Investment Banking awards 2008 - the winners

League table position can be bought and large deals do not necessarily mean effective or well-executed deals. The Banker has always tried to temper the claims of the biggest and best with the more laudable qualities of client service and innovation.

Now we have decided to follow through and concentrate only on innovation as our principle benchmark for the awards. And since innovation is not the preserve of the bulge bracket this means that all investment banks – as well as banks with investment banking divisions – can compete equally.

In a year when investment banking has suffered more than celebrated, the challenge for our judges lay in distinguishing a genuine innovation from a rebranding or marketing spin. But as always our judging panel was composed of experienced industry professionals with an eye for the true trailblazer.

Innovation is at the core of investment banking and keeps the industry powering ahead. There is no question that, in the current cycle, it resulted in damaging excesses. But even as the industry restructures in the wake of events over the past year, innovation will still be a prized asset that reveals itself in many shapes and forms. Given the circumstances, our judges placed greater store by innovations that brought transparency, clarity and stability to markets, provided genuine cost savings and risk management solutions for clients, and offered appropriate and value-creating products for investors. Evidence that the innovation is already transforming the relevant market also carried extra weight.

The next couple of years will not be easy for banks; the world will be a much more risk-averse place and market participants will be wary of anything that looks over-engineered – an attitude echoed by our judges this year. But banks and bankers have shown that they can rebuild and reinvent – even in the most difficult circumstances. By focusing on innovation, we believe The Banker’s Investment Banking Awards will provide a suitable showcase for the ground-breaking achievements that can help put the sector on the road to recovery.

THE JUDGES

J Mawuli Ababio is managing director of the African Venture Capital Association (AVCA) and is based in Johannesburg, South Africa. Born in Ghana, he has more than 20 years’ experience in the African financial sector, including work with the African Development Bank, PricewaterhouseCoopers and Intercontinental Bank of Nigeria.

Philip Alexander is the finance editor of The Banker.

Silvia Fazio is a partner and head of international-legal at Collyer Bristow, specialising in cross-border investments, international banking and financial transactions, and tax planning. Based in the UK and with more than 15 years’ experience as a solicitor, she is also qualified to practice in Brazil, Italy and Portugal.

Kenneth Ge is general manager and CEO of Bank of China’s London branch, and director of Bank of China International (UK). He has worked for the bank in various countries since 1993. He has been the director of the Association of Foreign Banks since 2004, and is a member of the EU Advisory Group.

Stephen Kingsley is a director at global expert testimony and analysis firm LECG, where he specialises in risk management and regulation. He has more than 30 years’ experience in the financial sector, previously working as the head of UK financial services at technology consultancy Bearing Point.

Dawid Konotey-Ahulu co-founded pensions and insurance investment advisory firm Redington Partners in London in 2003. He was previously the head of Merrill Lynch’s insurance and pensions solutions group for the EMEA region, where he implemented the first liability-driven investment hedge for a FTSE-100 company pension scheme.

Geraldine Lambe is the investment banking and capital markets editor of The Banker.

Francis Leung is senior advisor to CVC Capital Partners. He previously worked for almost three decades in investment banking in Hong Kong, most recently as chairman of Asia for Citigroup Global Markets, and was a co-founder of the Peregrine Group in 1988, becoming CEO of BNP Paribas Peregrine after a merger in 1998.

Zia Mody is a senior partner of law firm AZB, which has offices in Mumbai, Delhi and Bangalore in India. She has almost three decades of experience working in the US and India, where she has practiced as a court counsel for 15 years. She specialises in mergers and acquisitions, private equity, securities law and litigation.

Graham Moyse has more than 20 years’ experience as an investment bank equity research analyst covering the utilities and banking sectors, most recently as a team leader for Goldman Sachs, and previously at Deutsche Bank and Kleinwort Benson.

Raymond O’Neill is a founding member of investment and regulatory consultancy Kinetic Partners. He has 20 years’ experience in the investment management industry, including work for Bank of Bermuda and as head of the financial services practice at RSM Robson Rhodes. He advises on product structuring, distribution and regulation.

Roberto Paolelli is the head of credit trading at Banca IMI, the investment banking arm of Intesa Sanpaolo, with responsibilities for the bond and derivatives operations. His previous positions included head of fixed income funds at Capitalia Asset Management and senior positions in bond and option trading at JPMorgan.

Silvia Pavoni is the investment editor of The Banker.

Dr Mohamed Ramady is currently visiting associate professor in economics and finance at King Fahd University of Petroleum and Minerals in Saudi Arabia, where he teaches on subjects including banking and Islamic finance. He has previously held senior positions in Europe, the Middle East and the US with institutions including Citi, Saudi American Bank and Qatar International Islamic Bank.

Osman Semerci is CEO and managing partner of alternative asset manager Duet Group. Prior to joining Duet in April 2008, he worked for 16 years at Merrill Lynch in Europe and Asia, most recently as global head of the fixed income, currencies and commodities (FICC) group, and as a member of the bank’s global operating committee.

THE AWARDS:

MOST INNOVATIVE BANK:

Winner: JPMorgan

When Bear Sterns bankers arrived at JPMorgan some of them questioned whether they could go from ‘an entrepreneurial company’ to a more process-driven one. JPMorgan bankers retorted that they aimed to be both entrepreneurial and solvent (a distressed Bear Sterns was acquired by JPMorgan in May).

That it is achieving this is attested to by our judges’ choice of JPMorgan for our top investment banking award as the Most Innovative Bank of the Year. And, as it turns out, JPMorgan’s emphasis on innovation may have saved it from some of the worst excesses of the credit crisis that befell the bank’s competitors.

“Innovation pushes finance forward and makes new markets accessible, but over the long term it’s only by combining innovation and sound judgement that a firm is successful,” says JP Morgan co-chief executive Bill Winter.

Head of global sales and member of the investment bank’s executive committee Tony Best adds: “The desire to innovate has taken us away from some of the high-volume low-margin businesses that blew up during the crisis such as collateralised debt obligations of asset-backed securities. Our ability to come through the crisis relatively unscathed was a combination of good decisions and also some good luck.”

