IFR’s 2000th special issue would be incomplete without recognising the achievements of Hans-Joerg Rudloff, the man at the centre of many of the key developments in the Euromarkets since the formation of IFR. He spoke to Keith Mullin.
The Eurobond market owes its history of largely unbroken success to no single individual. The formative period of the 1960s and 1970s followed by the phase of explosive growth, globalisation and breathtaking innovation of the 1980s and 1990s have their hallowed lists of progenitors, progressive thinkers, inventors and pioneers.
Few people have straddled both periods and can legitimately lay claim to having their name on both lists. Fewer still remain at the forefront of capital markets today, standing ready to help marshal the industry towards its next adventure. One man who can make those claims, though, is Hans-Joerg Rudloff, now chairman of Barclays’ investment bank and senior adviser to Barclays’ CIB executive committee.
Rudloff’s banking career spans almost 50 years yet he shows no signs of slowing down, continuing to exude passion and boundless energy. He doesn’t focus on career high or low points. “I’ve always been happy,” he said simply. But he’s also convinced that in his time the capital markets have done their job.
“Capital markets have steered capital to all corners of this world and have lifted billions of people out of poverty,” he said. “Without the pioneering spirit of the investment banks in the 1990s and at the beginning of this century, emerging markets would not have been able to finance their reforms and their growth. I think that’s where investment banking was really tested and it proved its worth, just as it did in 19th century America.”
Start of a journey
Rudloff originally joined Credit Suisse in Geneva after graduating in 1965. In those very early days, he got to know the man who would become his mentor and watch over his career: Rainer Gut, undoubtedly Switzerland’s foremost investment banker – now in his 80s – and honorary chairman of Credit Suisse.
In 1968, Rudloff moved to New York and jumped ship to Kidder Peabody, one of Wall Street’s largest investment banks, where he stayed for 11 years. Kidder had a small Eurobond department and Rudloff’s moves to Zurich to head Kidder’s Swiss operations and then to London as syndicate manager gave him the chance to observe the burgeoning market up close. Rising quickly through the ranks, Rudloff became chairman of Kidder Peabody International, and, in 1978, a board member of Kidder Peabody Inc.
Of the very early days, Rudloff credits Stanley Ross, another market legend, for giving him his early vision.
“Stanley moved to Kidder from Strauss Turnbull, a typical London trading firm, trading everything under the sun, including international bond issues. I witnessed Stanley’s passionate appeals, describing the extraordinary potential this new international capital market would offer,” Rudloff said. “He had a vision of how it would develop and being a pretty young guy at that time, I was impassioned by his outlook that capital would once again flow freely across borders and would be a bridge into a more united and better world. “
To realise his and the market’s potential, though, Rudloff needed a bigger platform. Gut gave him the opportunity he needed. In 1971, Gut had joined Swiss-American Corporation (Credit Suisse’s US investment banking and securities subsidiary) as president and CEO following three years as a general partner at Lazard Freres in New York. By the late 1970s, he had returned to his native Switzerland and was appointed chairman of Credit Suisse’s executive board. He had observed Rudloff’s impressive rise so it was not long before Gut had engineered a move for Rudloff to join CSFB in 1980.
Michael von Clemm had recently taken over as chairman and CEO and it took no time at all for von Clemm and Rudloff to storm the Euromarkets. Rudloff thrived in those pioneering and swashbuckling years that saw Eurobond new-issue volumes grow exponentially.
Between 1980 and 1990, Eurobond volumes grew almost tenfold (from just US$18.5bn) and they more than doubled again to US$356bn by the time Rudloff left CSFB in 1994 to run his own Eastern Europe-flavoured investment bank MC Securities, which he did for four years. When ING-BBL acquired MC, Rudloff joined Barclays in 1998 to help Bob Diamond figure out how to build Barclays Capital out of the ashes of BZW, the group’s failed investment banking experiment.
Beginning of an era
Rudloff credits the early growth of the Eurobond market to two related themes. One was a sense that the economic and monetary regime that had come out of the Bretton-Woods agreement after World War II – of fixed exchange rates to the US dollar and severe restrictions on the flow of domestic savings across borders – had had its day by the end of the 1960s.
“It no longer fitted a world that had developed rapidly and created huge imbalances, particularly an American balance of payments deficit. It was in that evolving world that the sources of capital and the markets that were available for people to borrow in changed,” Rudloff said.
The other issue was that there were still enough people around who could think back before the two world wars and who believed that the world once again needed international markets to allocate capital in the most efficient way and direct it to where it was most needed.
In this regard, the Swiss franc capital market had long had a non-domestic segment for foreign issuers that was withholding tax-free and that enabled companies and sovereigns to borrow where their own markets were not big or liquid enough. But the Eurodollar market was always going to be the biggest segment of the newly-emerging Eurobond market.
“Dollars accumulated abroad had to be invested and there was a perfect supply-demand balance in the sense that American companies that wanted to spend abroad had to borrow abroad since they couldn’t export money from America, while foreigners who had accumulated dollars in Europe finally had a market in which they could invest. This didn’t happen overnight; it took something like 10 years to become significant,” Rudloff recalled.
As the markets grew, though, Rudloff and von Clemm not only stiffed the competition, they also transformed CSFB. The firm became what is now recognised as the archetypal Eurobond house: focused, aggressive, internally and externally competitive, solutions-oriented, innovative and not infrequently chaotic. In 1983, Rudloff was named deputy chairman and by 1989 he had become chairman and CEO. For four years, between 1986 and 1990, he also sat on Credit Suisse’s executive board and ran global securities and capital markets.
