The hunt for yield
The squeeze in rates and the compression in spreads has forced banks to think about the best strategies for issuing clients to take advantage of such a supportive backdrop, while at the same time delivering value for investors. For its ability to navigate that balance across all the developing regions, Citigroup is IFR's Emerging Markets Bond House of the Year.
Be it Asia, Central and Eastern Europe, the Middle East, Africa or Latin America only one bank has consistently dined at the top table in 2019: Citigroup.
There may be regions where one of its rivals has done more transactions or led more supply but none has achieved as balanced a global business.
It is the only bank in the top three in each of the regions over the awards period, according to Refinitiv data.
That's testimony to Citigroup's global platform – not just in terms of origination and syndication but across the markets business.
“One of the strengths of our franchise remains sales and trading," said Peter Charles, head of EMEA debt syndicate.
The ability to serve investors globally means that while Citigroup might not have a patent on ideas – no bank does – this institutional strength ensures it can react quickly to stay ahead of the pack.
And in a year where the general theme has been a hunt for yield, that hasn't always been simple.
Indeed, in December 2018 the outlook for the emerging markets asset class wasn't great. The Fed funds rate was expected to go to 3%, Bund yields were expected to rise and EM spreads were forecast to widen by 20bp–30bp. In the end the complete opposite happened.
How did Citigroup capitalise on the turnaround in sentiment? "It meant duration, currency and yield," said Samad Sirohey, head of CEEMEA DCM.
Citigroup wasn't the only bank to spot the opportunities but it was more dominant than its rivals. The bank led more euro supply, for example, and more 10-year-plus deals.
And yet it's not been plain sailing. The US-China trade dispute, FX volatility and a challenging political landscape in countries such as Turkey and Argentina meant that syndicates had to be nimble.
The growing disagreement between the US and China, for example, necessitated a change in tactics for borrowers.
"At a general level it wasn't a big issue," said Adrian Khoo, co-head of Asia debt origination, about the trade dispute. "But at a tactical level, issuers needed to be faster. That's why you've seen a bigger focus on intra-day execution and fewer roadshows."
Chinese oil major Sinopec, for example, issued a US$2bn triple-tranche bond in November taking advantage of a brief period of positive US-China trade talks.
The deal surprised some given that Sinopec had been in the market just three months earlier with a similar US$2bn triple-tranche offering, which priced just days ahead of escalating protests in Hong Kong. On both trades Citigroup was a global coordinator.
The ability to spot an opportunity again comes from Citigroup's reading of markets based on the intelligence gained from its core commitment to emerging markets.
Perhaps this is best illustrated through the bank's business in Turkey. Navigating all the political and economic headlines out of Turkey is one of the toughest jobs any bank involved in emerging markets has had to undertake.
But Citigroup still managed to be involved in 13 out of the 16 deals from the country in 2019 – with the only deals it missed out being three sovereign trades (it was still on three others).
It's a remarkable feat to have a 100% hit rate with every other issuer from the country in a year when the opportunity to fund has been fitful.
"It's been a difficult year but we've outshone," said Zeynep Kerimoglu, a director in emerging markets syndicate.
Most of the issuance came in the first quarter. In fact one of the first CEEMEA deals of 2019 was a Turkish trade, though not one the market was anticipating.
Lender Yapi Kredi priced the first ever public US dollar AT1 from the Turkish banking sector with a US$650m bond at an eye-watering yield of 13.875%. More than that, however, the bank's main shareholders, conglomerate Koc Group and Italian lender UniCredit, took over 60%.
Some rivals cried foul about the deal being recognised as a publicly syndicated bond but in total up to 70 accounts were involved.
Citigroup just got on with doing what was needed for the client.
The transaction increased Yapi's Tier 1 capital ratio by about 120bp and complemented a TL4.1bn (US$1bn-equivalent at the time) rights issue undertaken by the bank in June 2018.
Its Tier 1 ratio was 9.8% at the end of September 2018 (excluding regulatory forbearance). The deal took it to about 11%, a healthy cushion above the minimum regulatory requirement of 8.5%.
"Yapi was an incredible transaction given where Turkey was at the time," said Charles.
The big challenge for the country's banks was that they were facing a huge capital dilution because of the depreciating lira.
"Turkish banks needed to raise dollar-denominated capital but how on earth were they going to get a dollar AT1 done?" said William Weaver, head of EMEA DCM.
"It required a shareholder anchor to get the deal together and it worked out really well. It was what was required from something that wasn't plain vanilla."
Another transaction that was far from easy was a US$7.5bn three-parter in September for Mexico’s troubled state-owned oil company Pemex.
The offering was a triumphant return for the company, which just a few months earlier had been the centre of concerns relating to its finances.
The offering came in conjunction with a jumbo liability management transaction. But this was no straightforward new issue and tender exercise; Pemex, which carries more than US$100bn of debt on its books, wanted to deal with upcoming maturities and expensive debt payments.
"This was less of a liability management exercise but a repositioning of the credit," said Chris Gilfond, head of Latin America capital markets origination.
The bank started with a blank piece of paper when discussions began with the government on how to put Pemex's finances on a firmer footing.
Something seismic was required. "We adopted a shock-and-awe strategy," said Blake Haider, managing director, Latin America capital markets.
In addition to the new issue, cash tender for bonds maturing between 2020 and 2023 and an exchange offer for notes maturing between 2022 and 2048, the government also injected US$5bn into the company.
The deal got the thumbs up from Moody's, which said it would improve Pemex's liquidity position and debt maturity profile.
The challenge for Citigroup over the next 12 months will be to not rest on its laurels. It’s likely that the bank will remain a top three player in the emerging markets but as its leadership team knows there's still plenty of competition waiting to take advantage of any slip ups.
"One of things we looked to do over the course of the year was stay ahead of emerging trends," said Gilfond.
It's a mantra Citigroup will seek to meet in 2020 too.
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