Mr Best also attributes JPMorgan’s success in innovation to the strength of its derivatives business, where the focus is on finding solutions to client problems rather than providing them with an off-the-shelf product. “Engrained in the JPMorgan DNA is the derivatives business and derivatives are not products, they are tools for a solution. Our bankers have to understand a client’s problem and then structure a solution,” he says.

A bank of JPMorgan’s size obviously has processes and procedures to be followed – and which seemed irksome to Bear Sterns bankers used to a smaller firm – but, in fact, the desire to innovate goes right to the top of the firm. The bank likes to ensure that its off-sites for senior staff are not just spent worrying about next year’s numbers but in identifying and exploiting long-term opportunities. Currently, JPMorgan is busy staking out businesses in the areas of climate change and the longevity market. In March the bank bought Climate Care, a pioneer in carbon emissions reductions, with the aim of originating carbon emission reduction projects and trading the reduction credits so generated. Blythe Masters, the head of commodities at JPMorgan, is noted as a great innovator at the bank who is driving this project ahead.

In the same month, JPMorgan launched its LifeMetrics Index, designed to benchmark and trade longevity risk. With increases in longevity, pension companies, actuaries and governments are looking for financial products to hedge the extra costs involved. JPMorgan plans to be a leader in the field and is using its experience in the development of the credit derivatives market to speed things along.

“Credit derivatives didn’t take off until there were standardised indices and documentation,” says Mr Best. “Up to that point every transaction was bespoke. With that in mind we have made LifeMetrics an ‘open architecture’ index that other broker-dealers can use.”

Successful innovation involves never standing still and, while a pioneer in credit derivatives, JPMorgan continues to come up with new ideas in the sector. As a result the bank also won awards in credit derivatives for restructuring the entire Canadian asset-backed commercial paper market and in bonds for a convertible deal that overcame investors’ fears about ending up with illiquid stock.

JPMorgan has demonstrated that innovation is alive and well in banking and as essential for bad times as for good ones.

MOST INNOVATIVE TEAM:

Winner: Morgan Stanley Retail Structured Products

In a year of falling credit and equity markets and imploding structured products, delivering the right balance for a retail investor audience has been an especially delicate task. Morgan Stanley has sought the difficult combination of diversification and protection in volatile times, and our judges felt the achievement deserved recognition beyond the retail structured products category alone.

“The question we ask is: what we can bring to the table versus other retail houses – that is our institutional insight, the expertise in, say, commodities or equity research,” says Michael John Lytle, executive director at Morgan Stanley.

“So our next question is: how can we transform that product and deliver it into a retail context in a clear way. We don’t have the largest product range, we want to offer focused ideas that have impact,” he adds.

The retail structured products team sits above the multi-asset structuring group, enabling the team to take a big-picture view and select the best ideas across asset classes. This approach has come into its own in today’s more volatile markets.

“Equities are likely to stay the dominant asset class in structured products. They tend to range between 70% and 90% of volumes, but this does mean that when equity markets are trending sideways or downwards, it is important to provide investors with many opportunities to play broad market themes via other asset classes,” says Mr Lytle.

Morgan Stanley has taken two interlocking approaches to helping retail investors overcome that confusion. The first is to provide access to new underlying assets, and also key investment themes. In May 2008, this prompted the bank to offer retail investors access to the commercial property market, usually the preserve of specialist and institutional finance.

The second approach is offering investors a wider range of market-neutral products, rather than outright bullish bets. Again, the commercial real estate growth plan is a case in point. “Given the level of market uncertainty, we offered products linked to UK commercial property in an innovative structure that offers a positive return even if the market is flat or slightly negative. Because of the way the property derivative market is priced, investors can access this asset class at a significant discount,” says Katie Nurton, vice-president at Morgan Stanley.

To optimise payouts in all market conditions, the bank is also beginning to provide retail investors with access to alpha strategies driven by its in-house research capacity, such as the Europe Target Equity Index family launched in July 2007.

This is a bespoke index based on the views of Morgan Stanley’s own equity strategists, effectively giving retail investors semi-active management of their investment, without the high fee structure of an active fund manager.

However, to ensure retail investors understand the risks they are running with new products, each proposal is carefully vetted, with the structurer challenged to explain the concept of the trade in a few short sentences. And the team avoids jumping too many hurdles at once.

“In the retail-focused markets, we might introduce a new underlying, then three months later a new feature such as early redemption. We are always careful to introduce new concepts gradually,” says Ms Nurton.

CLIMATE CHANGE

Winner: Crédit Suisse

Runner-up: Barclays Capital

Climate change products are by their nature an early-stage market, and those banks that have entered the sector are effectively building a market infrastructure from the ground up. Crédit Suisse applied established tranching techniques from the collateralised debt obligation (CDO) market for a particularly novel use, to overcome a key obstacle for investors in carbon credit offsets that are known as Certified Emissions Reductions (CERs).

The problem is so-called ‘delivery risk’, the danger that a project which is expected to earn CER status is either refused certification, or delayed. For investors who are unable to take on such risks, Crédit Suisse securitised a pool of 21 Clean Development Mechanism (CDM) projects developed by EcoSecurities, creating a portfolio of 5.51 million tonnes of carbon credits. This was then divided, CDO-style, into A, B and C tranches, with the highest tranche being guaranteed – effectively stripping out delivery risk – while the lowest ‘equity’ tranche offered maximum exposure to delivery risk, but with the highest potential rate of return.

“Given that this was the first securitisation in this sector, it was comparatively plain vanilla, but we may see more complex transactions further down the track,” says Paul Ezekiel, head of environmental commodities trading at Crédit Suisse. And even such a relatively straightforward deal requires a significant commitment to the carbon market from Crédit Suisse – to risk-manage its own exposure resulting from the transaction, the bank needs to maintain a large portfolio of projects.

At present, most investor interest stems from those who want access to the CER market for carbon compliance reasons. However, Mr Ezekiel anticipates other classes of investor moving in, especially in view of the uncorrelated nature of returns in this project-based market. And he notes that there is a good pipeline of projects to supply portfolios for further securitisations.