CSFB dominated Eurobond league tables through most of 1980s, in fact right up until the Japanese warrant and convertible boom pushed the Japanese securities houses into the vanguard of the market from 1987. Rudloff also had the foresight to see how the evolving derivatives markets were going to transform the landscape, and he pulled off a master stroke by hiring Allen Wheat and around 20 of his derivatives whizz-kids (including current Credit Suisse CEO Brady Dougan) from Bankers Trust in 1990 and set up Credit Suisse Financial Products, easily the most successful and profitable derivatives group the market has ever seen.
Sign of the times
Rudloff remembers well the early days at CSFB, saying: “The market was still very small even though it had grown over the 1970s and it had had its ups and downs. But in fact it was various shocks to the system that propelled the market forward and it continued to grow because there was an ever-increasing need to borrow. By then, we had refined our syndicate methods and our distribution systems. We were already actively selling bonds and equities cross-border while the strict foreign exchange regimes had slowly softened. We invented a host of new instruments to make the markets more interesting and more liquid.“
Rudloff is clear that what also propelled the market to unheard-of amounts and activity was the decision of the UK and American governments to set markets free.
“When Margaret Thatcher became Prime Minister in 1979, she declared that markets should be free and people should be able to invest wherever they wanted, which in turn would force countries to adopt policies that made them attractive. Ronald Reagan espoused similar free-market views,” he said.
As the 1980s unfolded and the Eurobond market grew by leaps and bounds, one of its hallmarks was the sheer amount of innovation that enabled underwriters to solve countless issuer and investor problems. Another was a regime of light-touch regulation. Why was the market so innovative?
“Number one and most important, the market was an offshore market, so was free of domestic regulation. All other capital markets were heavily regulated,” said Rudloff.
“Another key element was the issue of taxation. Eurobonds were withholding tax-free, while most other markets had withholding tax on coupon payments. This was one of their biggest advantages and it drove private clients and institutions to the Euromarket. Every issue had a gross-up provision, which meant that if at any time or for whatever reason taxes were imposed by any government, issuers had to gross up coupon payments for tax.
“As far as regulation goes, you can be assured that in those days, syndicate managers had a long learning period behind them. We knew how to write a prospectus; we knew the legal implications; we knew the settlement side inside-out. Firms in those days were small enough that you could learn all of these things, and you were fully aware of what was going on.
“We were a family of banks that had a basic objective to build the market even though we were competitors. We knew that if we didn’t work together and set a certain frame around the market, things could go awfully wrong. Due diligence was extremely well done; we had close to zero bankruptcies on the issuing side in the early days.”
Of all the innovations in the Eurobond market, certainly since IFR’s launch in 1974, Rudloff credits the bought deal – a CSFB invention that history has assigned to either Rudloff or von Clemm – as perhaps the most transformational.
“One of the most important elements of change to the Bretton-Woods regime was that markets became much more volatile,” he said. “For issuers and investors alike, it was difficult to predict what would happen in the next few days. So we adjusted our syndication methods and introduced the bought deal, which served borrowers extremely well because they knew what they would get. Bought deals didn’t exist in America, so they made us very well-known.
“Bought deals allowed us to take all market risk away from borrowers. They could announce a deal and put it out to tender. We gave a price and the borrower either liked it or didn’t like it. If he took the deal, the lead manager owned the bonds from that minute on, regardless of what the market might do the next day.
“It was very convenient for issuers but obviously much riskier for the banks that participated. At CSFB, I felt very comfortable. First of all, Rainer Gut gave us a lot of leeway because he had been a syndicate manager. He knew that if we did our job properly, we would more or less know where prices would be, and we wouldn’t really get it wrong in a big way. But it did happen and one out of every 20 or 30 issues was mispriced, and we lost money.
“Some deals were done overnight and we bid many deals away from the American market, which continued to operate in a very traditional way. That gave the European banks a huge competitive advantage over the American firms,” he said.
Rudloff also credits the arrival of derivatives as having a dramatic role on the Eurobond market. “The [currency] swap market was initially an additional service to issuers who didn’t want foreign exchange risk,” he said. “By involving the FX market, we were able to give them their own currencies through the swap market.
“That was the big breakthrough in making the markets even bigger. All of a sudden, borrowers that couldn’t have borrowed before in the international dollar market because they were not allowed to run FX exposures could satisfy the requirements of their statutes. Derivatives added to the market’s sophistication and allowed many more participants to enter the market on the issuing and investing sides.”
Prop trading and derivatives
Rudloff is much less convinced, though, about the impact of commercial banks, with their huge, mostly deposit-funded balance sheets, on the bond market. He calls the big banks unwelcome participants because they started using derivatives in their proprietary trading strategies.
“[Proprietary trading] changed the investment banking world,” he said, “because the word ‘investor’ no longer applied and the supposed providers of liquidity became the biggest users of liquidity. An investor is someone who thinks long term, as opposed to a proprietary trader who is buying for the next five minutes because he thinks the market will go up or down.”
“That behaviour changed bond market volumes enormously and it affected the syndication process. If a syndicate manager got a US$50m subscription, he had to figure out if it was legitimate investor demand or a prop trading account, which would invariably see the bonds flying out five minutes later. The banks started taking the profits and not passing on the bonds.”
Rudloff acknowledges that the arrival of dozens of professional institutions forced the market to become more sophisticated and prices more scientific, at the same time as it also led to big distortions and made the market much more short-term oriented.
So what of the future of capital markets and the role of investment banks? “Capital markets have a great future and will, as in America, become the biggest financing mechanism for companies and sovereigns alike.” he said, “as long as firms prove that they exercise their profession with care and responsibility – and do not consider capital markets as a pitch on which you look for short-term advantages, without keeping issuers’ interests as well as investors’ protection in mind.”