Bond league tables grim reading for investment banks

If you are a pure investment bank, this year’s league tables for corporate bond issuance in Europe make for grim reading. Not a single securities house makes it into the table of top 10 bookrunners of euro-denominated fixed-rate corporate bonds for the year to date. Instead, universal banks appear to be making all the running in what may signal a shift in emphasis among corporate treasurers as access to capital has become more difficult.

Although there is plenty of time to make up ground, comparing the year-to-date bookrunner rankings with positions for the previous 12 months produces some interesting results. Deutsche Bank and Schroder Salomon Smith Barney occupy the same positions as at the end of 2001 – first and third – while BNP Paribas is up two places in second spot.

Dresdner Kleinwort Wasserstein’s fourth place at the end of April is a considerable jump from its thirteenth position in 2001. This improvement can be attributed to the fact that this year DrKW has been bookrunner on deals that include Ford and GMAC. “DrKW had a wobble in 2001,” suggests a competitor, “but they have come out with some big deals this year.”

Barclays Capital is in fifth position (after ending ninth in 2001), WestLB’s eighth place is literally a league apart from its nineteenth position last year, while Banc of America Securities is currently in the top 10, after missing out on the top 20 in 2001.

Among the pure investment banks, the most serious casualty is Merrill Lynch, which is not even in the top 20 as a bookrunner of corporate bonds in euros. Last year the bank finished seventh. Morgan Stanley is currently fifteenth (last year the bank gained fifth position) and Goldman Sachs is eighteenth. Among the US securities houses, only Lehman Brothers, in eleventh spot, is currently higher than its 2001 ranking.

Bond orginators at universal banks have plenty of theories for why pure investment banks may find life harder this year. Liquidity concerns are forcing companies into the arms of the large bank lenders, they suggest; moreover, the stronger credit ratings of many of the universal banks are an advantage at this point in the economic cycle. There is also the appalling publicity – not to mention the threat of legal action – that some securities houses in the US, Merrill Lynch among them, are facing because of the alleged bias of parts of their research. And finally, bankers at universal providers say that the pressure on borrowers to offer ancillary business, always a central consideration for commercial lenders, is today greater than ever.

“Banks do not receive enough return on loans unless they are remunerated through other products,” says a banker at a European universal bank, “and today, with all the emphasis on generating shareholder value, if a bank provides a loan they will expect repayment through, among other areas, bond mandates.”

A banker from debt capital markets syndicate at Merrill Lynch in London agrees that commercial banks have become more vocal as companies have become less confident about their access to finance. “Everybody is playing the same game at the moment,” he says. “The commercial banks are being very aggressive and saying ‘we lend to your company, so include us on the deal’.”

Greater use of multiple lead managers, and not just when it comes to multi-billion dollar transactions, might be an indication that corporate treasurers are indeed under greater pressure to spread business around. “There has been a trend towards use of multiple lead managers, even on smaller deals,” says Roger Spooner, head of primary markets at WestLB in London. “If you look at the number of deals of €1 billion or less that have more than two lead managers you have probably seen as many examples in 2002 as in 2001 and 2000 combined.”

Spooner thinks the increasing range of investors that are buying credit in Europe is one of the main reasons for this trend. “Credit is a more diverse market today, so you need broader coverage,” he says.

Awarding mandates to a broad range of banks makes life easier as well. “The argument used to be that if you have too many lead managers you lose control of the transaction,” says one London head of bond syndicate, “but having multiple lead managers makes your life easier as a treasurer. If you are awarding two of your eight house banks the mandate, you are going to have to deal with some pretty unpleasant conversations with the other six.”

Nick Studer, a capital markets analyst at financial consultants Oliver, Wyman & Company, thinks the trend among companies to mandate a greater number of house banks on each deal is encouraging a ‘me too’ mentality among smaller banks in the bond market. “Not all banks may aspire to be in the top three in corporate bond league tables, but many are certainly looking to be one-stop shops. We feel this can be damaging to their economics and that they can end up being jacks of all trades and masters of none.” Studer argues that all but the largest three or four banks should look to specialise in certain fields.

A director of syndicate at a US securities house appears to agree with that sentiment. “Rightly or wrongly, it is often believed that executing a bond is less difficult than equity or a convertible, so companies feel more at ease giving deals to smaller banks.”

Those same small banks, or those that cannot quite lay claim to being undisputably top tier, naturally argue that that is an unjustifiably exclusive view. Whoever is right, European credit is still widely regarded as being up for grabs, with as yet no distinct group of upper-tier banks able to lay claim to dominance. The market is also lucrative and has large growth potential, or as one debt capital markets director puts it: “Corporate deals are where the money is to be made.”

In those circumstances, few banks will want to throw in the towel without a fight, especially given that European corporate bond league tables seem prone to some interesting fluctuations. Some casualties can be expected, but the fact that an investment banking underperformer such as Commerzbank last month announced yet a further shake-up of its investment banking business, suggests few banks are yet willing to admit that the one-stop approach is not for them.