term commitment and those that had just come along for the ride in hope of better times ahead became more pronounced than ever.“It has been a year of recovery and rebounds and we’re proud to have exactly the right business mix,” said Christophe Mianne, deputy CEO of SG Corporate and Investment Bank. “We have the right products to be able to show to the board that we are consistently profitable.”The business posted a return-on-equity in the mid-30s, and while total equity revenues were 13% down for the first nine months of the year at €1.7bn, a solid third quarter saw the business post a 22% gain over the same three months in 2011.For shareholders and clients, the results validate the bank’s decision to stand by its contra-cyclical business model though 2011 despite escalating counterparty concerns that engulfed French banks as they lost access to dollar funding in mid-2011when credit default swap levels surged above 400bp.“2012 has been a turnaround year for us – it’s been make or break in terms of the business model,” said David Escoffier, head of global equity flow at SG. “It is reminiscent of 2003 or 2004 when we decided to be very counter-cyclical.”Liquidity providerWith its CDS back below 200bp, and many competitors forced to reassess their business models amid industry-wide ratings downgrades, SG was able to focus its attention on what mattered most in 2012: liquidity.“If you want to be big with clients, you need to deliver liquidity and if you want to deliver liquidity you need to be able to recycle risk,” said Escoffier.“It’s about having the right model for the right time. It’s tough to deliver results in this business when volatility is so low but our engine is finely tuned to the current environment. We saw a lot of banks retrenching, but because of our ability to generate profits, we can expand our business. What makes us different is that stability.”To address any residual counterparty concerns, the French dealer took a new approach to its structured product issuance at the start of the year with the introduction of a new collateralisation programme, SGIS.A full suite of engineering capabilities for both secured and unsecured notes were made available across the full range of payoffs and underlyings, with Bank of New York Mellon brought in as collateral monitoring agent and liquidation management agent to add an additional layer of comfort.Around the same time, the renewed focus on liquidity was also addressed with the launch of AlphaY, a cash equity trading venue that allows clients to tap the bank’s global equity and equity derivatives flows, including structured products and delta one trading.It proved to be a timely addition for clients and enabled the bank to double crossing ratios to almost 20% with daily volumes regularly in excess of €200m.In just a few weeks of launch, the bank ranked as a top three provider with hedge fund Marshall Wace. “We never realised how large and high quality [SG’s] volumes were until AlphaY,” said MW head of trading, Nick Nielsen.Winning bigThe liquidity advantage

To see the full digital edition of the IFR Review of the Year, please click here.There was not much room for profit in the commodities business in 2012. High regulatory and capital costs looming via Basel III and Dodd-Frank, as well as increasing difficulties in gleaning trading profits in a slow-moving and directionless market, scared off several firms from the space. But top-tier banks remained successful by using the entire portfolio and expertise across the firm to provide unique hedging opportunities in illiquid markets.“We have had a clear strategy for several years to deliver the entire portfolio of the bank in offering hedging capabilities,” said Louise Kitchen, global head of Deutsche Bank’s commodities business based in London. “The strategy particularly paid off this year as we were able to offer a liquidity supply to clients that they wouldn’t necessarily find in other areas.”Banks and their clients faced a very different commodities market in 2012 – one that was less directional than years past and characterised by generally low volatility, leaving clients with less incentive to hedge. But even without the general consistent bullish or bearish trends of previous years, Deutsche was able to offer innovative solutions and investment opportunities to its clients.For example, the bank solved a major hedging issue for gas distribution companies in Central and Eastern Europe. Those companies were buying gas based on oil indices, and therefore needed to hedge both the possibility that oil and gas prices would diverge, as well as the foreign exchange risk associated with buying gas denominated in euros and selling to clients in US dollars.In conjunction with the foreign exchange derivatives desk, the firm began offering forward contracts on oil indices denominated in both euros and US dollars, the first bank to do so. The strategy paid off for clients early in the year when Iran threatened to close the Strait of Hormuz and oil prices spiked while gas prices stayed level, necessitating an oil versus gas price hedge that could be denominated in both currencies. The bank has since created an offering for forward transactions denominated in Eastern European currencies too.The North American gas business did not lag far behind. Deutsche executed 2.5bn cubic feet of gas trades per day through the year and the client-facing business increased by 24% year-on-year, even as volumes across the market declined.Going longThe bank also excelled in providing long-dated hedges in electricity markets, a sector where banks shy away from entering purchase agreements maturing in more than five years due to a lack of liquidity. Not Kitchen’s team, though, which was able to combine strong relationships with European industrials and an ability to find investors who were searching for an efficient way to hold emissions-based risk to provide an innovative hedge, serving two different client bases at the same time.Deutsche executed several deals with European industrials to purchase electricity for longer than five years in advance and subsequently packaged the emissions risk into a “carry trading” note for its investor clients.Part of the bank’s success in the power and electricity market came from hiring six new traders, giving it the biggest continental European trading team in the industry and allowing it to execute trades seven days a week, 24 hours a day. That attracted the attention of small to mid-size consumers and producers that began outsourcing some of their off-hour trading responsibilities to the German dealer.“For us, it’s not so much about competing on price on every single trade,” said Simon Grenfell, head of metal sales and origination. “It’s about fostering the loyalty of major clients who know that we have the capability to address multiple facets of their hedging needs and that we will always be there to provide liquidity, as we were through the US dollar funding crisis this year.”And in a year when many banks cut their roster

