When the Bank of England quietly announced its $3bn, five-year dollar bond, everyone wanted a part of it. The lucky banks who won a share quickly put the usual rivalry behind them to pool expertise and pull off a star-quality deal. Geraldine Lambe reports.
There are some deals that every house wants – the kind of deal that, if you don’t get the mandate, you go home in tears. For many, the “must do” deal of this year was the UK’s $3bn, five-year dollar bond in June.
The transaction, which was carried out to fund the UK’s foreign currency reserves, sparkled with star quality. It had rarity value – the Bank of England has not tapped the dollar market since 1996 and this is the UK’s only outstanding foreign currency debt; it was priced through US Treasuries on a curve adjusted basis; it attracted a book approaching $13bn; the Bank of England is well respected as a hugely discerning and demanding client; and most industry pundits reckon it was the quickest selling dollar bond in recent history.
The four bookrunners – Citigroup, Deutsche Bank, Goldman Sachs and Morgan Stanley – were selected after a rigorous, and utterly discreet, process. “The discussion was kept extremely confidential. There were no market rumours, even when things were getting very hot,” says Charlie Berman, managing director, co-head of European credits markets at Citigroup.
Despite close coverage of the Bank (which most bankers agree can be a long and lonely task), antennae still had to be pretty finely tuned to pick up any hint that a deal was in the offing. Ziad Awad, co-head, frequent issuers syndication, at Goldman Sachs, says: “There were three simple lines in an HM Treasury report that signalled its intention to go to the market if there was value for money.”
The Morgan Stanley team: Daniel Shane (standing), with Mike Turnbull and Anneke de Boer
Poker-faced
Mr Berman says it is this quality that would make the Bank of England an excellent poker player. “The signals are always so subtle, you have to be really on your toes.”
Bill Northfield, co-head of frequent borrowers, debt capital markets, at Deutsche Bank, agrees. “The Bank cast a shroud over its research into the market but if you had your eyes on the numbers you could see that there was a potential opportunity for an issue in a foreign currency,” he says.
Prospective lead managers at probably more than a dozen banks got calls from the Bank of England in the week beginning June 16. In its classically British, understated style, the Bank of England asked contenders if they wouldn’t mind calling round to Threadneedle Street for some discussions on a potential issue, but please, it was stressed, don’t do too much work.
Final submissions were made in the late afternoon of June 20. Then, says Mr Berman, it was total radio silence. “I went home, depressed, at 9.30pm. I was convinced that I would end my career never having done a deal for the Bank of England. I drank a bottle of wine, got grouchy with my family and went to bed. At 11.22pm I got the call: ‘Charles, it’s Paul Tucker [executive director of markets at the Bank of England]. Sorry to call so late, but we’ve been rather busy here.’ The final confirmation that we were mandated as one of the bookrunners came in at 2.30am, with a tentative question from Paul: ‘Should we meet now?’”
The reason the Bank of England had been so busy (and the explanation for the late call) was simple – it was the day of Sir Eddie George’s retirement party, at which Mr Tucker had been giving a speech. It also became apparent that involvement in the transaction had been Sir Eddie’s swansong and that the Treasury had only given the final go-ahead for the deal that evening.
The timing – a meeting was called at a more sociable 10.30am on Saturday morning at the Bank – spelt a busy weekend ahead for all the banks involved and the immediate cancellation of any plans. Mr Awad was about to play a match with his wife when he got the call. Other bank team participants variously cancelled a trip to Ascot, gave up on watching the England versus Australia match or flew back from Geneva. It was all systems go.
The four successful houses were assembled in different rooms around the Bank of England’s labyrinthine building – they still didn’t know who the other bookrunners were. Citigroup’s team were hidden in the basement (where, Mr Berman says, the Bank of England team had been eating fish and chips the night before). “But we had spotted Anneke de Boer, head of frequent borrower origination at Morgan Stanley, so we knew they must be one of the teams,” he says.
Bill Northfield, Deutsche Bank: “We aimed to get in and out of the market in a day and a half”
Sense of privilege
The way events were orchestrated right up until the last minute helped to create an aura around the deal and contributed to a sense of privilege and team spirit felt by all the four bookrunners. “You couldn’t help but get caught up in the drama,” says Mr Berman. “We are all very competitive firms and it can be easy for that to result in an element of grandstanding or point-scoring. But in this case, we were all aware of the immense profile of the transaction and the pressure on all of us to deliver for the Bank.”
Mike Turnbull, MD, head of UK corporate coverage at Morgan Stanley, agrees. “There was an enormous sense of camaraderie and no inclination to try to upstage anybody. There was a very collegiate feel to the meetings. We were all responding to the professionalism of the Bank of England team.”
The co-operative spirit characterising the transaction was revealed in the way the bookrunners roles were allocated. There was no in-fighting for the best jobs. Mr Northfield says it just seemed to become clear who should do what. Adds Mr Awad: “We tossed a coin to see whether Goldman or Morgan Stanley should do the documentation.”
Ultimately, Citigroup was in charge of the press, Deutsche Bank the e-bookbuilding, duration management and primary swap counterparty, Goldman Sachs was syndicate communication manager and Morgan Stanley handled the documentation.
The level at which the deal was priced – 2bp over the May 2008 US Treasury note (equating to 3bp-5bp through Treasuries on a curve adjusted basis) – took the market by surprise. Some houses had reportedly pitched the transaction at Treasuries plus 10bp. The four bookrunners spent only about 10 minutes discussing the pricing.
