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AmericasMay 1 2005

Deutsche rides on wave of euro deals

Deutsche Bank’s successful euro issuance for Brazil helped the dollar market to rally, setting the stage for it to do subsequent dollar and euro deals for a diverse range of issuers. Sophie Roell reports.The Greeks may have won Euro 2004 but the Germans are firmly in the lead when it comes to euro issuance out of Latin America.
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In the past few months, Deutsche Bank’s debt capital markets team has been on a winning streak that has enabled it to bring to market issuers as diverse as investment grade Mexican oil company Pemex and riskier credits such as Jamaica and Venezuela.

But it was a nifty double deal out of Brazil – a €500m issue, which surprised the market and opened the field two weeks later to a 20-year $1.25bn issue – that raised attention, followed by two further impressive deals.

“It’s not luck, it’s the result of hard work,” says Marcelo Blanco, managing director and head of debt capital markets (DCM) Latin America at Deutsche Bank. “This is a team that was put together three to four years ago. We have had no rotation in personnel, we have a tight relationship with the issuers, and we have worked our way up the league tables from number seven in 2002, to number four in 2003, number two in 2004 and first or second in 2005, depending on how you calculate it.”

European opportunity

The driver was an opportunity in Europe, where flat interest rates and a dearth of issuance by blue chips in 2004 had left investors particularly keen for new names and higher yields.

“You’ve got flattening interest rates, tightening spreads and a strengthening currency. Add it all together and it says one thing: people need yield,” says Neil Shuttleworth, director, European DCM syndicate at Deutsche Bank in London. Notably absent from the market were the corporates that normally offer that yield. As Martin Hibbert, managing director, European DCM syndicate at Deutsche Bank in London, says: “Investment grade corporate issuance in euros was down 45% last year. What was going to take up that slack?”

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In London: Martin Hibbert (left) and Neil Shuttleworth of Deutsche's European DCM syndicate

Enter Brazil with its ambitious issuance schedule: about $6.5bn in 2005. Anticipation of its huge borrowing needs was already putting pressure on the dollar market. The solution seemed obvious: issue in euros.

“Brazil had already accessed the dollar markets at the end of last year, when they did the 2019,” says Douglas Chen, a director in DCM at Deutsche Bank in New York. “And towards the beginning of January, to avoid saturating the curve in the dollar market and given the volatility in the US dollar curve, the euro presented a nice opportunity. Naturally, we consistently monitor the euro because that’s our niche, and when we see an opportunity we take it.”

The question was, at what price? Deutsche believed it could do a euro deal without paying a big premium to the dollar, the traditional currency for emerging market borrowers. “All theory would tell you that Brazil would issue above the dollar curve, and indeed Brazil came to the market last year at a spread of 30 basis points (bp) over the dollar curve,” says Mr Blanco. “We decided to challenge that.”

Sceptics proved wrong

In the face of considerable scepticism, Deutsche was able to price the euro deal at a mere 2bp above the dollar curve, essentially avoiding a premium to the dollar. Within a week the bond had rallied a further 50bp.

Deutsche’s retail distribution network in Germany and Switzerland was key to success. “They underestimated our distribution capability,” Mr Chen says of the sceptics.

The rally in turn fuelled a rally in the dollar curve, enabling the larger dollar deal to take place on much more favourable terms two weeks later.

“Typically, Brazil has been known to access the market in the first couple of weeks of every year with a benchmark in dollars. So everyone was anticipating a dollar transaction,” explains Dennis Eisele, an associate in DCM at Deutsche Bank in New York. “So when we did the euro deal first, we really mitigated fears of oversupply in the dollar market, which in turn caused the dollar market to rally and set the stage for us do the dollar deal. So instead of doing a 10-year in dollars, we were able to do a 20-year – a much longer-dated tenor at much better levels.”

In the flow

With Brazil successfully completed, ground-breaking euro deals for other issuers fell into place. Neither size nor tenor seemed to be major obstacles.

Mr Blanco decided to run with the ball. “We were under the impression – and we were proved right – that the benign conditions that we saw at the beginning of the year were not going to last, so we decided to aggressively approach all issuers in the region recommending that they access the market. We really made that a conscious effort, to go out there and say ‘okay, this is now or potentially never’.”

Pemex, which already had made a decision in 2003 to widen its investor base by developing the euro markets, did not need much persuading, says Mr Blanco. “We went to Mexico City and we said: ‘You’ve got to think about doing this by Monday because we’re not going to see market conditions like this again’. Pemex is a very sophisticated borrower and immediately agreed and pulled the trigger,” he says.

The €1bn 20-year deal priced at 20bp through its dollar curve to become the longest dated euro-denominated bond for an emerging markets sovereign or corporate borrower. “No-one has done a deal like that before, up to 20 years,” says Carlos Mendoza, vice-president in DCM at Deutsche in the US.

Venezuela, which was absent from the euro markets for a number of years, was next. “They had a bond maturing in March and we made the point that it was very important that they take the opportunity that the market was presenting to them – extremely low nominal, historical yields, in addition to extremely tight credit spreads,” says Roy Ellis, director of DCM Latin America.

For a full week, Venezuela’s new ministry of finance officials were taken on the road to reintroduce them to European investors. “At the end of the roadshow, it was clear that there was a significant amount of demand for the credit,” says Mr Ellis.

Sensible liability management by the government – in the past two years, more than $8bn in debt has been reprofiled – weighed far more with investors than the political noise coming out of the country. And oil prices hitting more than $50 a barrel that week also helped in selling Venezuela to investors.

The 10-year bond was a €1bn offering, ultimately priced at a premium of just 10bp to 15bp over its dollar equivalent. Again, European investors liked it. By the time the book closed, orders were in excess of €4.5bn.

Sea change

The deals help to contribute to something of a sea change for emerging market issuers in terms of currency choice. “The emerging markets model has always been to issue in dollars and sell it to dollar buyers – and we’ve cracked that model,” says Mr Hibbert. “In the deals that we did for Brazil and Venezuela we’ve more than cracked it, we’ve blown it apart: we have proved that [to do a deal in euros] you don’t need to pay a big premium to dollars and that you can get size done.”

Mr Shuttleworth says: “It’s tremendously healthy from the borrower’s perspective because they now have another viable market they can access. They don’t have to say: ‘We need New York, we need to access the US, we need 144a, otherwise we’re not going to get more than a $200m-$300m deal done’. Now they can go to Europe and do €1bn. And that gives them a lot of leverage over the US. The US is now going to have to compete for the emerging markets asset class.”

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