Global head of capital markets origination, DrKWJoe Dryer talks to Geraldine Lambe about the major restructuring at Dresdner Kleinwort Wasserstein and the advantages he believes it has given the bank.
Dresdner Kleinwort Wasserstein (DrKW) and parent company Dresdner Bank have had a less than easy time over the last few years. There was a high-profile failed merger attempt with Deutsche Bank, then the integration of Wasserstein Perella, followed by acquisition by insurance giant Allianz – whose enthusiasm for the purchase has seen many ups and downs since the transaction was completed. At the same time, it suffered lacklustre performance in the markets.
But things are looking up. The investment bank has been in profit for the last three quarters and, in August, Allianz made plain its commitment for at least the next two years. To effect this turnaround, the investment bank took a long hard look at itself; it was honest and brutal in its conclusions – its structure was bloated and one problem was a focus on products rather than clients.
In 2000, as part of its rebuilding mission, Dresdner Kleinwort Benson (DrKB), as was, adopted what was then a pretty unusual strategy – at least for a European bank – to combine its debt capital markets (DCM) and its loan business. It went on to create an overall Capital Markets unit from the merger of its debt and equities business in April 2002 and one origination platform across equity capital markets (ECM) and DCM.
To effect such a drastic rebuild, changes had to begin at the top. In September 2000, Joe Dryer, now global head of capital markets origination, was drafted in from BNP Paribas by Andrew Pisker – then the new head of global markets and his old boss at Paribas – to restructure debt origination.
It has been a big job. When Mr Dryer joined, morale was low. And while he was given responsibility for global debt origination, he says it was really only a name – the business was split between global finance, structured finance and DCM, carrying more than 600 staff. Similarly, although DrKB carried out all the international business for Dresdner Bank, including risk capital, lending and all products, in Germany there was the corporate bank, which was responsible for all domestic business.
Solid foundations
Mr Dryer maintains the bank had good building blocks to work with. “It had lots of clients, a very large balance sheet and plenty of good products. The problem was that it was a client-facing business that was embedded in product and geographical silos; and there was little connectivity or communication between the different silos – even when clients were important to different business lines.”
After first combining DCM with lending, Mr Dryer says the bank carried out a client mapping exercise to find out which clients did what business with the bank. The principle aim was to identify and then target as core the ‘super clients’: those which straddled lending, DCM and investment banking; the second tiers were those which crossed two of the three main business lines. “We needed to know who we were allocating our risk capital to,” he says.
Then Dresdner created its Institutional Restructuring Unit (IRU) into which it siphoned off up to E30bn of client debt. “If DrKW’s business with a client was restricted to lending and did not include any investment banking, debt or equity capital markets products, then the client would likely be classified as non-strategic, perhaps exited altogether or the relationship transferred into the IRU. Once there, the idea is that the debt is restructured or securitised, wrapped up and possibly sold on,” says Mr Dryer.
Strategic slicing
Over a period of three to four months, DrKW whittled down its client list to a strategic base of about 800 globally; risk capital was clawed back and reallocated more profitably. It was a painful process – and one which led to a fair amount of screaming by some bankers, (whose own numbers were drastically sliced back), as the client list was slashed.
“It was difficult but it had to be done. A lot of client businesses were consuming huge amounts of risk capital. At the time we had a higher exposure in the US than we had across Europe – excluding our home markets of Germany and the UK. This did not fit with the board’s strategy that we should be a strong European advisory firm with international reach,” says Mr Dryer. “We refocused our equity business in Asia and reduced our loan portfolio in Asia and the US. Our brief was to focus on fewer clients and make a more tactical use of our assets.”
Changing shape
One of the biggest challenges has been changing the culture of the business and the mindset of its personnel. Allianz measures its businesses by the Economic Value Added (EVA) model, and according to Mr Dryer, becoming EVA positive – ie, exceeding an acceptable return on the cost of capital – has become the gospel at DrKW. “We had to make people realise that interest income is not to be treated as P&L. In our credit business, for example, a new portfolio group was set up with a new methodology and new business drivers, whereby we now mark to market the various loan portfolios, calculate any shortfalls and generally move away from bilaterals to syndicated loans.”
At the same time, Dresdner moved from a regulatory capital to an economic capital model, and the ramped-up balance sheet did not look so good. “When you look at it from an economic capital perspective, the mark to market value on certain loan portfolios could be huge, and could put you underwater. The lending book is there not as an end in itself but becomes a means to an end. The end is investment banking, corporate finance, M&A advisory, or distributable securities business.”
DrKW had to move away from thinking in terms of origination and convert its approach to that of debt advisory. The origination business was reorganised across a matrix of four sectors and four regions, and the heads of the sectors and the regions, plus most of the directors beneath them are capable of having a broad discussion with clients covering the gamut of loan and DCM products. “The big change is that coverage people are now responsible for directing the allocation of risk capital that supports their clients, which allows us to market products across the entire debt value chain. The execution people – the guys with the screwdrivers – are layered beneath or alongside them,” says Mr Dryer.
These fundamental changes took about 18 difficult months to execute, but there were yet more to come. In April 2002, having successfully completed the debt rebuild, Andrew Pisker announced the creation of Capital Markets, essentially the combination of the debt and equities divisions under one management umbrella. Then, in November, came the decision to merge ECM and DCM to create Capital Markets Origination. “Under the new model, it is not the intention to have marketers pushing IPOs and rights issues – that stays with corporate finance and advisory. It is to add balance sheet optimisation products like convertibles, blocks and exchangables to the coverage guy’s armoury.”
Deserved rewards
After the pain comes the gain; over the last three quarters the investment bank has been profitable – in H1 this year, DrKW made an operating profit of E213m – and examples of the investment bank’s successful evolution continue to stack up. On the debt side, DrKW worked on Gazprom’s $1.75bn bond issue in February – the largest ever emerging market corporate bond. In ECM, DrKW was sole bookrunner in June on the E220m cash/equity placing for Hannover Re as part of an overall E500m capital increase. The dialogue began last November for a hybrid capital bond, then evolved into a convertible pitch and finally became a straight equity transaction. In the past, the bank would have had three separate teams working on that transaction, but under the new structure, a single team was the touchpoint throughout. “At each iteration, other banks were pitching – each bringing in a different team for each product. The result really shows the strength of our model,” says Mr Dryer.
Rising through the ranks
Naturally, DrKW’s more upbeat profile is reflected in the league tables: according to Thomson Financial, in H1 this year the bank ranked number one in all EEMEA and covered bonds, and number five in all financial institutions bonds. In ECM, current Dealogic figures put it at 13th for European ECM and, according to Thomson, ninth in terms of bookrunners in global ECM.
What may well prove challenging to the bank could be the retention of its new hires once the industry picks up again. According to Mr Dryer, many were attracted by the opportunity to turn a business around, and to do so with an innovative model. “Let’s be honest, some observers have tried to write us off. But we have been able to hire some of the brightest people around because of what we were trying to do. I think that they will probably stay because there are few firms that offer the sort of integrated model, the transparency of business drivers and the upside potential of being part of DrKW’s growing success.”
Mr Dryer says making the changes has been like driving a Fiat in need of repair and trying to convert it into a Porsche, while racing at the same time. “We have been in transition since I got here. Basically, we have had to compress the number of clients, use the balance sheet more tactically with a more modernised methodology and generate higher return. It has been incredibly hard and I’m not sure I’d choose to do it again. But with the ongoing support of senior management, we’ve got where we wanted and are now well positioned to compete in higher gear.”
