As 2018 opened, the bond markets were still in good shape. But emerging markets bankers at Citigroup realised that dark clouds were looming.
In the US, the Federal Reserve had begun its hiking cycle, while in Europe speculation was growing about when exactly the ECB’s bond buying programme was likely to wind down and then stop.
Then there was the unpredictability of the Trump administration to take into account, while within the emerging markets elections later in the year in Brazil and Mexico had to be considered. And those were just the known risks back in January. Who knew what else was around the corner?
This is where the long experience of the emerging markets team at Citigroup paid off. They realised the best way to navigate volatility is to avoid it altogether. Clearly, no-one could know when exactly markets would turn but the advice to clients was unequivocal – get out while markets are still good.
Citigroup’s clients listened. In the first quarter, when conditions remained largely supportive, bar a sharp bout of volatility in early February, the US firm shot out of the blocks.
By the end of March it was already top of the league tables in Latin America and emerging Europe, the Middle East and Africa – positions it would never relinquish in 2018 – while in emerging Asia only HSBC and Standard Chartered had transacted more volume out of the international firms, and the latter by a whisker.
“Coming into the year, there was a degree of healthy paranoia to do the best for our clients,” said Chris Gilfond, head of Latin America capital markets origination at the firm. “Clients voted with their mandates.”
It would be wrong, though, to think of Citigroup as a flat-track bully, able to execute transactions only when the going was good. The firm was smart to get as much business done upfront but like every other bank Citigroup also had to confront choppier waters as the year progressed. It didn’t shirk the challenge.
“We demonstrated that when the market is tricky, we’re the house to go to,” said Peter Charles, head of EMEA fixed-income syndicate.
While the jumbo sovereign deals also proved difficult at times in 2018, more often it was the smaller non-headline grabbing trades that needed the most hand-holding. In emerging EMEA, they included deals for the likes of Blom Bank and Bulgarian Energy Holding.
The former was the first non-government issue from Lebanon. The leads, which included Deutsche Bank as well as Citigroup, took the unusual step of putting out the final yield in its first pricing message to see what sort of book they could build.
There were no realistic comparables, with the yield based on a price-discovery process. The deal also came at a time of great political upheaval in the region.
In the end, Blom Bank was able to issue US$300m of five-year notes at par to yield 7.5%.
BEH, meanwhile, succeeded in mid-June where regional neighbour EPP had failed just a few days before and got a deal done, glad no doubt to take €400m at 3.5% for a seven-year note issue, even if pricing was stuck at guidance.
And although the size was below the €500m the company had said it was targeting a few months ahead of the trade, BEH was still able to extend its curve in a tough market. The company subsequently tapped the bond issue about a month later for €150m with Citigroup as sole lead.
“These were difficult trades to manoeuvre,” said Charles.
These trades were two of more than 100 over the awards period that the bank executed in emerging EMEA, more than any other bank.
But perhaps more impressive than the number of deals on which Citigroup has acted as a bookrunner is the number it has acted on as a global coordinator.
Citigroup’s hit ratio as a global coordinator as opposed to just a bookrunner – nine to one – is far better than any other rival. It shows that clients wanted Citigroup to drive those deals rather than act as a passenger.
“We want to be the global coordinator. We want clients to turn to us for advice and leadership on transactions,” said Samad Sirohey, head of CEEMEA debt capital markets.
This advice could be extending duration, liability management or different currency mixes.
One of the key themes earlier this year, for example, was African sovereigns issuing in the euro market, with Ivory Coast, Senegal, Egypt and Tunisia all doing so in 2018. Citigroup was involved in three of those deals, the only exception being Egypt (for which it acted as a bookrunner on an earlier US dollar transaction).
The Ivory Coast deal even included a 30-year tranche as the country became the first African borrower to issue bonds at that tenor in the single currency. While the cost of funding after taking into account the cross-currency swap is clearly more expensive than issuing in US dollars, it’s really a moot point as it’s doubtful that any bank would enter into a swap with such a risky credit because of the costs involved.
And many of these countries need euro funding. Ivory Coast, for example, is a member of the West African Economic and Monetary Union, an organisation of eight mainly Francophone states whose currency is the CFA franc.
These deals were part of an impressive roster of transactions from Africa generally. Citigroup was also involved in trades for Ghana, which included its first-ever 30-year bond issue, and two separate transactions for Nigeria, helping the sovereign raise a combined total of about US$5.5bn in the process.
Its success in the region wasn’t just confined to sovereigns. In April, for example, Citigroup was one of the leads on a Tier 2 note offering from Barclays Africa Group.
The bank printed a US$400m 6.25% 10-year non-call five issue at par, with significant tightening from the starting point, which was the 6.625% area, and an increase in size – by US$100m.
Barclays Africa was formed in 2013 through combining Absa Group and Barclays’ African operations. By the end of 2017, Barclays had reduced its shareholding to 14.9% from 62.3%.
But perhaps the most impressive transaction Citigroup was involved in not from Africa but from the Middle East – a US$3.3bn-equivalent offering from Dubai’s port operator DP World.
DP World undertook a multi-tranche transaction comprising simultaneous Islamic and conventional bonds in US dollars, euros and sterling. There was also a liability management exercise.
The scope of the deal was rare in ambition for an emerging markets borrower, with many typically sticking solely to dollars as the most cost-effective funding option.
The complex offering got done despite an uncertain economic backdrop in Dubai, where residential property prices continue to slide, and fears that tit-for-tat tariffs between the US and China will spill over into a trade war. Citigroup was one of two banks on all legs of the deal.
“We had to go to different parts of the investor universe to get it together,” said William Weaver, head of EMEA debt capital markets.