But there is a cloud on the horizon: the current EU Emissions Trading Scheme under which such deals are arranged expires in 2012, and participating governments have yet to hammer out a replacement deal. “The limitation is not product design, it’s market design. We are running out of runway, so the sooner we get some regulatory clarity, the better. Until then, there is a limit to the amount of liquidity that will be in the market,” says Mr Ezekiel.

SUSTAINABILITY

Winner: Merrill Lynch

Runners-up: Citi and RZB

In trying to secure a sustainable future, one of the most difficult decisions facing many developing nations is how to avoid exploiting their natural resources to the detriment of the local and global environment. Many nations are being warned not to log valuable forests because of the critical role they play in carbon sequestration, yet few are offered an alternative source of much-needed and sustainable revenue. Until now.

In the groundbreaking financing for Ulu Masen Ecosystem in Aceh, Indonesia, Merrill Lynch, in partnership with Carbon Conservation (working on behalf of the governor of Aceh), came up with a deal that provides carbon financing for the world’s first independently validated avoided deforestation project, which is compliant with the rigorous Community, Climate, Biodiversity Alliance (CCBA) standard. It may not be the first avoided deforestation scheme, but it is the first to harness the power of an international investment bank and to link environmental benefits with companies’ ethical product offerings.

In April 2008, Merrill Lynch essentially paid villagers in Aceh $9m not to log the rainforest, which, as well as ‘trapping’ carbon dioxide, is home to rare Sumatran tigers, clouded leopards and orangutans. In return, Merrill will get the carbon credits judged to be earned (in return for the carbon that is trapped by the forest which, if it were cut down, would escape into the atmosphere). The process is monitored and verified by CCBA.

Merrill is using the credits to create packaged products for institutional clients who want to offer ethical products to their retail customers using ‘voluntary’ credits; for example, a power company that wishes to offer a carbon-neutral electricity tariff, or an airline offering carbon-neutral flights, or a car manufacturer who wants to carbon-neutralise its cars.

Abyd Karmali, global head of carbon emissions at Merrill, says the deal vindicates governor Irwandi Yusuf’s ‘Green Initiative’, which laid the foundations for the transaction. “And it’s a good model for other parts of Indonesia, which faces one of the biggest deforestation challenges,” he says.

Mr Karmali believes that the credit crunch and slowing global economy may have some impact on projects, but that because sustainability has become one of the variables on which companies compete, such efforts will not be derailed. “Companies compete on technology, on labour costs and on supply chains, and sustainability has become another competitive dimension. From that standpoint, the need to demonstrate a clear strategy and a strong performance in climate change efforts is critical to corporate stakeholders,” he says.

COMMODITIES

Winner: Barclays Capital

Runners-up: UBS and JPMorgan

Roger Jones, co-head of global commodities at Barclays Capital (BarCap), cannot remember another period of growth in activity and sophistication quite like the one that has surged through commodities over the past two years, as food and fuel prices soared. In such a fast-moving and increasingly competitive landscape, finding the right product for investors requires careful judgement.

Several algorithmic strategy indices and long-short hedge-fund replicators based on finding the best performers from a basket of commodity underlyings came to market during that boom. But BarCap ­generated something distinctive when it launched the Commodities Out-Performance Roll Adjusted Liquid Strategy Index (Corals) in February 2008.

The team noted that many products coming to market were built around a purely technical approach, which could prove unreliable as volatility picks up. “So the most important thing for us was a product that diversified and included fundamental inputs, economic and other data, and performed the algorithms on top of that data,” says Mr Jones.

The team was also very aware of the need for efficient construction of the index to optimise returns and appeal to investors in a variety of market conditions. “Our first step was to make sure people could understand the components they were investing in, so we picked the most liquid contracts available in the benchmark commodity indices. They also liked the concept of looking at the roll yield, which has been a big question in recent years as there have been swings in the roll yield from positive to negative,” says Mr Jones.

Corals was initially targeted at BarCap’s core investor audience of asset managers and insurance clients, but Guglielmo di Borgoricco, head of global distribution, sees growth in his business coming from all angles, including corporate clients and more plain-vanilla products.

“As corporates step up their risk management capabilities, there is demand for indices on underlyings that really have not traded before, or at tenors that have not been available to the market,” he notes. “The innovation is how to risk-manage these products – in these markets, simple technical strategies have tended not to hold for the asset or the liability side”.

TRADE/PROJECT FINANCE

Winner: Standard Bank

Runners-up: Royal Bank of Scotland and Exotix

The continuous growth of developing countries and the need for developed economies to finance trade and update their infrastructure have not left project financiers short of work. The past year saw an increased number of trade and project finance deals and many innovative solutions in this space, which made this category hotly contested.

The judges were particularly impressed with Standard Bank’s innovative solutions, epitomised by the Blue Ridge Platinum project for the development of an underground mine in South Africa. A significant challenge, common among platinum producers, lay in the project’s sensitivity to fluctuations in the rhodium metal price and lack of instruments available to protect cashflows against this. Rhodium is found in platinum ores and, depending on forecast prices, rhodium could make up as much as 40% of the project’s cashflows. The structure had to work around the fact that rhodium only settles physically and that the project had sold all its physical metal to a refiner.

The successful structuring and execution of the hedging transaction allowed the lenders to smooth out potential cashflow volatility and enable the sponsors to raise the finance necessary to proceed with the project. It also allowed the user to source a long-term supply of a metal where these types of contracts do not exist.

Solutions such as these have the potential to expand into new markets, which is something that Standard Bank is set to achieve, even beyond its core markets in Africa.

“We aspire to be a leading emerging markets project finance house, leveraging our local knowledge with centres of excellence in execution and distribution,” says Jonathan Wood, head of project finance at the bank. “In Brazil, where we recently hired a six-man project finance team from ABN AMRO, we intend to build market share across advisory and financing. In Russia, the CIS and Turkey we will work closely with our local offices to service clients in our focus sectors, being telecommunications, oil and gas, power and infrastructure or mining.”

