What CFOs think of credit derivatives and why they get the worst price on foreign exchange deals, and why Bear Stearns has gone football crazy

Brian Caplen reports.Customer fears over profitable sideline

Client focus is the investment banking mantra these days and some banks are so eager to please that they may send 10 or more bankers to a single client meeting (until the boss forbids it). But when it comes to credit derivatives on corporate loans, the clients are divided in their views and clearly feel they have not been properly considered.

Fritz Fröhlich, the chief financial officer and deputy chairman of Dutch company Akzo Nobel, says that it does not matter because “the volume is limited and the impact on us is negligible”.

However, Michael Wurth, CFO of Arcelor of Luxembourg, feels that the company’s core banks are its partners and “should bear some risk on the company”.

Iordanis Aivazis, CFO of Greece’s OTE, takes a more balanced view. “Banks’ use of credit derivatives has a positive and a negative aspect. By transferring the risk, they can assume bigger credit lines to the corporate. But credit derivatives allow the market to leverage so that in a downturn of the economy we could have a multiple negative effect.”

These CFOs took part in a virtual round table with The Banker, published in this month’s issue.

Credit derivatives are not going away – they are one of the fasting growing and most profitable parts of the business. But there is a conflict of interest that is going to pit even the most client-focused banks against their customers from time to time.

When best practice means worst rates

Talking of CFOs and treasurers, it appears that by following best practice on foreign exchange (FX) deals, they may end up getting a rate below what they could achieve in another way.

Best practice means taking several quotes and going with the best one. Electronic platforms that deliver prices from a range of banks, such as Currenex and FXall, have allowed this to be done with greater ease.

But Lars Olesen, FX global sales manager at Citigroup, says: “Multi-bank platforms have great purpose for normal amounts in liquid currencies. Larger and sensitive trades are better handled in partnership with a single provider who has the ability to warehouse the risk and achieve a better rate.”

Even with normal amounts, smart treasurers check out the platform prices and ask their bank to match the price, which is bad news for multi-bank platforms.

However, they are not the only players that are facing tough times in the rapidly consolidating and commoditising FX business – the subject of a recent report by the London-based Centre for the Study of Financial Innovation. Information providers like Reuters, the report’s sponsor, also face a challenge as dealing rooms merge and higher volumes go through fewer banks, meaning less traders to sell screens to.

The traders that remain are also running out of desk space, says Michael Feeny, economist and market analyst at Sumitomo Mitsui Banking Corporation. With single bank and multi-bank providers jockeying for position, the early bird platforms physically crowd out the late arrivals. Some traders will demand screens whatever their desk dimensions, believing that the more they have, the more important they are. “I hope it’s not a question of status in my case,” jokes Mr Feeny. “Fifteen years ago at Chemical Bank I had 15 screens. Now I only have three [two Reuters 3000 XTRA and a Bloomberg].”

Bear Stearns niche player is on the ball

Screens, securitisation and settlement are not generally of interest to British football fans. But the notion of securitisation is now being explored on such websites as Blue Kipper, which is run by Everton followers, complete with the warning that the site contains strong language (and they are not referring to such terms as “blow out” or “dog deal”).

This is all thanks to a Bear Stearns niche: securitisations based on future ticket sales, which have been done for Everton and Manchester City FCs.

British sports finance is a curious business for a US bank famous for its driven culture in which ratting on transgressors is openly encouraged (that’s not cricket). Yet plotting out whether Manchester City fans would continue to attend matches if the club got relegated (apparently they would) has not proved beyond the bank’s capabilities.

“An important issue is the stability of the club’s revenues in adverse times, particularly relegation,” says Yves Leysen, Bear Stearns head of debt corporate finance Europe. “For example, when Manchester City was relegated for the 1998/99 season, average attendance at games went up. Fan loyalty is an important risk mitigator for clubs.”

There are no such worries about Everton, which has been in the Premiership (and previously the First Division) for 99 years. As for the Football Association, which wants money raised against broadcasting and sponsorship revenue, that’s a tougher calculation.