To see the full digital edition of the IFR Review of the Year, please click here.The largest sovereign debt crisis in recent memory made the rates market resemble a rollercoaster ride as banks’ fixed-income revenues increasingly mirrored the macroeconomic environment, dipping violently when fears over eurozone disintegration peaked, before jerking upwards as central banks stepped in.Even as the eurozone crisis reverberated throughout the rates world, the largest reforms in the history of the swaps market loomed. Banks were forced to adapt business models in view of Basel III, which lumps aspects of the interest rate swaps business – particularly long-dated, uncollateralised trades – with hefty funding and capital charges.Of more immediate concern was the US Dodd-Frank Act taking effect in 2013 – swiftly followed by similar legislation in Europe – requiring all standardised swaps to be centrally cleared and electronically executed, forcing banks to bolster infrastructure and prep customers.In a time of unprecedented upheaval, JP Morgan stood out for its work in adapting both itself and its clients to the new operating environment, without losing sight of customers’ day-to-day needs of hedging exposures and gaining access to funding.“JP Morgan has always been one of the best liquidity providers in the derivatives markets. They rank for sure in the very first [tier]. The quality of their service is very good and has proven to be consistent over time,” said Gianfranco Marin, a senior trader with Intesa Sanpaolo in Italy.In a year where liquidity in the swaps market remained scarce despite the profusion of cheap central bank money pumped into the system, consistent price-making and an ability to recycle risk without making waves in the market became hallmarks of JP Morgan’s rates franchise.“Rates is by far the largest business of JP Morgan, and this is where our global presence and size helps us to recycle risk quickly and efficiently,” said Alessandro Barnaba, co-head of sales at the bank.“In a world that is moving away from niche players, clients are moving towards dealers that can offer breadth. We feel our size, balance sheet and strong capital position have helped our client business boom from an already strong position.”The bank’s much-touted “fortress balance sheet” remained a potent weapon. Even a botched credit derivatives trade in the firm’s chief investment office earlier in the year barely made a dent. After announcing the losses, which could end up totalling US$7.5bn, JP Morgan’s five-year CDS briefly shot to 169bp in early June (still the lowest of its peers) before settling back to 105bp in November.Largest revenuesJP Morgan’s fixed-income division continued all the while to register the largest revenues across the industry, with its relative lack of exposure to the eurozone periphery making its earnings less volatile.The interest rate derivatives business alone raked in more than US$2.2bn over the first half of the year, accounting for over a quarter of total fixed-income revenues at the bank. This was achieved with a 35% return on capital under Basel III.“It has been a transitionary year for rates and JP Morgan. Combining corporate and investment banking has been a major change in response to our clients’ needs, but also because of some impacts of the regulatory changes,” said Kemal Askar, head of European interest rate trading.“On top of the Dodd-Frank rules, the rules related to capital will also be meaningful. The good news is we have managed to maintain our top spot in revenues in a very good year.”As well as the merger of corporate and investment banking, the interest rates business became fully integrated with the FX business earlier in the year. This aligned risk management systems, with the rates business moving on to Athena, a pricing and risk management platform introduced in the FX business two years previously.Athena provides traders and salespeople with a one-stop shop to price and manage the risk on m

To see the full digital edition of the IFR Review of the Year, please click here.After a stuttering start, the year ended strongly with the European equity-linked market running at a level of activity not seen in years. Volumes eventually overtook those of both the previous two IFR award years. Yet it was not plain sailing, with an active first quarter followed by a very quiet second. Several banks had to wait until after the summer for their first deal of 2012.Deutsche Bank’s year was different as a steady stream of deals ensured its team was constantly active. It earned a staggering 19.6% market share across 15 deals.“In a market where there are often four bookrunners as lenders are included, sole bookrunning positions are rare so building market share relies on printing a lot of deals,” said Keyvan Zolfaghari, head of equity-linked for EMEA at Deutsche.Volkswagen’s €2.5bn mandatory convertible bond is IFR’s EMEA Structured Equity Issue of the Year, while the other candidates were the US$3bn Siemens bonds plus warrants; the US$475m Severstal transaction that secured the top premium of the year at 45% (in effect, even higher due to premium redemption) and an extraordinary US$2.6bn of demand; and Nokia’s €750m CB, which combined its status as the largest vanilla convertible bond of the year with one of the worst equity stories in Europe. Deutsche Bank was a bookrunner on every one.It starts at homeGermany was an important market with the jumbo US$3bn bond plus warrants from Siemens, the €2.5bn mandatory convertible bond from Volkswagen, adidas’ €500m CB, plus smaller