Our panel of judges was also impressed with Royal Bank of Scotland’s ability to bring innovation to even the most mature markets, and with the combination of a new asset (zinc warrants) in a new market (Yemen) created by Exotix.

PRIME BROKERAGE

Winner: Deutsche Bank

Runners-up: Crédit Suisse and Barclays Capital

Even before the credit crunch began, Deutsche Bank prime brokerage was positioning itself to meet three key developments in the hedge fund sector. These were the growing international breadth of investment, increasing use of multi-asset and multi-strategy funds, and the concentration of assets in the leading hedge funds that obliged them to move more capital more efficiently through the market.

“We were early to recognise that prime brokerage and equity financing had morphed from a collateral-based agency business into a portfolio-based risk-lending business due to the wider array of products in prime brokerage accounts, the growing use of derivatives to create leverage, and greater geographical spread into emerging markets,” says Barry Bausano, co-head of global prime finance at Deutsche.

The past year has added a fourth and most urgent priority for hedge funds: operational and financial risk management. Having escaped the worst of the battering that destroyed and damaged many rivals, Deutsche Bank was a natural partner for large funds looking far more closely at counterparty risk on both the asset and liability side.

Not that the bank has simply waited for business to fall into its lap. To help clients assess the risk of short squeezes, it introduced what Mr Bausano calls an “industry shake-up”, the DB SLAM securities lending analysis and monitoring tool. This is designed to help clients overcome opaque data and pricing in equity securities lending, providing much more comprehensive details on the percentage of available floats withdrawn from the market for borrowing.

“There are only three sources of recurring value in a financial services institution – financial technology, intellectual capital, and strategic relationships. So this is a key innovation,” says Mr Bausano. And Deutsche is increasingly taking cutting-edge financial technology into new markets, introducing synthetic equities lending and swaps in countries as diverse as Nigeria, Ukraine and Kuwait, as well as bringing the first prime brokerage service for assets in Bangladesh in January 2008.

TRADING

Winner: UBS

Runner-up: Morgan Stanley

The winning entry in this category drew together several key strands in the way that trading has developed over the past year – more algorithms, more volatility, and more fragmented market liquidity. When UBS brought its algorithmic equities trading strategy TAP to the market in 2007, it was the first such system to respond adaptively to market liquidity, marking a significant step from previous strategies based around ­volume-weighted average prices.

TAP seeks that liquidity in both displayed and undisplayed markets – so-called dark pools – including the bank’s own substantial internal pool. And it does so in a way intended to allow the client to decide how urgent the trade is, and to avoid market impact or signalling the trade to bank proprietary trading desks.

“What makes it so powerful around the world is the fact that it is combined with the ability to interact with order flow that UBS has, so we are able to save our client a good deal of money by not crossing the bid-ask spread,” says Daniel Coleman, global head of equities at UBS.

The past year has certainly provided a baptism of fire for the strategy, and Mr ­Coleman is satisfied with the outcome. “Many algorithms developed at a time when markets weren’t very volatile, so the potential for slippage was not that big. So the fact that more clients are using TAP every day says a lot, because the performance of algorithms is much more widely distributed today, whereas one or two years ago it was hard to tell the difference between them,” he explains.

UBS has also bolstered loyalty by tailoring the algorithm to suit individual client needs. The benefits to the bank are clear – commission fees for UBS Direct Execution rose by 250% year on year in the first quarter of 2008. But Mr Coleman is not resting on his laurels. “Two or three years from now, there had better be a TAP junior, because the market structure is bound to change, and I’m sure our competitors are coming up with their new algorithms,” he says.

FOREIGN EXCHANGE

Winner: Royal Bank of Scotland

Runner-up: Deutsche Bank

Chris Leuschke, global head of currency structuring at Royal Bank of Scotland (RBS), describes his 24-strong worldwide team as “the client-facing side of the FX option trading desk”, with responsibility both for maximum institutional and corporate client penetration and designing and pricing new FX-linked products for the retail investor base. In the past year, both those audiences expanded dramatically into new territory, as RBS integrated ABN AMRO’s much larger network of relationships in Asia, Latin American and eastern Europe.

Far from halting innovation, says Mr Leuschke, the integration of new clients has stimulated it. A case in point is his team’s work for Chicago Bridge & Iron (CBI), a US engineering firm. The bank pulled off a two-dimensional hedge of Chilean inflation and foreign exchange risk for CBI, to help it manage a contract to build a liquefied natural gas import facility in Chile’s Quintero region. The RBS response was a marked difference from the usual inflation and interest rate combination. “We have helped put inflation on the map outside the interest rate world,” says Mr Leuschke.

The team also uses hybrid technology to build FX-based index products for an investor audience. The bank has sought to position itself as a more sophisticated, niche player, rather than aiming for mass distribution of carry-trade products. This cautious approach has proven appropriate, as markets became more volatile and some simple trades built around interest rate differentials between developed and emerging markets suffered heavy losses.

One of RBS’s FX concepts subsequently took on a wider appeal in July 2007, as a product for retail distribution by a longstanding RBS client in Scandinavia. This was a capital-protected note linked to an FX basket designed to play the expected appreciation in the BRIC currencies (Brazil, Russia, India and China), and Mr Leuschke’s team is already working on index products incorporating a much larger set of currencies.

INSTITUTIONAL STRUCTURED FINANCE

Winner: Royal Bank of Scotland

Runners-up: UBS and BNP Paribas

The asset-backed security (ABS) markets have faced something approaching a buyers’ strike in the past year, but issuers themselves still have business to do, posing unprecedented challenges for institutional structured finance.

There was still demand for solid, quasi-government agency ABS, and for Royal Bank of Scotland, tapping a varied investor base rather than predetermining the best audience was just one important part of a ground-breaking transaction for US utility Baltimore Gas & Electric. The deal securitised the cashflow from rate stabilisation charges on customer bills, which were permitted by the State of Maryland to allow the company to smooth the transition from capped to market electricity rates.

