Citi DCM EMEA chief still sees ways of getting business done

In many ways, the early weeks of 2016 can be seen as a kind of microcosm of the preceding year – the headlines have been dominated by a further decline in the Chinese stock market and intervention from the Chinese government, weaknesses in the automotive sector, and the price of oil has continued its game of ‘how low can you go?’.

The outlook for the months ahead is not good, either. The oil price collapse, which some analysts believe could level out at as low as $18 per barrel, will cause further damage to the economies of producer countries. Western stock markets are on high alert for economic data from China, and may take a turn for the worse if the news is unfavourable. With interest rates still at very low levels in most developed economies, policy-makers have fewer tools to ward off a recession.

It is clear that investors will have to be on their toes to make good returns in this environment, especially as a general scarcity of liquidity in the markets means that exceptional volatility can be produced off the back of fairly run-of-the-mill news. “Volatility has become more volatile. In early January, when the People’s Bank of China devalued the renminbi, Western stocks suffered a bit, but the VIX index hit 40 points, which is where it got to the day after the Lehman collapse. So smaller events trigger much bigger reactions than before,” says Will Weaver, head of debt capital markets (DCM) and syndicate business for Europe, the Middle East and Africa (EMEA) at Citi in London.

A receptive market

With secondary markets suffering from a bout of instability, it would stand to reason that primary issuance would be a pretty tough gig at the moment. Not so, says Mr Weaver. “Despite the doom and gloom in the headlines, primary markets have been a lot more receptive than secondary markets indicate. In an illiquid secondary market it’s difficult for investors to put large cash piles to good use, so the only way fixed-income investors can put a significant amount of money to work is in primary issuance.”

Debt issuers are aided by the handicaps involved in hoarding large amounts of cash – by doing so, investors can run a less risky profile but also seriously hamper their own returns. “Investors are carrying high cash positions because of uncertainty last year, but with deposit rates in negative territory and high-grade sovereign debt offering such little returns, there is a high cost in staying out of the corporate credit market,” says Mr Weaver.

As risk indicators increase, investors could start differentiating between high-quality and low-quality credits within business sectors, rather than pursue a general bias for or against specific sectors. Oil and gas offers a good example, here. The sector is broadly split between established high-grade producers and high-yield exploration outfits. At the onset of the oil price slump in late 2014, all of these businesses were treated with caution by investors.

Since then, even as the oil price has continued to fall, the high-grade producers have fared fairly well in the markets, but high-yield exploration firms have fallen into a tailspin. This has been particularly apparent in Europe, where North Sea oil is increasingly costly to extract. At one point last year, the combined market capitalisation of all EMEA exploration firms contracted to such a degree that they were worth less than the largest single equivalent firm in the US.

Window of opportunity

Primary markets may be in decent health, but more frequent bouts of excessive volatility makes finding an opportune time to issue much more challenging. “Picking the right window for issuance has always been a huge part of offering market advice and guidance to clients. However, it feels like the windows are getting smaller and smaller, and our strategy has to change to reflect that,” says Mr Weaver.

In the run-up to a client issuing in the market, banks typically spend an intensive period of time selling the client’s story to potential investors and doing the groundwork to establish an extensive orderbook. Given the unpredictability of today’s debt markets, this ‘roadshow’ practice may now seem a little outdated. “Going on a one-week roadshow on behalf of a particular issuer with a view to pricing the week after is now more difficult, because the market environment might change completely in that time frame,” says Mr Weaver.

With time-consuming roadshows less handy than before, the onus now falls on DCM desks putting in the hours away from issuance periods to keep clients in the shop window. “There is value in being in front of investors. They need to know the client, so we’re putting in a lot of work outside the traditional transaction time periods to make sure our clients can go to the market very quickly and find a pool of investors ready to take on the issuance,” says Mr Weaver.

Moving away from extensive roadshows may produce a bias towards certain investors in certain geographies, and reduce take-up from those that may need an extra bit of persuading or are based in far-flung places, but with investors increasingly sticking to home markets to reduce risk, this is not such a worry at the moment.

Shorter issuance windows inevitably create a ‘seat of the pants’ ride for the life of DCM desks, where each day any number of deals can be taken off the shelf and placed in the market if the time is deemed to be right. “Every morning we invariably have a number of deals on which we take a go or no-go decision. We’ve done all the prep work around documentation so that we can advise a client to issue at short notice. Issuers need to be alert to that, and need to be well advised,” says Mr Weaver.

It is this area where Mr Weaver sees DCM businesses really earning their corn in the year ahead. Quality advice may be hard to come by for clients, however, as many major banks are cutting costs and cutting back on investment banking head counts. “A lot of banks have been downsizing their fixed-income businesses, just at the time when client relationships are so important,” adds Mr Weaver.

Insurers get on board

Part of the advisory process is helping clients decide not just when to issue debt, but in what form. One type of investor that Mr Weaver is seeing a lot more is insurance companies, particularly when it comes to longer tenor deals. Under the Solvency II regulations, European insurance providers must build up their capital ratios and gravitate to longer term investments to make themselves safer.

“We tested that appetite for longer term assets at the start of the year with a dual-tranche issuance from Poland, one at 10 years and the other at 20. For that kind of emerging market sovereign, you typically get a lot of demand for the 10 year, but with the 20 year we found a distinct audience of insurance buyers that are fewer in number but put big bids on the table. In the end we had the same-sized order book for both tranches,” says Mr Weaver.

Last year was marked by a big increase in US corporates issuing debt in European markets. According to data from Dealogic, euro-denominated debt from US issuers in 2015 increased by 23% over 2014 and, at $108.7bn, reached its highest level since 2007. Though the average deal size was a little lower than in 2014, a wide range of names from the finance, food and drink and telecoms sectors brought large deals to market.

With many large US corporates engaged in major business operations in Europe, it made sense for them to align their funding sources with these asset bases. Add in the persistent low-interest-rate environment in Europe, and the result was a heady cocktail for new issuance. According to Mr Weaver, this year is likely to see more of the same, with economic disparities driving the trend further.

“One thing to watch out for in 2016 is continuing divergence between European and US rates, with the former remaining suppressed and the latter rising steadily. This should increase the flow of cross-border issuance. A major theme last year was euro-denominated issuance by US corporates. In fact, the US was the single biggest issuer of euro corporate debt,” he says.

“Citi is well placed to act as a conduit for this activity, because we are perhaps one of the most ‘Europeanised’ of the big US banks. Our global profile matches that of many of our US corporate client, so we have experience in managing cross-border activities.”