SocGen’s global head of DCM celebrates inspiring year

Demetrio Salorio

Société Générale Corporate and Investment Banking has been a top 10 player in debt capital markets (DCM) for the past decade. The bank’s global head of DCM, Demetrio Salorio, believes 2018 will end up being a year for further consolidating the group’s position, thanks to a good run in corporate bond financings and a rethink among lower rated borrowers in Europe, something Mr Salorio has been advocating for years. And as the borrowers' market, which has been dominating in recent years, is slowly coming to an end, issuers will have to choose their bookrunners more wisely, which could work in SocGen’s favour.

“At SocGen, we have a clear strategy to continue to be a strong force in the European market,” says Mr Salorio. “For more than 10 years, we have been one of the top banks in Europe. This year, we are going to win market share – we are currently number three.”

By the end of August, SocGen had been involved in 222 euro-denominated DCM transactions in Europe in 2018, according to Dealogic data, amounting to an equivalent of $47.8bn in deal volumes and a 5.6% market share. Only BNP Paribas and Deutsche Bank worked on more deals. This time in 2017, SocGen was in eighth position, before finishing the year at seventh.

Megadeal player

Some $15.3bn equivalent of this year’s volumes involving SocGen relate to 67 corporate bond transactions, according to Dealogic. SocGen was one of the bookrunners in 2018’s largest bond transaction to date: the €8bn of senior unsecured bonds, divided into six tranches, for pharmaceutical company Sanofi, which was seeking to raise funds to partly refinance two recent acquisitions. SocGen was one of three global co-ordinators on the transaction.

“There is a trend towards more mergers and acquisitions [M&A] among corporates,” says Mr Salorio. “We expect an increase in M&A in Europe, which will further support the corporate bond market in Europe.”

The €3bn senior notes for commercial property company Unibail-Rodamco was another example of that. SocGen was one of four global co-ordinators on the bond placement, following a €2bn hybrid bond a month earlier, to refinance the company’s acquisition of Westfield shopping centres.

Overall, however, the credit market has been less buoyant in the first half of 2018 than in 2017. Across banks, euro DCM volumes in Europe have fallen from $813bn equivalent in the first six months of 2017 to $726bn equivalent for the same period in 2018. For SocGen that has meant a reduction of 18.1% in revenues in the fixed-income, currencies and commodities business compared with the first half in 2017, according to the bank’s half-year results. Still, SocGen’s DCM volumes were only $880m equivalent lower than in the first six months of 2017; other top 10 DCM bookrunners posted significantly larger reductions (up to $15.5bn) on volumes in the first six months of 2017, according to Dealogic data. This means SocGen jumped from ninth place at the end of June 2017 to second in the DCM league table at the end of June 2018.

A sea change

“We have been going through the golden age of DCM for borrowers in the past few years, by which I mean rates were going down, the demand for paper was huge and borrowers could dictate the conditions in terms of spreads, new issue premium and issue timing,” says Mr Salorio.

“Now we are going back to something more normal. This slight change of dynamics does not prevent transactions from being done. It is simply a more difficult game, and it is more about choosing your tactics and your timing wisely.”

Rising interest rates in the US and UK, the end of quantitative easing in the eurozone, Brexit, Italy’s new anti-immigration government and a potential trade war between the US and China are all likely to cause more market volatility in the near term.

Especially for the emerging markets asset class, the strengthening dollar and higher US rates are biting because most emerging markets bonds are denominated in US dollars. This is expected to make future refinancing operations more expensive for emerging market borrowers and cause some outflows from global emerging market funds (see The Banker’s analysis of what US policy will mean for emerging markets).

One of the countries hardest hit so far is Turkey, which is struggling due to the plunge in the value of the lira. Turkey’s story, however, has its own underlying issues such as deteriorating relationships between the country’s president and some Western governments.

“Turkey is one of the first countries that has been hit, but this is related to idiosyncratic risks,” says Mr Salorio. “Certain corporations could be very much exposed to foreign exchange risk but Turkey will not export difficult times to other countries.”

Of the euro-denominated emerging market issues in 2018, SocGen ranks third with an 8.5% market share and nine transactions with a deal value of $2.5bn equivalent. While Mr Salorio expects the near term to be “more difficult” for emerging market issuers, he strongly believes that emerging markets “will thrive” in the medium to long term. “Most of the world growth will continue to happen in emerging markets but we are sensing the end of a cycle, especially related to the outward financial flows linked to a stronger dollar and higher interest rates,” he adds.

The high-yield fight

Having started out in the US in the 1980s, sub-investment grade bonds are now a staple of the European market. Like investment-grade issuers, those lower rated corporates have also been enjoying record low refinancing costs.

Still, Mr Salorio notes that the system of running the books and allocating the bonds on these European deals has traditionally been too Americanised, with a handful of large US investment banks and few Europeans being in charge of the transactions.

“This system tends to favour certain investors and, in our view, may not provide the best outcomes for the borrowers,” he says. “The Markets in Financial Instruments Directive II [better known as MiFID II] is very clear on this – our duty of care is to the issuer, not the investor.”

Mr Salorio notes that the benefit of having more banks working together on transactions is allowing issuers to achieve more investor diversification and include smaller investors.

“We are starting to prove our point to borrowers that the [so-called] left-lead system is not right for Europe,” he says. “It has been a record year for us in terms of active bookrunner positions.”

Examples from this year include SocGen’s joint global co-ordinator and active bookrunner roles for Greek issuer Titan Cement’s €250m add-on, Casino’s €200m add-on and Faurecia’s €700m senior notes. The average ticket size for investors allocated in the Casino transaction, for example, was €5.2m, offering significantly more granularity than many of the traditionally US investment bank-led transactions.

Growing further afield

Apart from growing in its key countries in Europe across all segments of DCM, SocGen has a clear strategy of expansion everywhere the bank has clients, according to Mr Salorio. “The strategy of the institution is to provide our clients with the full suite of products where they are, and that includes DCM, of course.”

One of these other regions is central and eastern Europe, where SocGen’s DCM business has been strong in the first eight months of 2018. SocGen also operates in Russia, where it owns the eighth largest bank by Tier 1 capital, Rosbank. DCM volumes in the country have been low in 2018 but the lender remains “extremely committed” to the country, according to Mr Salorio.

SocGen is also expanding its DCM business in Asia-Pacific, hiring more staff in Japan, Singapore and Australia, and is also increasing its footprint in the US. Transactions such as the $2.5bn of senior unsecured debt raised in multiple tranches for General Motors Financial in April and those for Toyota Motor Credit in January are underlining the bank’s strength in the automotive finance sector and are making the French lender the number one lead manager for US auto makers in dollars in the first eight months of the year, according to Dealogic data.

So, despite there being “plenty of sources of potential instability” globally in the near term, Mr Salorio is “fundamentally positive” for the future of the DCM business.

“This is where we DCM bankers and syndicate managers can provide the maximum value to borrowers,” he says. “We can act as key advisers to make sure transactions are properly executed. We always work on behalf of the borrower and as such we can provide, due to our experience and knowledge around the marketplace at every single moment, the best strategy to go by. This is going to be key.”