“Pricing was the big question,” says Mr Berman. “If you go to your syndicate desk and ask them where to price a UK deal, they’ll probably tell you that they are too busy to think about it. Price discovery is difficult – there is no direct comparison because it is such an infrequent issuer. The scarcity value becomes really significant, the premium is quite emotional. But we quickly agreed that the right price guidance was mid-single digits. The Bank of England is also a very astute investor and is very aware of the after-market. It didn’t want the issue to collapse and we all had to resist the temptation to go too tight.”
Mr Turnbull agrees that the bookrunners were careful to get the best deal for the Treasury, but not to push the market too far. “We had had discussions about how far through Treasuries we could go, but the decision to go for plus 2bp to the benchmark was pretty quick,” he says. “We did not want to be too aggressive and risk weakness in the secondary market. The subsequent performance has vindicated our strategy. There was no dumping in the secondary market and the deal has traded as tight as 1.5bp through the pricing benchmark,” he says.
Unanimity on pricing
Mr Berman says that the level of discipline displayed by all participants to the deal was extraordinary. “Everyone had to demonstrate complete unanimity and strength on pricing when we took it to market. There could be no light escaping between the objectives of the deal and its execution. Nobody could even entertain the idea of a discussion in which they promised some investors a cheap deal.”
It was a bit like herding sheep, says Chris Lees, director of syndicate at Citigroup. “If you send the dogs in too hard, the sheep will scatter. You do have to lead them in the right direction, and make them feel confident about going there.”
According to Mr Awad, the senior co-leads on the transaction – Barclays Capital, BNP Paribas and HSBC – were also instrumental in its orderly execution. “They were an integral part of the effort,” he says. “When Tokyo opened, all seven syndicate desks were working together as one team. We took the markets by storm.”
The minute the deal was announced, it achieved star status, says Mr Lees. “Everyone immediately focused on it and all other deals were put to one side. Investors asked the usual questions, such as why the UK was issuing in dollars and would the deal size be increased? Our message, and that of the Bank of England, was clear; it would not be increased and this was not part of a programme of issuance in foreign currencies. This contributed to investor urgency – they had to make sure they were part of this deal.”
From left to right: Ziad Awad, Goldman Sachs; Charlie Berman, Citigroup; and Chris Lees, Citigroup
Rivetting process
After the launch was given the final go-ahead at around 7pm on Sunday, the bookrunners decided to announce the mandate at 8am Tokyo time, midnight London time. The bookbuilding process, watched in real time by the Bank of England staff, was rivetting. Mr Northfield says: “When we left the Saturday meeting, we were already targeting Monday. We aimed to get in and out of the market in a day and a half – that is, before the Federal Open Market Committee meeting’s decision was announced on Wednesday.”
Little sleep was had by anyone involved; the London-based bankers snatched a few hours while their Asian counterparts hit the phones and Bank of England staff did not leave Threadneedle Street throughout the duration of the deal. “We understand that some of the senior managers made periodic visits to the trading floor during the early morning hours of Monday, just to look at the orders coming in over the e-bookbuilding system,” says Mr Northfield.
The timing of the transaction was perfect. Against the backdrop of concern over US agencies, there was a huge demand for AAA dollar product. Added to that, supply had been limited and arbitrage opportunities were seen as particularly good. Equally, the attractiveness of the UK credit as risk diversification for eurozone central banks simply added to the appetite for the highest quality assets. “The timing on the Bank of England’s part was quite extraordinary,” says Mr Berman. “It picked, in 24 hours, the perfect day to carry out this transaction. If it had delayed by 24 or 48 hours, or had done the deal earlier, we wouldn’t have got the same result.”
Everyone was astounded by the speed of execution. “The time frame from discussing the transaction to execution was the quickest I’ve ever seen by a sovereign or a supranational,” says Mr Turnbull. “We launched at midnight on Sunday and the books were closed – at $12.2bn – by 1pm on Monday. It was really quite phenomenal.”
Similarly, the bookrunners were all impressed with the calibre of the team at the Bank of England. “As they moved from monitoring to execution mode, the quality and intensity of the dialogue got better and better,” says Mr Awad.
Mr Turnbull agrees: “This is particularly true for what was a complex idea. The decision to price through the treasury was very brave and it required a great deal of confidence to execute at such a tight level. They displayed total understanding of market dynamics.”
But it was during the allocation process that the Bank really showed its mettle. “What was really impressive was that the Bank of England allowed the four bookrunners to exercise their discretion over the allocation strategy. They made absolutely no attempt to change, influence or distort the shape of the book. That is extremely rare,” says Mr Berman.
Balanced investor profile
Ultimately, central banks took 35%, fund managers 38%, banks 23%, and others 4%. According to Daniel Shane, associate, supranational and sovereign coverage at Morgan Stanley, the Bank of England ensured liquidity by allowing the bookrunners to be a little more innovative with their strategy – it did not want the issue to be too much like a private placement and to disappear. “We had to balance the investor profile. We didn’t want all the investors to flip the bonds immediately, but it is healthy to have a little bit of float; so it was good to have a few more active traders on board such as the hedge funds,” says Mr Shane.
Overall, the deal was characterised by the level of responsibility felt by all concerned. The Bank of England clearly communicated its responsibility to produce substantive value for the British taxpayer (industry estimates suggest the deal generated savings of about Ł8m over the life of the deal) to the bookrunners.
“Because there was no ‘need’ for the transaction as such – this was not to fund a deficit – every decision was under tremendous scrutiny,” says Mr Berman. “This added to the feeling that we all had to perform incredibly well.”