The transaction has obvious application for other jurisdictions where capped rates are due to expire, and Daniel McGarvey, head of non-mortgage ABS at RBS Greenwich in the US, believes the model could be adapted more widely for the utilities sector. “It could be used for other capital expenditure purposes, such as building a new plant for greater capacity that will allow a utility to lower rates in the long run, or for replacing capacity with the latest technology after storm or hurricane damage,” he notes.

A similar open mind on potential investors was necessary for Airspeed, an operating lease securitisation on 36 aircraft owned by RBS Aviation Capital. In a departure from traditional aircraft ABS structures, the deal included the sale of an equity portion to private equity funds, to diversify the investor base. “The sale process was launched into pretty sticky markets when the early signs of the credit crunch were coming through, so this was an important market validation of the value and yield on the aircraft portfolio in challenging conditions,” says Richard Holliday, managing director of asset-backed bonds at RBS.

Market conditions continue to deteriorate, but Richard Bartlett, head of European corporate debt capital markets at RBS, says the key drivers for the business are still in place, especially after the European Central Bank’s tightening of repo collateral conditions in September 2008. “Structures keep evolving, and we are responding to the rapidly changing conditions. Our ability to take new borrowers across the Atlantic in both directions and into Asia helps us to seek out the marginal investor, and that will be even more important when we see the re-emergence of the market,” he says.

RETAIL STRUCTURED PRODUCTS

Winner: Morgan Stanley

Runners-up: Commerzbank and Barclays Capital

INFLATION PRODUCTS

Winner: Barclays Capital

Runners-up: BNP Paribas and Royal Bank of Scotland

With inflation on the rise around the globe, this category was hotly fought. In particular, two of Barclays Capital’s innovations will play an important role in bringing transparency and liquidity to high inflation markets that were previously opaque.

In October last year, BarCap launched the first ever family of indices tracking the performance of inflation-linked debt issued by sovereign borrowers within developing countries. This addresses the needs of investors in emerging market inflation-linked assets, says Ralph Segreti, BarCap’s inflation-linked and rates total return product manager.

“When we began to increase our commitment to inflation in the emerging markets, we noticed three distinct classes of investors who came to the fore: local investors using it to hedge, international emerging market investors using it for alpha and diversification, and the global inflation investors using it for yield enhancement. Many of them wanted to transition from a tactical investment to a strategic investment but didn’t have the tools to do so,” he says.

“By creating this index we have enabled investors to do country-level analysis of returns and relative value comparisons, allowing them to make strategic investments, which is a trend we are already seeing.”

Judges were also impressed with the first subordinated inflation-linked bond, issued in April this year by Barclays’ ABSA Group. As well as affording attractive funding for the issuer, it provided vital product for South Africa’s institutional investor community and offered substantial pick-up of more than 150 basis points versus the benchmark government issue that the lower Tier 2 bond was replicating.

The eventual popularity of the subordinated bond is testament to the bond’s ability to overcome investors’ reluctance to increase their exposure to bank debt. Timing is ­everything.

“Any reluctance to take on further bank capital was overcome by investors’ needs to take on some inflation protection,” says Clinton Clarke, head of fixed income sales at ABSA. The feedback has been extremely positive, illustrated by the five further taps, bringing the total notional value outstanding to ZAR1bn ($121.7m).

INTEREST RATE DERIVATIVES

Winner: HSBC

Runners-up: Royal Bank of Scotland and Barclays Capital

HSBC’s core strength of reducing financing costs for corporate clients in emerging markets is long established. This clear aim has evidently provided a solid base to generate new interest rate derivatives products, often in countries where financial innovation is itself a relatively new concept.

Epitomising that combination, HSBC devised a ground-breaking ‘flexi-start’ interest rate swap for West Coast Power, the largest independent power generator in Sri Lanka. This overcame the problem of an uncertain start date for a major project, by enabling the company to risk-manage the process of raising €152m floating rate finance and swapping into fixed rate, and at a lower cost than the existing payer swaption method.

“This is a good case study of what we have seen over the past year. It is the type of product you can explain in one sentence, which is where this market has headed after so many dislocations,” says Paul Baldwin, global head of structuring at HSBC. In addition to other project finance deals, he believes the tool could be applied to just about any corporate borrower seeking to hedge future financing costs, as it would give them more flexibility to tap the bond market whenever it is most liquid.

Straightforward explanation also appears to have helped the success of another new product, this time targeted at investors. The Dynamic Term Premium strategy is based on the tendency for the dollar forward rate curve to over- or underestimate actual interest rate trends at different phases of the cycle.

Mr Baldwin has been pleasantly surprised by the take-up in non-dollar markets such as the Gulf and south-east Asia, which he attributes partly to the fact that the sophisticated algorithmic trading strategy was built on a comparatively simple and widely observed underlying market anomaly.

“Given the volatility we have had in traditional interest rate structured products, we have a sea change in what investors want,” says Mr Baldwin. “Algorithmic strategies are a diversifier away from traditional curve steepener or constant maturity swap strategies in which both the buy-side and the sell-side have probably become too concentrated in recent years.”

EQUITY DERIVATIVES

Winner: BNP Paribas

Runners-up: Crédit Suisse and JPMorgan

The winning entry in this category incorporated new products for long-established BNP Paribas (BNPP) clients, and the tailoring of existing products for new markets.

According to Remi Frank, global head of equity derivative sales at BNPP, the common thread running through the operation is the existence of a discreet structuring team numbering about 150 staff worldwide, sitting between trading and sales functions.

“This team’s only goal is to provide new ideas to the clients,” says Mr Frank. He explains that, in addition to the parts of the structuring team who work on developing new pay-offs and monitoring the regulatory requirements, a third of the staff are now focused on developing new underlying assets or indices, to discover innovative performance engines especially in today’s turbulent conditions.

One such index, compiled with socially responsible investment consultancy Forum Ethibel, backed up by leading supplier of extra-financial data Vigeo, enabled BNPP to respond to the needs of longstanding Belgian client, Crédit Agricole, by developing an innovative life-long ethical structured equity product for distribution to its retail investors.

