When Deutsche Bank launched a US$750m US high-grade bond just over a week ago there were some unusual names as active leads, including CastleOak Securities, Loop Capital and Mischler Financial. They were among six firms picked as joint lead managers on the deal, and bankers have praised the active roles given to the firms to push forward diversity and inclusion efforts.
Wall Street’s big banks are taking action to make capital markets and finance more diverse. That’s partly due to the heightened focus on racial issues and inequality in the past year, but also because banks are keen to attract new investors who are demanding more focus on sustainability and social issues.
Goldman Sachs, Morgan Stanley and peers are using different tools and approaches to address ongoing issues of race and equality in capital markets. Diversity and inclusion initiatives have been in place for decades, but there are signs it is accelerating after being slow to pick up in the corporate bond market and some mandates were criticised as box-ticking without much active involvement.
Deutsche Bank said it wanted to use a structure on its latest bond deal that helped showcase the D&I firms' capabilities.
“What Deutsche Bank did well is not just raising the profile, but also the experience of all the firms, because we were involved in every step of the transaction – from the market update, go/no-go calls, the bookbuilding, through to pricing,“ Dave Yang, vice president in investment banking at Loop Capital, told IFR.
Deutsche partnered with six joint lead managers and five co-managers, all owned and led by management teams that are female, minorities or have service-disabled veteran backgrounds.
“Our role was to give them an opportunity to make the most out of the deal participation,” said Jeanmarie Genirs, head of US investment-grade syndicate at Deutsche.
“Let’s be a springboard for more discussions, more visibility, higher profile, better quality discussions,” she said.
Genirs is optimistic that after the deal, the firms will make more calls to big corporates, and management will be more willing to take those calls.
There is evidence that has been happening. Investment banks that are owned by minorities, women or veterans have been underwriters on 118 deals for US investment-grade companies so far this year, representing 36% of total deals, according to Refinitiv data.
That is the highest ever level and up from 29% in 2020 and 17% of deals in 2010, Refinitiv data showed.
The firms, which have traditionally had a stronger footing in the US municipal bond market, are now keen for that involvement to be more active on corporate deals.
60% share of fees
Deutsche led its offer of US$750m of senior non-preferred callable four-year fixed-to-floating-rate bonds, but from the outset all the JLMs were included in discussions on pricing, sizing of the deal, distribution and other aspects.
They experienced a more interesting deal than planned. It had been due to launch on March 29, just as concerns about Archegos Capital were spreading, which prompted worries that banks were exposed to big losses – which Credit Suisse and Nomura were – and the deal was delayed. It completed on April 1.
“We thought those conversations with clients and investors would be more impactful and their profiles would be raised in a much more meaningful manner if they acted as joint lead managers alongside us,” Genirs said.
“If the goal is really to make significant change and expand diversity on Wall Street, then we have to give experience and opportunities and we have to give those ‘at-bats’ to people who deserve it.”
The firms were well rewarded for a smooth deal. Filings showed each JLM will retain 8% of the fees and collectively the 11 firms will receive about 60% of the fees from the deal. That equates to US$150,000 for each JLM.
The six joint lead managers were CastleOak Securities and Loop Capital, African-American owned firms; Academy Securities and Mischler Financial, owned by service-disabled veterans; women-owned R Seelaus; and Siebert Williams Shank, women and African-American owned.
"Time to take a stand"
Pressure has been building on banks from several fronts – protests over racial injustice spread in the US and other countries last year; giant investor BlackRock has led calls for more action and said it will put its money where its mouth is; a boom in issuance of ESG bonds; and changes in work patterns following the coronavirus pandemic and lockdown have changed the thinking too.
Added to that is the potential for D&I firms to bring a different perspective and new investors – who may be smaller but more in tune with the social and diversity issues that some bulge-bracket firms are struggling to meet.
Verizon and Alphabet last year mandated D&I firms on big bond deals, and US insurer Allstate put down a marker in November when it priced US$1.2bn of five and 10-year senior notes through a syndicate exclusively comprised of minority, women and veteran-owned businesses.
It was the first time a corporate bond offering of that size had been managed exclusively by such firms. Allstate said it had been “time to take a stand” to create more equity in the securities markets. It plans to double its trading volume with diverse firms in 2021 and called on other corporate bond issuers, investment managers and bulge-bracket banks to do more.
R Seelaus CEO Annie Seelaus said in the past year D&I broker-dealers had seen a broadening of corporate engagement and an elevation of roles being offered, and Deutsche’s deal had added to that.
Mischler Financial has worked on more than 700 primary capital markets deals in the last five years, but Ronald Quigley, its head of fixed income syndicate, primary sales and FIG/utilities DCM, praised Deutsche for taking a “landmark new approach” to its deal.
“Having the JLMs side-by-side with Deutsche Bank was something that is much more significant than the cliche of moving the deal forward for D&I,” Quigley told IFR.
The hope is the opportunity to show their distribution capabilities enhances the firms' prospects for landing future big corporate bond deals.
“The big challenge for our firms is getting active bookrunner opportunities, which is a Catch-22," said Yang at Loop Capital. Bankers need experience to lead a transaction, and need to lead a transaction to gain that experience.
"The Deutsche Bank transaction helps to chip away at this cycle that needs to be broken,” said Yang. “This transaction … gives us additional content in our discussion with corporations, and not just other banks, and it allows us to showcase the full extent of our capabilities,” Yang said. “And the goal will be that other corporations will be more inclined to use us on their next bond deal as an active bookrunner.”