Barclays built a multi-asset execution platform out of the Lehman acquisition, and the debt specialist in the bank’s two-man management team for global finance in the EMEA region is relishing the opportunity to deploy that platform if merger and acquisition activity picks up.

When Barclays purchased the US operations of Lehman Brothers in 2008, the build-out of global equities and mergers and acquisitions (M&A) practices were the most obvious transformations that resulted. But the change for Barclays’ traditionally strong fixed-income business was no less dramatic.

Lehman had built its equities and M&A business in the final decade of its life, with its historic strength in the debt capital markets (DCM), just like Barclays. But its geographic focus on the US perfectly complemented Barclays’ presence in Europe and Asia.

“We were known as a sterling house; it took us about four or five years to persuade people that we are also a euro house, but it took much less time after the Lehman acquisition for clients to think of us as a leading dollar house, which is absolutely what we would have wanted. In the past two years, we are the only bank worldwide that has been among the top five DCM banks in all three leading currencies,” says Richard Boath, Barclays’ co-head of global finance for Europe, the Middle East and Africa (EMEA).

The league tables certainly prove his point, with Barclays the top lead underwriter in US debt markets in the first quarter of 2012, and the number two bookrunner by proceeds raised behind only JPMorgan, according to Thomson Reuters data. Those two banks, together with Deutsche Bank, now stand apart from the pack as the top three debt houses across origination, sales, trading and research. Since the Lehman acquisition, Barclays has also organically built DCM volumes in yen, South African rand (helped by its ownership of South Africa’s Absa Bank), Swiss franc and Australian dollars.

First quarter surge

In the first quarter of 2012, Thomson Reuters estimates that total global DCM deal values rose by almost 70% compared with the fourth quarter of 2011, with volumes rivalling the post-Lehman reopening of markets at the start of 2009. The major explanations are the pipeline of deals postponed as the euro crisis intensified during the final quarter of 2011, and the liquidity injection administered by the European Central Bank’s Long-Term Refinancing Operation (LTRO).

Perhaps equally important is an improvement in investor sentiment towards the rapidly evolving regulatory environment for banks. Mr Boath, who was previously Barclays’ head of financial institutions group capital markets, says investors now seem willing to put aside concerns over emerging European regulation such as bail-in legislation. And this should not come as a great surprise – the Basel III and European Banking Authority requirements mean banks have approximately doubled their pre-crisis capital and liquidity levels.

“It is difficult for banks to hit return-on-equity targets, but that affects equity investors. Credit investors are perfectly happy with 10% Tier 1 capital ratios, which should significantly reduce the risks of banks falling over,” says Mr Boath. 

Eurozone factor

Mr Boath does not play down the challenge posed by high debt-to-gross domestic product ratios in the eurozone, which will take time and economic growth to heal. And he adds that the revival of senior unsecured debt markets remains selective, with banks beyond the top institutions in Spain, for example, still largely restricted to covered bonds. But he is confident that the three-year LTRO provides the liquidity window needed to allow Europe’s banking sector to get back on its feet.

“Three years is an age in banking. There may be more impairment to come in the peripheral countries, but that is on the whole already priced into the bond market. The structural issues are a long-term project, but the extreme short-term risks have now been addressed,” he says.

The first quarter issuance boom looks to have benefited all banks still active in the DCM business, with few firms having scaled back their activities significantly during the turbulent times of 2011. Since M&A and equities were even quieter than the debt markets, these areas are likely to have borne the brunt of any staff cuts, especially for non-electronic equity sales teams.

“Bond origination is the closest ancillary to balance sheet lending, and it also drives the derivatives business because most bond transactions are swapped. Smaller banks are not going to close their DCM desks unless they are walking away from investment banking altogether, and we have not seen people pulling out of this business,” says Mr Boath.

His conclusion is that the top three players face a large hurdle if they are to further consolidate their current market share, which fluctuates between 7% and 8% each. In Europe especially, he notes that the top foreign player in the major markets, such as the UK, Germany, France or Italy, is usually only number four or five overall, with the leading positions dominated by domestic players that have on-the-ground relationships. 

Integrated model

Where Mr Boath is confident Barclays can make progress is in exploiting the model of combined DCM, equity capital markets (ECM) and M&A expertise that was built on the Lehman acquisition. While his experience is on the DCM side of the business, his co-head of global finance for the EMEA region is Sam Dean, an ECM specialist. Both teams sit on the same floor and share their client pool, in a structure modelled on Lehman’s own set-up.

Genuine multi-asset solutions are usually driven by M&A transactions that then require some combination of rights issues, bridge-to-bond financing and risk management advice. Barclays played that combination of roles for investment vehicle Resolution’s £2.75bn ($4.38bn) purchase of AXA’s UK life insurance business in 2010, but such M&A deals were rare during 2011.

Mr Boath believes the second half of 2012 could usher in a lift-off for M&A activity. Many European corporates are sitting on a cash pile that is not generating a return. While they are not yet under pressure to spend the money, that will change if the macroeconomic environment improves while interest rates and inflation remain subdued. “If chief executives see value-accretive acquisition opportunities, now is the time to take them. That would suit Barclays, as we have already invested heavily and the Resolution deal was the first time in Europe where we showed that we could seamlessly deploy all the pieces at the same time for a client,” he says.

This year will also be a significant test of the Barclays model following the announcement that the bank will operate under a single brand, phasing out the separate Barclays Capital, Barclays Wealth and Barclays Corporate brands. Mr Boath says co-operation between the divisions already existed, with Barclays Capital’s dollar private placement activity for UK corporates deriving almost entirely from Barclays Corporate clients. While not an architect of the rebranding strategy, he is clearly an enthusiast.

“There is a genuine effort to bring the corporate and investment bank into closer alignment, and having one Barclays brand is an obvious starting point. I know people on my desk have long answered the phone simply as Barclays, and this will cement the mindset of an integrated corporate and investment banking model,” he says.

Structural change

During the next few months, Mr Boath sees the potential for renewed sovereign debt volatility if peripheral eurozone countries fail to hit fiscal targets as the key risk to the current stability in the markets. In the longer term, the DCM business is adjusting to the tighter conditions for bank balance sheets.

He notes that the capital relief that was once provided by securitisation is now largely unavailable under the new regulatory regime, but it is a useful tool for shifting funding risk from bank balance sheets into the capital markets. So far, the UK securitisation market is again beginning to offer a reliable way to provide long-term funding for prime retail mortgages, but other categories and geographies are much less active.

“Basel III is very heavy on long-dated lending, so if it is possible that will go into the capital markets. But I think banks have always wanted to do that to some extent, the question is how far markets are willing to take on those risks, and in what format,” says Mr Boath.

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