The index composition is reviewed each time Forum Ethibel removes a company from its ‘Pioneer’ list of ethical large-caps. Mr Frank expects this methodology would have applications in other areas, such as shariah-compliant investing, that require a product to evolve over its own investment maturity, rather than retaining a static structure once launched.

In countries where BNPP is offering products that are unprecedented in that market and building new client relationships, Mr Frank believes the bank’s rigorous approach to product development is an important selling point. Half of all new product proposals in the bank are rejected by internal management and compliance processes without ever being presented to clients, and the bank has also developed a scoring system that it shares with clients to check if a new product suits their needs.

“We examine the back-testing. Is it dependent on the time period chosen. What sort of market environment is this product designed for?” says Mr Frank. This process is especially important for establishing the credibility of non-flow algorithmic equity derivative products such as the Millennium index, which BNPP customised for landmark rollouts in Poland in November 2007 and Malaysia in February 2008.

CREDIT DERIVATIVES

Winner: JPMorgan

Runners-up: BNP Paribas and Deutsche Bank

The past 12 months will be remembered as the year that credit derivatives turned hostile. The market witnessed unprecedented conditions: multi-notch downgrades to mortgage-backed securities, and the disappearance of funds even from what were supposed to be the most liquid short-term money markets.

In this context, the most urgent demand for innovation was to repair the damage when credit derivatives fell into distress. JPMorgan’s global structured solutions group found itself restructuring not just individual assets, but in one case an entire market, in the largest ever deal of its kind.

In mid-August 2007, 22 Canadian third-party asset-backed commercial paper (ABCP) conduits failed to roll over maturing ABCP on the same day, potentially forcing the mass liquidation of C$35bn ($24.3bn)) in assets and the unwinding of a further C$200bn or more in credit default swaps that formed part of leveraged super-senior tranches. To avoid such a disastrous firesale into an illiquid market, a large pool of investors and banks agreed to freeze the conduits and formed a committee that selected JPMorgan as an advisor.

Andrew Kresse, managing director of global structured solutions at the bank, takes up the story. “We had to pool the resources available throughout JPMorgan to value the underlying assets, although ultimately identifying and getting all the information we needed on the assets was what took longest,” he says.

In addition, approximately 70% of the conduits were backed by synthetic credit derivatives such as collateralised debt ­obligations, and the remainder by cash securitisations such as credit card receivables and auto loans. These categories required very different treatments under the restructuring.

The degree of co-operation among market participants in Canada has not yet occurred elsewhere. Even so, the lessons of the so-called ‘Montreal Accord’ have been applied to rescue efforts for large structured investment vehicles (SIVs) in Europe, notes Ian Slatter, co-head of north Europe sales and marketing at JPMorgan.

“Every client comes with a different problem, but they are almost all liquidity-related. The Canadian situation was extra­ordinary because it was so complex, but our priority is to keep the solution as simple as possible. The simpler it is, the more executable it is, the greater the chance of success,” says Mr Slatter.

ASSET & LIABILITY MANAGEMENT

Winner: HSBC

Runners-up: Société Générale and Lazard

When liquidity dries up and financial market values tumble, asset and liability managers come into their own. No surprise, then, that the ALM category attracted one of the strongest fields of entries. HSBC won through, after moving first on what would become a familiar theme – the restructuring of structured investment vehicles (SIVs).

And moving first might just be a key lesson. Two HSBC-sponsored SIVs, Cullinan and Asscher, totalling $45bn in assets, were increasingly shut out of the commercial paper (CP) markets from mid-2007. Although it had no legal obligation, the bank consolidated both entities onto its balance sheet to minimise investor losses, and was the first SIV manager to carry through a reorganisation and funding plan, in November 2007. Speed was also of the essence, says Dominic Swan, managing director of SIV management at HSBC, because it pre-empted market value triggers that could have forced the SIVs into a forced sale of assets.

The aim was to retain maximum value for all tenors and classes of investor in the vehicles. There were two planks in this process.

First, HSBC provided a 100% liquidity facility to one successor vehicle – Mazarin – that allowed renewed access to the CP market. Second, two other vehicles, Barion and Malachite, were funded through the term repo market, eliminating the problem of lost CP liquidity and allowing the asset portfolio to mature at par.

It helped that between 80% and 90% of those assets were AAA rated, with no downgrades at the time the reorganisation took place.

But Mr Swan also underlines the importance of calling in expertise from the bank’s risk management and structured credit teams, avoiding documentation changes that would have required time-consuming noteholder votes, and focusing on investor needs to achieve high acceptance rates.

“The situation was new, but the solution had all the classic themes that you need to think about in a restructuring – something that is equitable to everybody, and has the right alignment of interests,” explains Mr Swan.

Two strong runners-up also caught the judges’ eye. Société Générale, with its ­solvency put for pension funds, and Lazard’s work for the US United Auto Workers’ Union, restructuring the medical benefits schemes of three leading US auto manufacturers.

RISK MANAGEMENT

Winner: Deutsche Bank

Runners-up: HSBC and Barclays Capital

The risk management function at Deutsche Bank is spread throughout the organisation, stimulating widespread innovation in both internal and client-facing processes. In particular, the bank’s pensions servicing platform has benefited from this holistic approach over the past year, being scaled up to help clients meet the tough challenges that have emerged from rising inflation on the liability side and more volatile markets on the asset side.

“What differentiates us from the standard advisor on the street is being a group sitting within investment bank trading. We have access to all the risk models that our traders are using around the world, which means we can bring a pan-asset class model together and offer something very cutting-edge,” says Joseph Hamilton, head of the global pensions strategy group.

In one major deal in December 2007, a UK pensions company with a £300m ($545.7m) portfolio sought Deutsche’s advice to manage duration risk using a mix of derivative products including interest rate and inflation swaps. A key part of Deutsche’s offering that swung the deal, says Rashid Zuberi, head of the complex life and pensions group, was the bank’s rollout of a web-based module that gives clients greater control and transparency over the advisory process, allowing them to run scenarios online based on their own portfolio inputs.