While Citigroup wasn’t the leading bank in the Middle East, it was still in the top three. More pertinently, it was the number one bank in Africa, Russia and the CIS, and the rest of Central and Eastern Europe over the awards period, according to Refinitiv data.
Another region Citigroup dominated was Latin America. The US bank once again towered high above its competitors in 2018, flexing its muscles in a tough year for the asset class.
Over the awards period, Citigroup stood firmly atop the league tables, with 41 deals under its belt and a market share of 16.3%, versus second-placed JP Morgan, which boasted 35 deals and a market share of 11.7%.
That is an impressive achievement, given market shares among most other competitors were in the single digits as banks fought tooth and nail over scraps in a very low volume year for the region.
Latin American cross-border bond offerings in the 12 months to mid-November 2018 fell to the equivalent of around US$84bn, far short of the US$138bn-equivalent seen in the 2017 awards period, according to IFR data.
Whether its dominant position helped or worked against Citigroup in a down year, the bank nevertheless expanded its market share considerably – up from 13.9% in 2017.
“If you are number one and picking up market share, that means you are doing something right,” said Gilfond. “Those basis points of market share are hard fought … In a shrinking waterhole the animals tend to fight.”
Geoff Hunter, head of emerging markets syndicate, said it reflected the team’s know-how. “In a difficult environment, issuers turned to experienced dealers,” he said.
Understandably Citigroup’s debt capital markets underwriting fees shrunk over the awards period – to US$46.4m from US$81.5m in the prior year – but it still beat other financial institutions by a decent amount, according to Refinitiv data.
Number two and three – JP Morgan and Bank of America Merrill Lynch – garnered US$34.4m and US$33.1m in fees, respectively.
The results came after the US bank adjusted its strategy in the Latin America retail banking space – a move that ultimately benefited its DCM business, Gilfond said.
While maintaining its large consumer banks in Chile and Mexico – Banco de Chile and Banamex – Citigroup retrenched in Brazil, Argentina, Peru, Colombia and Central America.
“We have divested several of our consumer businesses in the region to really narrow and refocus the strategy at a global level and Latin America has been a beneficiary of that,” said Gilfond.
“In all these places we enjoyed varying degrees of success in the consumer business, but did not reach the scale to be an effective long-term competitor.”
The move allowed Citigroup to redeploy capital raised from these asset sales and double its efforts on its institutional business.
“People say we were exiting that part of the region, but what we were really doing is reinvesting capital into a core business in the region,” Gilfond said. “We actually have more assets in Argentina than when we had the consumer business.”
Firing on all cylinders, Citigroup was able to capture a broad range of mandates in countries across Latin America and the Caribbean.
Aside from sovereign mandates from the likes of Argentina, Brazil, Colombia and Uruguay, Citigroup led some of the biggest deals in the investment grade space, including liability driven bonds from quasi-sovereigns such as Petrobras and Pemex.
It also worked on a rare hybrid from Mexican bread maker Bimbo as it sought to curtail downgrades from the rating agencies, while continuing to make inroads among debut issuers.
That was not always easy at a time when investors were growing increasingly risk-averse and were less inclined to buy new and often junk-rated credits.
Asia was the only region where Citigroup didn’t end up number one in the league tables but only the HSBC juggernaut beat it. “In Asia, we’ve continued to maintain a strong position. The commitment is to focus on the critical geographies,” said Adrian Khoo, co-head of Asia debt origination.
One area that Citigroup has pushed hard is in 144A transactions. “Late last year and early this year a lot of issuers were happy to go through the Reg S route. But as conditions have got more challenging, where we’ve had the opportunity to pivot the client and get more certainty of execution, we’ve gone down the 144A route,” said James Arnold, head of APAC syndicate.
That doesn’t mean the firm isn’t still trying to capitalise on regional liquidity through Reg S-only deals where appropriate but the 144A format plays to Citigroup’s global distribution strengths.
Perhaps the most interesting Asia-Pacific deal Citigroup worked on was for Papua New Guinea. The sovereign priced US$500m of 10-year bonds at par to yield 8.375%, well inside initial guidance of 9.00% area, after orders exceeded US$3.3bn.
The 144A/Reg S offering marked the end of a 20-year journey to the international markets and underlined the appeal of a new frontier credit despite the recent turmoil in other emerging markets.
“We continue to push boundaries and put new stories into the market,” said Charles.
Another deal that fits into that category was a trade from Indonesia, which in February became the first sovereign borrower to go Green in Asia. A US$1.25bn five-year sukuk issue was also the world’s first Islamic Green bond from a sovereign. The dual-tranche trade also included a non-Green US$1.75bn 10-year sukuk issue.
While some quibbled about Indonesia’s Green credentials – the country is the world’s fifth largest emitter of greenhouse gases and one of the world’s largest exporters of thermal coal – the deal was at least a step in the right direction.
To encourage green investors, the issuer structured only the shorter, five-year tranche as a Green bond issue, since those buyers are typically not duration players.
The Green bond and Green bond framework received a “Medium Green” rating from the Center for International Climate Research (Cicero), which provides an independent assessment of the environmental impact of eligible projects.
Norway-based Cicero describes Medium Green as its second highest rating, “for projects and solutions that represent steps toward the long-term vision, but are not quite there yet”.
Indonesia’s Green bond and Green sukuk framework include its pledges under the Paris Agreement, the global deal aimed at combating climate change.
Sometimes Citigroup’s efforts fail. As with many banks it suffered the odd pulled trade last year – most notably for Ukrainian state-owned utility Naftogaz. But that was a rare misstep.
Despite all the hurdles – and as the year evolved, further risks that couldn’t have been foreseen on January 1, such as the economic crises in Argentina and Turkey, added to the challenges that needed to be overcome – Citigroup shone.
“We’ve still come up as a leader in all three regions,” said Weaver.
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