deals from real estate firms TAG Immobilien and GSW Immobilien.Rivals argue the “German bank” was certain to capture a large portion of these deals. That’s true, but Deutsche was bookrunner on every one. Deutsche Bank did not lead its market, it completely dominated it.Though a traditionally strong equity-linked house in Europe, Deutsche dropped back in the late noughties. The last two years saw the bank end fifth then fourth in the league tables by volume. In the IFR award year to mid-November 2011 the bank led just four deals.Success in 2012 was driven by large deals on behalf of German issuers, but as multi-nationals with multiple banking relationships, none required a domestic bank.In January Siemens needed US dollars. But its accounts and listing are in euros, and one thing investors (and accountants) do not like is cross-currency bonds. The bond with warrants structure used in February allowed the company to raise US dollar funding but issue euro-denominated warrants. The solution was not perfect as investors found the bonds could not be delivered against the warrants and there has been little liquidity in the bonds.Yet by coming to market in February when investors were starved of investment-grade paper and printing at US$3bn, the largest corporate deal since the engineering business’s last visit in 2003, Siemens easily defied those imperfections.Deutsche was sole global co-ordinator and invited the other bookrunners to participate the night before launch.The lender was soon back with another issue on behalf of Siemens. Despite the jumbo transaction, the market was still starved of high-grade paper and bankers were aware that extra efforts were required to satisfy the investor base. Deutsche took this to a new level when Siemens wished to dispose of in-the-money warrants in technology company Draegerwerk.The easy trade was to simply sell the warrants or the converted equity in the market. Instead, having seen how ravenous investors were for Siemens’ product, Deutsche came up with a Bunds plus warrants structure to give the market some much-needed Triple A paper. Sourcing similarly dated Bunds, the two parts were packaged and sold to technical investors, and a few outright accounts.Deutsche was sole bookrunner on the deal which, although worth only €107.2m, maximised the value of the warrants and maintained the flow of issuance. The transaction was a clear s

To see the full digital edition of the IFR Review of the Year, please click here.The ability of Priceline, a notoriously shrewd company, to virtually name its own price on a US$1bn convertible bond in March was the type of iconic transaction that showed what was possible on terms and pricing. Against a backdrop of pent-up investor demand, the online travel broker managed to print a six-year unsecured CB with 50% a conversion premium paying a 1% coupon.The aggressive terms – the conversion premium represented the highest achieved by on a vanilla CB in the US since 2003 – provided a template for similar transactions, including a US$525m five-year, 2.25% CB by Tibco Software in April that boasted a 52.5% conversion premium and a US$250m CB by Toll Brothers priced at 0.50%, up 50%.“It was a watershed event for the convertible market this year,” said Bennett Schachter, a managing director in the Americas equity-linked origination group at sole bookrunner Goldman Sachs. “It broke the up 50% barrier that would facilitate similar deals for homebuilders as well as other sectors. We had a view that it was investment grade and that there was a shortage of paper in the market.”With ruthless efficiency, Goldman trumped the competition by agreeing to buy a US$875m CB at 1%, up 50%, with an agreement by the company to repurchase US$200m worth of stock alongside the transaction. To the dismay of rivals, the bank was able to finalise pricing at 99.5, the top of a 98.5–99.5 marketing range, and subsequently exercise its US$125m over-allotment option.Tellingly, the size of the share repurchase, designed to facilitate delta-hedging on the part of technical buyers, was decreased from US$200m to US$166m, reflecting the presence of long-only buyers in the bookbuild. Further evidence of outright participation was a 1.9% rise in the underlying stock the day after pricing of the overnight transaction.Priceline, rated BBB by S&P, had contemplated a convertible bond since its previous CB two years earlier, conducting a series of competitive auctions only to shy away due to the focus on achieving a premium share price. Arguably, the company benefited from a process that provided feedback on where investment banks stood at multiple stages and led to increasingly aggressive terms.“You have to give the guys at Goldman Sachs credit,” said one rival CB banker. “They absolutely nailed the terms.”Others were critical of the issuer given the lengthy gestation period of the transaction and all of the work undertaken in securing approvals for such a sizeable commitment.For Priceline the financing was truly opportunistic. The company sold a US$575m five-year CB in March 2010 and considered the possibility of a straight-debt placement, with pricing possible in the 4% range. The low-coupon, high-premium CB offered a similar profile, at lower all-in cash costs.Priceline accomplished a number of goals from a corporate finance perspective. Although the company had sufficient liquidity, after finishing 2011 with US$2.7bn of cash and short-term investments, US$1.7bn of that was “trapped” offshore due to the tax obligations associated with repatriation. The CB provided liquidity in both the domestic and foreign markets.Another accomplishment was the ability to lock-in the price of the repurchased stock, continuing its commitment to shareholders. The company purchasing stock at US$629.74, the reference, but dilution only kicking in above US$944.61 makes sense. That it was able to raise funds at an ultra-low rate of 1% is all the more impressive.The additional liquidity would come in handy. In November, the company agreed to acquire Kayak Software for US$1.8bn, continuing a legacy of acquisitions that has helped it expand its business globally. The purchase, which is expected to close in the first quarter of 2013, will be funded with US$500m of cash and US$1.3bn in equity and assumed stock options.