“We do not simply say: ‘Send us your liabilities and we will tell you the efficient frontier, the mix of traditional and alternative assets that you need.’ This client liked the fact that it was not a black-box approach,” notes Mr Zuberi.

Individual Deutsche risk management products that broke new ground in the past year included a ‘stagflation’ hedge strategy and the snappily titled dbImpAct Volatility Return Index, which gave investors the first opportunity to take an index-based view on the difference between implied and realised interest rate volatility.

HSBC came in a very close second in this category, with new products including a put-call strategy that enabled Borse Dubai to build a $1.2bn stake in Swedish financial market OMX AB, without having to finance the position unless the bid was successful.

MERGERS & ACQUISITIONS

Winner: Citigroup

Runners-up: Perella Weinberg Partners and Merrill Lynch

The birth of 4G communications technology, allowing wireless broadband access (WiMAX), is in itself an innovation that could transform work and leisure environments. Creating a viable network for the whole US market required some financial ingenuity to boot. Citi’s role advising Sprint on financing the development of its WiMAX services was key in clinching the innovation award for the M&A category.

Citi had been working on a strategy for Sprint since early 2007, and the bankers had already noticed that ClearWire held complementary bandwidth coverage. From here, the proposal to launch a start-up by merging the two companies’ 4G assets was a natural step that would also allow the management of the two founder companies to focus on their core activities. But as the credit crisis took hold, raising capital for the new entity from the market started to look decidedly less appealing.

As an alternative, Citi helped bring on board five strategic investors, all of whom had a vital interest in fostering a successful WiMAX network, including three cable operators, chip manufacturer Intel and web technology giant Google.

“At its core, facilitating a seven-party transaction required true innovation. For each issue you needed solutions which could bridge the objectives of multiple parties and not upset the overall balance of the discussions,” says Eric Medow, co-head of Citi’s North American investment banking communications group.

In particular, as several of the strategic partners were tax-sensitive, Citi employed an ‘UPREIT’ structure for the new venture, which combines the properties of existing limited partnerships. It will enable the strategic investors to facilitate tax deductions by booking the start-up’s losses in the early years right away. This model, not normally used when creating a new company through a merger, should be applicable far beyond the communications sector.

Alongside the unique package of commercial agreements signed between the parties, Citi needed to design a high-­quality corporate governance structure robust enough to accommodate so many interests. “We needed a governance structure that would allow people to have influence, but would avoid stalemates in the day-to-day operation of the business,” says Mr Medow.

LEVERAGED FINANCE

Winner: Goldman Sachs

August 2007 was an inauspicious time for innovation in leveraged finance, as global liquidity drained away. Even in this climate, Goldman Sachs broke new ground by arranging the financing for the first true leveraged buyout (LBO) in Russia: Lion Capital’s purchase of drinks company Nidan Soki.

“We were very focused on how to structure it to protect ourselves in a downside scenario: where are you incorporated, what jurisdiction the documentation is governed by, where our security is held,” says Doug Henderson, head of EMEA credit finance at Goldman Sachs.

These kinds of western European structural protections made the credit much more attractive for traditional emerging market investors looking at their first LBO in Russia. And the audience could widen as the market opens up – Goldmans is already working on another deal for Lion Capital, the $600m purchase of Russian Alcohol.

In more established LBO jurisdictions, having introduced some of the bull market innovations that favoured private equity sponsors, Goldmans also helped respond to the new, post-crisis paradigm. In February 2008, it arranged the first major LBO underwritten in Europe since the credit crunch, $1.625bn in senior and $540m in subordinated financing for the First Reserve purchase of British oil field services company Abbot Group.

“We were very focused on the amount of flex we had, market terms and documentation that was much more investor-friendly,” says Mr Henderson. The $540m subordinated facility was initially distributed as a bridge loan, but with the intention to refinance it as a high-yield note if market conditions allow. Under discussion at the time of writing, this would be the first high-yield corporate issue in Europe in a year.

A fresh mindset was also needed to switch investor audience, replacing the collateralised loan obligations that were victims of the squeeze.

“We structured this deal to have amortising ‘A’ tranches and a shorter average life, some of the things that are more important to the banks that are driving transactions in today’s market,” says Mr Henderson. As it is still unclear whether the LBO market will ever return to its pre-crisis form, this deal could prove an essential template.

HYBRID CAPITAL

Winner: Bank of America

Runners-up: Goldman Sachs and UBS

Before the middle of 2007, US banks looking to raise capital without significantly diluting ownership or excessively increasing leverage had tended to issue non-cumulative preferred shares with dividends received tax deductions (DRD) to a small dedicated investor base, with issue sizes rarely exceeding $1.5bn.

Once the write-downs on mortgage-backed securities portfolios began in earnest, however, packets of this size were insufficient to plug the massive holes appearing in bank balance sheets.

US mortgage giants Fannie Mae and Freddie Mac began to break the mould in late 2007 with larger preferred stock issues of $7bn and $6bn, respectively. These transactions appealed to a wider audience that included crossover equity investors, given the difference between their common and preferred dividends. But for banks with higher dividends, it was more difficult to attract a common stock audience to preferred stock issuance.

So when the parent bank asked Bank of America Securities (BAS) to self-lead a $6bn capital-raising in January 2008, explains Kyle Stegemeyer, head of client solutions at BAS, the answer adopted was to tap crossover institutional fixed income investors instead. To do this, it introduced the first Tier 1 security issued by a domestic bank in the US.

“The large credit investors we were looking to attract were more concerned about the liquidity of preferred stock than traditional preferred investors who focus more on the tax benefit, so we changed four features to create a security that from their viewpoint was going to be more liquid, without compromising the underlying characteristics of the preferred,” says Mr Stegemeyer.

The par price was changed from $25 to $1000, coupons are paid semi-annually instead of quarterly, and the securities trade with accrued interest rather than a clean price. Taken together, these inn­ovations made the issue more directly ­comparable with a regular fixed income instrument.

