Investment banks are always boasting about their services for emerging market sovereigns. But what do the customers think? The Banker's poll provides a unique insight.
The lock of the global investment banks on the underwriting of emerging market sovereign bonds is illustrated by The Banker's first ever survey of the issuers. In a questionnaire of debt managers across a range of countries, respondents rated Goldman Sachs their overall favourite for doing business with - but not by much.
JP Morgan, noted for its strong emerging market franchise, was right behind followed closely by Salomon Smith Barney, Deutsche and Morgan Stanley. All the banks featured in the chart did well. Senior debt managers were asked to rate banks from four to one - four for excellent, three for good, two for average and one for poor - on seven criteria:
ability to provide new and innovative ways of funding;
speed and efficiency of execution;
depth of distribution;
support for bonds in the after market;
skill in working in difficult market conditions;
straightforward and easy to deal with;
skill at arranging meetings and presentations with investors.
Scores across the top 10 banks range from 2.23 to 3.27, meaning all players are on the right side of average, pushing towards good and even excellent.
In all, 26 countries were canvassed and detailed responses were received from six countries and part responses from the others. Although the sample size was small, the total universe of issuing emerging markets is also small, and the survey does give an indication of the views of emerging market debt managers.
US domination
The fact that only 1.04 points separates the first and tenth placed banks gives an idea of the degree of competitiveness in the scramble for emerging market sovereign mandates. The US bulge bracket players dominate the top half of the top 10 ranking thanks to their unmatched firepower and long years of experience in slugging it out in emerging markets across the globe. But it is worth noting that the other half of the league table goes to European players which are moving up fast behind their American rivals. Deutsche, with its reputation as Europe's bulge bracket player bucks the trend and comes in fourth.
Results breakdown
Interesting information can be found by looking at how the results break down. While Goldman Sachs ranked as overall winner, a breakdown by criteria gives a more varied picture. In what most issuers would consider one of the key categories, the ability to provide new and innovative ways of funding, Goldman Sachs slips into second place with a score of 3.75, marginally behind Deutsche Bank and Salomon Smith Barney, which tied with 3.8 each.
In the area of skill in working in difficult market conditions, Goldman Sachs moves down to seventh position with 2.75 points, while Salomon Smith Barney takes the top slot with 3.4. Merrill Lynch and JP Morgan tie for second with 3.2 each, and Deutsche Bank ranks third with 3.0 points. Deutsche comes first in the category of depth of distribution with a score of 3.4, compared with 3.25 for Goldman Sachs, 3.2 for JP Morgan and 3.0 each for Merrill Lynch, Morgan Stanley and Salomon Smith Barney.
Goldman Sachs considers innovation a crucial component of the business and an important part of liability management in its emerging markets operations. "We are known for the development of the first Brady exchange in 1996 and we continue to innovate constantly," says John McIntire, managing director and co-head of Latin America. "The challenge is that we are not far from the end point of the Brady exchange game and emerging market sovereigns are moving on to the next level."
Mr McIntire says the next phase of financing for emerging market sovereigns will be similar to the current market for developed sovereigns, that is, more active management of the interest rate and currency components of their liabilities. "We are well placed to capitalise on sovereign financing opportunities because of our world class foreign exchange, derivatives and commodities operations," he says.
"Relationships do matter and we have a senior focus on the sovereign business at all levels. Macroeconomic research is another component and obviously an integrated capital markets, syndicate and distribution effort is critical. Large sovereign transactions are very visible parts of our emerging markets franchise."
Richard Luddington, JP Morgan's head of debt origination for Ceemea (Central and Eastern Europe, Middle East and Africa), says that following the merger with Chase, the group has been able to leverage the franchises of both JP Morgan and Chase. "This has given us a powerful platform not only in underwriting, but also in sales, trading and research," he says. "We have proven the underwriting capabilities of the firm in dollars and euros, with strengths in all the regions that few competitors can match. Our secondary trading market share now accounts for about one-third of the global emerging market volumes."
This year JP Morgan has lead managed major dollar deals for sovereigns such as Mexico, Argentina, Lebanon, Panama, Brazil, Philippines and China, as well as issues in euros for countries such as Slovenia, Colombia, Venezuela and Croatia.
Multi-currency approach
Third placed Salomon attributes its growing success in emerging markets to a large extent to the merger process that has brought its investment banking activities under the Citigroup umbrella. "Since the formation of Citigroup we have taken a comprehensive approach to our clients," says Michael Corbat, co-head of global emerging markets debt origination for Salomon Smith Barney in New York. "In terms of issuance, we believe we are unique in our ability to represent our issuers in all three major currencies. We have established a leadership position in execution of US dollar, euro and yen transactions." Mr Corbat sees this multi-currency capability as a key factor, in that a few years ago emerging market issuers were very dependent on the dollar market.
More recently, however, the growth of institutional and retail interest in the euro market has lessened the dependence on the dollar market. "The resurgence of the Samurai market can be considered the third leg of the stool," he says. "We have an integrated presence in each currency as Salomon Smith Barney, Schroder Salomon Smith Barney and Nikko Salomon Smith Barney. Additionally, we have placed significant emphasis on helping our clients with liability management.
"We are leveraging our on-the-ground presence globally. Citigroup is present in 102 emerging countries and we can make use of our strategic relationships and understanding of the market. For instance, we are doing a debt exchange for the Republic of Colombia in the local market that would have been a lot more difficult to accomplish before Citigroup."