To see the full digital edition of the IFR Review of the Year, please click here.Corporations that had the flexibility to choose a funding route almost universally opted for straight debt over any equity-linked solution in 2012. Enticed by low interest rates and tightening credit spreads, there was little need to expose shareholders to the risk of dilution.“I think people were surprised by the light volumes that we’ve seen this year as well as over the past three years,” said Steven Winnert, head of equity-linked origination for the Americas at Credit Suisse. “But I also think most people believed interest rates would not have stayed this low for this long.”In 2012, convertible bond issuance plunged to US$19.1bn, down from US$30.8bn last year and continuing a trend that has seen volumes fall to decade-low levels. With a few exceptions, investment banks responded by cutting or reallocating resources previously devoted to the asset class.Credit Suisse was one of the few banks that actually added to its group, nabbing Will Brett in July 2012 from Nomura to augment its equity derivatives practice, which falls under Winnert.Along with Winnert and Tobias Schraven, the addition of Brett gave the bank three managing directors in its Americas equity-linked practice and builds out capabilities across call spreads, structured share repurchases, margin lending, and monetisation of cross-holdings.Shifting focusThe core convertible bond business suffered from a lack of corporate interest, placing greater emphasis on banking and structural advice to ensure seniority in deals won from lending relationships.Credit Suisse ranked a distant sixth in the US structured equity league tables with US$1.5bn across 12 deals over the consideration period when equal credit is apportioned among joint bookrunners, despite acting as a lead loan arranger for two of the issuing clients.JP Morgan, by comparison, ranked first with US$3.4bn of business on 27 transactions, of which it was lead loan on five situations, according to Thomson Reuters data.However, when credit is awarded entirely to the lead-left bookrunner, Credit Suisse climbs to the top of the league table, with US$3.3bn of business across seven of the transactions. JP Morgan (US$3bn, 11 deals) falls to second on this same measure. Bank of America Merrill Lynch saw the steepest decline, falling from second (US$3.1bn, 19) to fifth (US$1.9bn, six), by IFR’s numbers.“When I get hired for a deal of any significance, I’m usually on the left,” said Winnert. “I’m getting hired for the ideas and solutions I am providing, not because I’m lending.”The way forwardWellPoint, rated Baa1/BBB+, and its decision to issue a US$1.5bn, 30-year CB in October is emblematic of the stigma many companies faced when issuing a convertible bond. Having just raised US$3.25bn from the four-part sale of straight debt to help fund the acquisition of rival Amerigroup (for US$4.9bn), the healthcare insurer certainly had its choice of financing options.“We had been looking at convertibles, specifically this convertible, for a number of years,” said Merrill Yarling, staff vice-president of capital markets at WellPoint. “You have to understand that this isn’t the cheapest source of capital. When you’re able to issue senior debt at 4% it’s pretty hard not to do so.”Credit Suisse, which was lead-left on the CB, was there throughout, advising the company on a series of acquisitions and championing a long-dated CB as a cost-efficient way to balance the needs of debt and equity holders, while providing the benefits of tapping a new constituency of CB investors.The concurrent repurchase of US$400m of stock on the CB placement reinforced the company’s commitment to shareholders and was consistent with a targeted return of US$3bn in 2012 from dividends and buybacks. Bifurcation of the security into its debt and equity components put US$500m of equity on to the balance sheet, reducing leverage to below 40% in terms of debt to capitalisation an