In the past 18 months, RBS has been building out its hybrid issuance capacity, making new hires and reaching out to the largest investors. Its efforts started to pay off in 2013, when the bank notched up a number of mandates in the first six months of the year.
In 2012, RBS ranked 16th in the league of bookrunners for Europe, Middle East and Africa (EMEA) financial institutions' hybrid capital issuance, according to data provider Dealogic. In the year to the end of July 2013, it was running fifth. This was no flash in the pan but the result of a plan by the bank to turn hybrid issuance into a core strength.
The initiative was a natural corollary of the investment bank’s new strategic focus on fixed income. It also reflected the undeniable fact that RBS was devoting as much attention as any other institution to repairing its own balance sheet, so why not make a virtue out of necessity?
In January 2012, the bank hired doubly qualified UK solicitor and US attorney ‘AJ’ Davidson, taking him away from Citibank and putting him into a new RBS Markets post of head of hybrid capital and balance sheet solutions, EMEA and Asia-Pacific. After eight years in private practice, Mr Davidson had been a director in Bank of America-Merrill Lynch’s debt capital markets (DCM) execution and structuring group before joining Citibank’s DCM new products group as a director in 2010.
“We had some capability in the hybrid capital space over the previous five years, but our proposition was very much distribution led,” says Matt Carter, head of financial institutions capital markets at RBS Markets. “In a post-crisis world, to be relevant to the senior [executives] at issuers we needed a strong capital capability, and hiring Mr Davidson was a key step.”
Team building
Until that point, two people had focused on hybrid capital, but less as a defined unit than as part of the broader fixed-income advisory team. Directors Phil Pearce and Gavin Kirkpatrick formed the nucleus of the new hybrid team, and were joined in June 2012 by vice-president Laura Stephenson, also from Citi.
“We needed to own this product from A to Z, to know everything about it – how it trades, who the investors are, the regulatory and rating agency concerns – so that we could be brought into the strategic dialogue with clients earlier and act as originators as well as structuring advisers,” says Mr Davidson.
The way responsibilities are divided up is not unique, but it is relatively uncommon. Instead of being carved up by sector – banks, insurance and corporate – responsibilities are allocated by region. “This allows us to provide a more balanced level of client advice since many of the issues, such as tax and accounting, are jurisdiction specific,” says Mr Davidson.
The team spent time with clients, impressing their new capability upon them. They visited more than 50 of the largest hybrid investors worldwide, getting feedback on the latest sentiment and then sharing it with the client base. They also spent time with a number of different European regulators.
Progress was not made overnight. “A lot of issuers have very long established relationships with respect to capital, and getting into the tent can be difficult,” says Mr Carter. “The key decision makers have often been there for a long time. Finding ways to be relevant to them was a big challenge.”
One method used by the team was to host a number of conferences and special gatherings, designed to bring issuers and investors together. In Hong Kong and Singapore, for example, RBS organised ‘speed networking’ events where a handful of European bank issuers met a handful of Asian investors, supported by talks and panel discussions.
“Asian high-net-worth individuals [HNWI] are a critical investor base for the new-generation capital product,” says Mr Carter. “RBS has a very strong sales force focusing exclusively on Asian private banks, HNWIs and family offices – which make up the fastest growing wealth community in the world.”
Gaining momentum
Regulatory uncertainty has held bank hybrid issuance in check until very recently, so the first indications that the RBS hybrid team was gaining traction came in the insurance sector. In this, it was helped by the bank’s strong DCM presence in that sector, under the eye of Tristram Whittingham, head of insurance DCM.
A significant milestone was a mandate as sole structuring adviser and joint bookrunner on Achmea’s €500m 30-year, non-callable for 10-years (30NC10) issue in March 2013. The Dutch insurer announced a tender offer at the same time, allowing existing investors to participate in the new issue without doubling up their exposure and, the bankers say, guaranteeing better execution of the new issue.
In the same month, RBS was also one of five bookrunners on Swiss Re’s issue of $750m in 11.5NC6.5 subordinated contingent write-off notes, the first ever from an insurance company. If the company’s Swiss Solvency Test ratio falls below 125%, it triggers a permanent write-off of principal. At the time of issuing, the firm’s actual ratio was 202%. “This was a great example of stepping up a notch to win a prize mandate, with a structure that had never been done before,” says Mr Davidson.
In the bank sector, while all has been quiet on the Tier 1 front, there has been some Tier 2 activity. RBS was joint bookrunner on Nationwide’s €1.25bn issue of 10NC5 fixed-rate reset callable subordinated notes. “Nationwide was a good example of winning a mandate because of the amount of holistic advice we were starting to give our banking clients,” says Mr Davidson.
Not least among banking clients has been RBS itself. When interviewing for the job, it was made clear to Mr Davidson that advising the RBS group treasury would be part of his remit, and the team has since acted as its sole structuring adviser on a number of capital transactions. The most recent was for $1bn of subordinated Tier 2 notes, issued in June 2013. That was part of a larger liability management exercise, including a capped cash tender for $5.2bn of Tier 2 notes in various currencies
The team’s internal partner on that trade, as on a number of others, was Andrew Burton, head of liability management, and Mr Davidson also pays tribute to Harman Dhami, joint head of European financial institutions syndicate. “Not many investment banks have the hybrid capital advisory and structuring experience of a captive group treasury client which they can leverage off for third parties,” Mr Davidson says. “It puts us in a small universe.”
Repeat business
Now that the regulatory outlook for Tier 1 is more clear, September should see a wave of issuance. “The top 40 banks in Europe must raise €200bn to €250bn in additional Tier 1 capital between now and 2016,” says Mr Davidson. “So they will come to market multiple times after the first trade.”
He adds that the delay in finalising regulatory requirements for bank capital has been a blessing in disguise for RBS, giving the team more time to engage with clients before they pull the trigger on Tier 1 mandates. He notes that there was already a large pipeline of mandated deals before the team had got itself into position.
“In certain cases, we are the new kids on the block, and we get that,” says Mr Davidson. “We may not be that involved in the first wave, but we feel good about our prospects. And we may have a few surprising wins in the first wave, because we have done such a good job of making up lost ground.”
The benchmark for the team’s business, Mr Davidson adds, is how many clients come back for repeat business, and how many of them ask RBS to participate in a new project because of its advice, and not merely as a distribution platform.
Mr Carter predicts a successful future for hybrid paper in general, as it becomes less dependent on the alternative investment universe and the Asian market. “They are a deep but capricious investor base,” he says. “Deal by deal, however, hybrid transactions are getting greater participation from the wider long-only asset management community. The market needs this asset class to become a mainstream investment tool, and we will see that evolve over time.”