Finally, BAS even ensured the security identification code (CUSIP) was in line with those for fixed income rather than preferred stock, allowing credit investors to analyse it with their usual Bloomberg trading tools.

In the first half of 2008 alone, $26bn out of $29bn in DRD preferred securities placed with institutional investors used the BAS model, including every transaction of more than $500m.

BONDS

Winner: JPMorgan

Runners-up: CIMB and HSBC

It takes a steady hand to steer a client around a previous financial market accident. In January 2006, Indian mining company Vedanta sought to launch a $750m bond convertible into an as-yet unlisted class of non-voting stock, as a way to raise capital without diluting ownership. Investors baulked because the free float on the non-fungible foreign currency global depository receipts (GDRs) into which their bonds were to be converted would consist of the original bondholders and no one else – too small to create a liquid and freely tradable market.

So when another Indian industrial giant, Tata Motors, came to JPMorgan with a similar objective the following year, it was clear a new approach was needed. The bank proposed a non-conversion period of four years, with conversion after that time dependent on a qualifying event.

“Investors’ conversion option will be limited to conversion into a class of non-fungible GDRs only if the issuer has within four years established a minimum free-float in this class of GDRs. In the absence of a minimum free float, investors can convert into the ordinary shares,” explains Achintya Mangla, managing director in JPMorgan’s Asia equity-linked markets team.

“A large free float relative to the size of the convertible will ensure liquidity for investors post-conversion, and they will also be compensated for any discount that this class of GDRs may trade at on conversion,” he adds.

From the client’s perspective, the business may well have grown enough in four years to allow the company to realise greater value from the GDR listing. And investors were sufficiently comfortable with the safeguards to allow the bond to price in the middle of the guidance range, even as the first signs of trouble emerged in global credit markets in June 2007.

Since then, market conditions have deteriorated to a degree that makes a convertible structure such as this, incorporating four years of credit risk, more difficult to launch. But Mr Mangla stands ready should things improve.

“We started marketing this as the wider Tata Group and not just Tata Motors well in advance, because we knew capital raising is a broader issue for them, and any solution we can provide them could be used in multiple situations,” he notes.

INITIAL PUBLIC OFFERINGS

Winner: Goldman Sachs

Runners-up: Morgan Stanley and UBS

Having worked on the MasterCard initial public offering (IPO) in 2006, Stuart Bernstein, managing director of equity capital markets at Goldman Sachs, already understood the risks involved for the client when Visa decided to list the following year.

Specifically, like MasterCard, Visa faced anti-trust class action litigation that could cost the company billions of dollars if successful. This threat could have undermined the largest ever US IPO, especially at a time of such market volatility in the first quarter of 2008.

“One of the lessons that we learned from MasterCard was that the perceived cost to market value associated with the unknowable litigation risk would exceed the actual cost. So if we could structure something that would ring-fence that liability, then all parties would be better off,” says Mr Bernstein.

To help realise a higher IPO value, the member banks of the Visa consortium therefore agreed to create a “retrospective responsibility plan” to cover public shareholders against any losses arising from judgements or settlements in the class actions. Mr Bernstein believes the concept of isolating liability or downside risk can be used in other situations where there are specific risks that can reduce market value.

“Currently, certain financial institutions have a perception of the risks on their balance sheet that is very different from the perception that investors have,” he says. “So if there is a way to convince investors when you do an offering that you can cap the downside risk, you are able to provide investors with an ability to achieve an internal rate of return hurdle at a higher effective price to the issuer.”

Similarly, energy companies can hedge commodity price volatility partly to reduce the risk premiums associated with investor discount rates.

Moreover, while Goldmans was one of eight lead managers on the deal, it distinguished its marketing campaign with an online presentation module to answer institutional investors’ most common questions, and with the most systematic targeting of sovereign wealth funds (SWFs) that had been used to date.

The size of SWFs, and underdeveloped portfolio management teams in some cases, made the large allocations available from a mega-IPO such as the $20bn Visa offering particularly attractive to these investors. Recognising the cautious investment pro­cesses of these organisations, the Goldmans team visited the top decision-makers at each fund well in advance of the IPO.

ISLAMIC FINANCE

Winner: BNP Paribas

Runners-up: HSBC and CIMB

Demand for shariah-compliant financial products is one of the fastest-growing areas of investment banking, and the market is having to develop quickly to keep pace, while accommodating a complex and evolving framework. The BNP Paribas (BNPP) Islamic finance unit, Najmah, is focused on developing shariah-compliant derivatives products designed to close the gap – in terms of both cost and sophistication – between Islamic and conventional structured finance, says Rami Falah, the bank’s head of Middle East Islamic banking.

In judging this category, our panel was conscious of the challenges of such a rapidly evolving market, as well as the fact that the strictness of shariah application varies in different jurisdictions. Saudi Arabian shariah boards tend to be especially rigorous, and this year’s winner closed a number of ground-breaking structured Islamic finance transactions in the kingdom. These also needed to take account of the wider legal environment in Saudi Arabia, for example the laws governing escrow accounts that are vital to many securitisation deals.

The unique June 2007 supertanker finance facility for the National Shipping Corporation of Saudi Arabia arranged by BNPP faced a further challenge. “Banks do not usually want to take the ownership risks of the vessels, because they would have to assume third-party liability,” says Mr Falah. The bank therefore structured a commodity murabaha for the facility, and has already received requests to arrange several other Islamic shipping finance deals in the Gulf Co-operation Council.

Working for another Saudi client, Arabian Cement Company, BNPP also arranged the first Islamic export finance deal involving a Jordanian project. This required further innovation to enable multi-source export credit agency participation, the separation of an export insurance component that could not be used as an underlying tangible asset for a murabaha , and a shariah-compliant foreign exchange forward component that should provide standardised documentation for other transactions.

In practice, each case differs from the next, says Jacques Tripon, global head of Islamic banking at BNPP, but the bank’s work is building a momentum of its own. “We forecast next year in Saudi Arabia that at least one out of every three transactions will be done with shariah compliance,” he says.