But the likely sale may come as a blow for the French bank’s arch rival Société Générale, which was also actively interested in purchasing ZCM assets. It is also a second-best solution for Zurich Financial, which initially wanted to sell its entire capital markets unit. But BNP Paribas, Société Générale, Barclays Capital and Bank of America all turned down that initial option. These banks viewed the horizontal business structure at ZCM as being incompatible with their largely vertical business models, and described some ZCM transactions as “toxic”, with some of the asset management products containing what one banker described as “huge liabilities”. There was also the legal liability risk of conducting due diligence on some 150 special-purpose vehicles set up by ZCM. A Zurich Financial spokesperson said the specific structure of the BNP Paribas deal had yet to be finalised, so he could not comment on the matter.
BNP Paribas and Société Générale were viewed as the serious contenders. Bankers said Barclays and Bank of America lacked the experience and infrastructure to take on such a large and specialised business. But following Zurich’s failure to dispose of the entire unit, BNP Paribas moved swiftly to enter negotiations to buy ZCM’s structured funds transactions on an exclusive basis. The speed of the move is believed to have wrong-footed Société Générale, which one banker, speaking on condition of anonymity, said was still grappling to get senior management go-ahead to enter new talks with ZCM. Société Générale declined immediate comment.
BNP Paribas is set to purchase around 90% of ZCM’s structured funds assets for an undisclosed price. These deals range in size from $10 million to two worth more than $100 million, said bankers. The transactions that were described as “toxic” by a number of bankers familiar with ZCM’s books are unlikely to be included, as it appears BNP Paribas is interested in a proprietary investment in the ZCM assets rather than to liquidate the assets. Both BNP and Zurich Financial declined to divulge the purchase price, or a price range – which given the complexity of instruments involved is impossible to approximate. But given that cash-strapped Zurich had effectively initiated a ‘fire-sale’ – something its management denies – it is unlikely that BNP Paribas will pay any significant premium.
As part of the deal, BNP Paribas is set to hire 60 ZCM staff out of a total of around 90 employees. This should include ZCM’s head of structured products Kurt Overley, but not ZCM’s chief executive Stephen Sinacore, nor its chief operating officer, Douglas Dachille. Once the deal is completed and IT installations finished, the majority of these hires are set to move from ZCM’s downtown New York offices to BNP Paribas’ offices in mid-town New York. Smaller teams will join BNP Paribas in Dublin and Tokyo. ZCM’s Australian operations will remain closed.
But the transaction will also result in a significant increase in BNP Paribas’ gap risk. Both BNP Paribas and ZCM have constantly improved their models to hedge this risk and price transactions to gain a premium for holding such risks on their books. Although both institutions have found ways to model and substantially reduce the delta, there is no perfect hedge to gap risk. It is also unclear how well BNP Paribas and ZCM’s models integrate. BNP Paribas declined to comment on either its current or expected gap risk level once the ZCM transactions come onto its books. While banks typically receive a higher premium for this gap risk compared with other business lines that contain similar risk levels, there are concerns in the structured funds industry that some leading banks may have to scale back transaction levels should their gap risk levels become too high.
So far this year, Zurich Financial has sold its Rüd, Blass & Cie private bank to Deutsche Bank, unveiled plans to sell its asset management business in India to Housing Development Finance Corporation, and stated its plans to exit insurance operations in the Baltic countries through portfolio sales and run-offs. In May, it agreed to sell its United States Zurich Life unit to Bank One for $500 million, saying the company is on track to meet its goal of generating $1 billion in risk-based capital through divestments.
The sale of ZCM’s assets should help it meet this goal. But it is unclear how it plans to deal with the remainder of ZCM’s assets and business lines.
BNP Paribas is expected to complete its purchase within the next couple of weeks.