Loop Capital Markets guides John Deere bond to record-low pricing

When John Deere Capital sold a three-year bond this summer, it would have been an everyday event, but for two extraordinary features: it priced at the tightest-ever three-year spread for a financial issuer and was led by a syndicate solely comprising “diverse-owned” firms. One of them was Loop Capital Markets.

The Chicago-based firm, which takes its name from the city’s downtown business district, is black-owned. It was set up as a municipal bond firm in 1997 by its present chairman and chief executive, Jim Reynolds.

Mr Reynolds, an alumnus of big Wall Street houses Smith Barney, Merrill Lynch and PaineWebber, started Loop Capital with a staff of six. Today it employs around 200, largely in Chicago and New York, but with a presence in 20 US cities. It is now a full-service investment bank, brokerage and advisory firm with international clients across corporate, government and institutional sectors.

In June, Loop Capital announced that it had sold an undisclosed minority stake to Canadian Imperial Bank of Commerce (CIBC). CIBC has been expanding in the US Midwest over the past four years, with acquisitions including Chicago’s PrivateBancorp and Milwaukee-based investment bank Cleary Gull.

Announcing the CIBC investment, Loop Capital said this would allow it to take larger positions on its balance sheet, lead bigger transactions and consider strategic acquisitions.

Diverse-owned financial firms

In the US, diverse-owned financial firms are those owned and run by women or minorities such as African Americans, Hispanics and military veterans.

As demonstrated by Loop Capital, these firms first began to make headway in the public finance market, which includes municipal bonds, back in the 1990s as more black and Latino mayors were elected in major cities.

“They created opportunities for diverse-owned firms to do business,” explains Sidney Dillard, a Loop Capital partner and its head of corporate investment banking. “Meaningful opportunities in the corporate market came more in fits and starts.”

After George Floyd was murdered by a Minneapolis policeman in 2020, and the Black Lives Matter campaign gathered force, the pace of this quickened. “In the aftermath, there was a lot of focus on racial justice,” Ms Dillard says, adding that the lockdown effects of the pandemic intensified this reaction.

“Corporates responded in a different way,” she notes. “Their boards and employees wanted them to do their part to address some of these issues.”

High-profile institutions including JPMorgan and Princeton University announced they would support diverse-owned financial firms — asset managers as well as investment banks and brokers.

Increased opportunities

Before 2020, Loop Capital had been a co-manager on many debt and equity deals, including for international clients, but had been an active joint bookrunner in fewer instances.

“Then, last year, we began to see more significant opportunities for diverse-owned firms to direct and spearhead transactions without being chaperoned by larger firms,” Ms Dillard says. “We had the capabilities, but not the opportunity, and we were ready for it.”

The first significant corporate deal with Loop Capital and its peers in the driving seat was for the A3/A-/BBB+ rated Allstate Corporation, a Chicago-based insurer with whom the firm had a long-standing association.

“Allstate is a well-known issuer, so no roadshow was needed for the deal itself,” says Cary Schulz, senior vice-president and head of syndicate and debt capital markets at Loop Capital. “But it wanted to maximise the visibility of the transaction with investors, and so the four diverse-owned bookrunners hosted and took part in a non-deal roadshow.”

The joint bookrunners introducing themselves alongside Loop Capital were veteran-owned Academy Securities, Hispanic-owned Ramirez & Co and minority-owned Siebert Williams Shank. “Investors could draw the conclusion that a deal could be forthcoming, and this gave them time to open a new relationship [with the bookrunners] so that they could be involved,” Mr Schulz says.

Last November, in the week before Thanksgiving, Allstate priced a $1.2bn senior notes offer in two equal tranches, a five-year with a 0.75% coupon and a 10-year with a 1.45% coupon.

Initial price thoughts were Treasuries (T) plus 60 basis points (bps) area and 90bps area respectively, tightening to guidance of +40bps and +70bps. The total orderbook was $4.3bn — more than three times oversubscribed — and final pricing settled at +37.5bps (a –2.5bps new issue concession) and +65bps (zero).

“What made it unique was that this was our first corporate deal of benchmark size as a lead left,” says Dave Yang, Loop Capital’s Chicago-based vice-president in debt capital markets. “You need experience before you can be a lead, but you only get experience by being a lead. That’s the cycle that needed to be broken.”

The preparations for the Allstate transaction were used to inform the John Deere deal, including a deep dive on the issuer’s diversity efforts and profiles of the diverse-owned firms hosting the non-deal roadshow.

The ‘S’ in ESG

One large fixed-income investor told Allstate that they were pleased to hear what the company was doing from a diversity perspective, which was one of the reasons they held its bonds in their environmental, social and governance (ESG) portfolio, Ms Dillard reports.

“It said to me that the work Allstate was doing allowed it to attract a broader base of capital,” she says, noting the steady expansion in ESG funds.

As primarily an agricultural machinery manufacturer, John Deere has a direct interest in green and sustainability issues. Lining up a syndicate of diverse-owned leads for its June bond issue helped it to show that it also cared about the ‘S’ in ESG.

John Deere Capital, the tractor manufacturer’s A2/A/A rated finance captive, mandated the same leads as Allstate had — Loop, Academy, Ramirez and Siebert.

The three-year deal surfaced with initial price talk of T plus high-30s before tightening to plus 20 area. Based on a $1.25bn orderbook at pricing, the deal was sized at $600m and the spread set at plus 18bps. With a 0.45% coupon, the transaction was priced to yield 0.492%. The spread was the tightest three-year ever for a financial issuer and the third-lowest three-year spread on record.

The spread was narrower than that of an earlier three-year bond issued by John Deere Capital in March, without solely diverse leads. “Timing and conditions matter,” Mr Yang observes. “But it shows that we did a great job in terms of pricing.”

One of the distinguishing features of the Allstate and John Deere transactions was the way in which they were supported by diverse-owned asset managers. “They are often overlooked and underserved in the primary capital markets, because they don’t represent substantial pockets of money,” Mr Yang says. “But we have deep relationships with the diverse ecosystem.”

Loop Capital analyst Jamie Adams notes that one of the largest orders (and one of the largest subsequent allocations) in the Allstate deal was from a minority-owned fund manager who wanted to be supportive and wanted new exposure.

“I’m not saying they wouldn’t have put in a bid with a bulge bracket firm,” Mr Adams says. “But they felt empowered to bid in size, in the knowledge that they would be allocated fairly.”

Mr Yang has worked with ESG ratings specialist Sustainalytics to draw up a framework for ‘diversity and inclusion’ (D&I) bonds. These would allocate at least 50% of an issue to minority and/or women investors. 

“The D&I bond would allow diversity investors to participate in primary bond offerings with larger allocations,” Mr Yang explains. “This would directly support their ability to compete with the well-known institutional asset managers who — with their sheer size and influence — command the new issue market and get more than 90% of allocations in every bond deal.”

Looking ahead, Ms Dillard believes the firm’s job is to ensure the market continues to be inspired by more diverse transactions. “We must think about how to create a framework that works for them to do the same,” she says.

Loop Capital’s culture is shaped by geography as well by ownership. “Being in Chicago gives us a Midwestern point of view,” Ms Dillard points out. “We think we can get more done together than on our own.”