Sanjeev Kumar leads a corporate advisory team at RBS designed to maintain the ability to provide large corporates with strategic advice after the bank’s exit from mergers and acquisitions and equity capital markets. He tells The Banker why talk is valuable.

When RBS decided to exit its mergers and acquisitions (M&A) and equities businesses in early 2012, the bank was keen to find a way to maintain an advisory relationship with major corporate clients. This was the thinking behind the creation of a dedicated corporate advisory unit to provide large, mostly international corporate clients with expertise around capital structuring, credit ratings, risk management and working capital.

“For certain sectors that are more oriented to our product set, we also wanted sectoral expertise that would allow us to pre-empt moves in the market and assist clients in thinking through solutions for their events,” says Sanjeev Kumar, a member of the executive team for RBS international banking appointed global head of the new division.

Mr Kumar feels the role neatly pulls together the strands of his own career, which has encompassed sectoral investment banking coverage at Citi, financing and risk solutions roles at Barclays and later RBS, and M&A advisory for RBS in Asia. He says the bankers on the team have a range of different skills needed to cover all their clients’ advisory needs. But he also seeks what he calls “fungibility” of skills, to give the team the flexibility to focus on whichever themes are dominant at any given time. The services that the team provides may exist in other global banks, but rarely grouped together in this way – for instance, most banks would include ratings advisory in their debt capital markets division.

Uncluttered view

“The relationship bankers bring us in to see their clients where relevant, and they also take to the clients the themes and issues that we see, so it is a mix of reactive and proactive approaches,” says Mr Kumar. “We also work together with the product teams for the execution of a financing or hedging transaction.”

The corporate advisory team is evidently hoping to present the absence of equity and M&A businesses at RBS as an advantage for its own work. Mr Kumar says client feedback has been positive, with appreciation in particular for the ability of RBS to give advice on financing without having an agenda driven by the desire to close M&A deals. His role is also uncluttered by the process of onboarding clients and the resulting due diligence.

“Most banks situate their advisory work within the M&A or equity capital markets teams. RBS is different because it has a natural debt bias itself, and that shapes how we think for the clients,” says Mr Kumar. “It allows us to focus on the financing and capital structure questions. Our team also focuses on existing credit line clients, so there is an obvious desire to maintain the ongoing banking relationship, rather than just thinking from one deal to the next.”

An international profile

In total, the team is ready to serve the 1500 dedicated investment banking clients, together with some UK corporate banking clients where appropriate. It is designed to tackle whichever sectors are a source of demand, with telecoms, media and technology particularly important in terms of event-driven business in 2013. RBS itself has a strong presence in the power and utilities and infrastructure finance segments, and industrial clients more broadly are a good source of corporate advisory work. The corporate advisory team is based across London, RBS’s US headquarters in Stamford, Connecticut and in Hong Kong.

By definition, much of this work is confidential, especially in the case of hedging and risk management or private market financing transactions such as supply chain finance. But some of the event-driven advice is public knowledge. In 2013, RBS was involved as a funding and ratings advisor to Ireland’s Bord Gáis in connection with the proposed sale of Bord Gáis Energy and as a debt advisor to Italian road infrastructure operator Atlantia on its merger with Gemina.

The bank also recently acted as ratings advisor to German engineering and services group Bilfinger as well as the European Stability Mechanism. The corporate advisory team has also worked with Chinese companies on public deals during 2013, such as China’s Shuanghui on its takeover of US meat product manufacturer Smithfield Foods.

Client priorities

As a sector, corporates in Europe and elsewhere have strong balance sheets at present after several years of delevering, with trillions of dollars in surplus cash. At the same time, they have access to cheap funding while interest rates remain at record lows. The liquidity pushed into the markets by central banks is driving up valuations, and competition for assets is fierce. But, says Mr Kumar, shareholders contemplating the surplus cash pools are demanding some kind of action to earn a return on the cash.

“There are many companies trying to work through this dilemma, and we are doing a lot of work around this, be it liquidity management tactically in the short term, event financing that flows from this situation, or thinking about cost of capital and shareholder value,” says Mr Kumar.

In the US, activist shareholders have become a more prominent feature of the market in recent months. This is increasing pressure on corporate spin-offs to enhance shareholder returns, with RBS advising on capital structure and financing through the spin-off process, and for the individual companies created afterward. Meanwhile, in Asia, M&A activity is increasing, while financing has become more complex owing to increased market volatility since mid-2013.

“As the excess liquidity that is out there either starts to be taken out by central banks, or starts to be used by companies, we want to make sure that we are best positioned as a bank across our product set, whether that be financing, risk or transaction services,” says Mr Kumar.

With interest rates still very low, and uncertainty about when they will begin to rise, he says at least some clients have chosen to lock in financing now. That trend was further fuelled by indications from the US Federal Reserve in the first half of 2013 that it was beginning to consider tapering quantitative easing. The expectation that rates are now at the bottom of the cycle has skewed the funding mix for many companies toward fixed rate borrowing.

Rating and regulatory changes

For those companies that still face higher debt burdens, RBS is advising on balance sheet optimisation, with hybrid capital issuance surging in 2013. The corporate advisory team also brings in the bank’s transaction services expertise to help companies manage and enhance working capital, and Mr Kumar says mobilising trapped cash pools within corporate structures and arranging supply chain finance are two particular strengths. On the ratings advisory side, much work has been generated by proposed criteria changes by Standard & Poor’s, which would restrict the contribution of excess cash balances to the agency’s calculation of net debt ratios.

“Depending on what comes out of that proposal, it could affect the ratings of those who have large swings in working capital, so it will really tie together our advice on ratings and on working capital,” says Mr Kumar. “In any case, in optimising a rating, companies need to optimise their liquidity and there are many discussions that flow from that, such as how companies use their revolving credit facilities and cash lines.” 

The other significant change in market conditions has been the growing amount of regulation over derivatives, especially the European Market Infrastructure Regulation (EMIR). Some companies may be considering taking naked risk without hedging, or issuing in their working currency and leaving it to investors to bear the cost of hedging. But others still want to work with derivatives as a risk management tool and are willing to use their liquidity to meet the increased collateral needs of derivatives trading.

Swap needs

“We coined the word ‘swaptimisation’ to describe what clients need,” says Mr Kumar. “We are working with clients to think about how derivatives are being affected from a funding, credit and capital perspective – you end up with different banks having very different views of the same deal depending on their own position. There is a benefit to corporates in looking again at their portfolios and seeing if there are ways to optimise them in light of these changes. EMIR only compounds this, because companies will be in a better position from a trade reporting perspective if they can manage to collate their swaps into the same dates.”

As the global economy continues to improve into 2014, Mr Kumar expects trade and supply chain finance to be important growth areas for RBS as a whole, with his team providing the advisory backing. And like most bankers, he is assuming that the long-awaited but so far elusive revival in M&A as companies put surplus cash to work must at some point begin to become apparent.

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