In just one week, the hit team – drawn from Deutsche Bank, Goldman Sachs and Morgan Stanley – devised a strategy, pricing, timing and a script for pricing conversations with investors that made Germany’s $5bn bond issue sell like hot strudel, reports Edward Russell-Walling .

Everyone knew it was coming. But when it finally arrived, it was a showstopper nonetheless. Germany’s recent $5bn bond issue notched up superlatives of every description and, for those bankers fortunate enough to have worked on the deal, is guaranteed a permanent slot in their CVs.

The lucky bankers in question were from lead managers Deutsche Bank, Goldman Sachs and Morgan Stanley. And, of course, their appointment didn’t owe much to luck. “We were aware of three selection criteria,” reports Bill Northfield, co-head of Deutsche Bank’s frequent borrowers group. “Quality and consistency of advisory services; the capacity and credibility to lead a benchmark dollar deal; and our years of activity in the primary and secondary Bund markets.”

That Germany intended to issue dollar-denominated paper this year was not exactly a state secret. Given the nation’s deteriorating finances and the rising costs of funding, the German finance ministry had been serially advised to diversify its funding base in order to save money. “They made an announcement last year that they had approved two new products – a dollar bond and a euro index-linked bond,” notes George Richardson, a former US Navy pilot who heads Goldman Sachs’ sovereign, supranational and agency coverage.

This was the first foreign currency bond in the Federal Republic’s post-war history, and new legislation was required to allow the proceeds to be swapped back into euros. From the moment that was signed into law in March, the rumour mill ground into action, and every time bonds had a good patch, the market would work itself into a fit of anticipation.

For the chosen bankers, the call eventually came in mid-May. They were summoned individually to the Finanzagentur, the agency that handles Bund issuance, on Whit Monday (May 16). No one knew who the other lead manager candidates might be, but it wasn’t long before they had their suspicions, with sightings of familiar faces in the car park or the airline lounge. On the flight from London to Frankfurt, one of the Morgan Stanley team sat directly across the aisle from one of the Goldman Sachs bankers.

“They asked us if we would be interested to work with them,” says Mr Northfield, adding that there was little doubt about the answer to that. “We met individually with representatives of the issuer, and then they brought all five parties together in one room to agree on the next steps for the week ahead.”

“We spent the rest of that week planning,” recalls Anneke de Boer, Morgan Stanley’s head of sovereign and supranational origination. “We had all been competing for this mandate. Now we had got it – and we were honoured to get it – we had to pull together as a team to do the best transaction for Germany.”

Under pressure

It was, unsurprisingly, a busy week. There were two or three conference calls each day with the agency and the finance ministry, to exchange views of the markets, to discuss strategy, pricing and timing and to hammer out a script for pricing conversations with investors.

Delighted though everyone was to have landed the mandate, the sheer weight of expectation created pressures of its own. “Everyone wanted this to be the biggest and the best,” says Mr Richardson. “Anything else would be criticised as failure. And getting it just right takes a lot of time and thought.”

Those pressures were political as much as anything else. The delicacy of the prevailing political climate in Germany was not much helped by impending elections in North Rhine-Westphalia the following weekend – elections which the government party was widely expected to lose. “We knew the transaction would be scrutinised – by the markets, by politicians, the press and the public – which raised the bar that much higher,” says Dan Shane, Morgan Stanley’s syndicate manager for interest rate products in Europe.

Ziad Awad, co-head of European syndicate at Goldman Sachs, puts it even more baldly. “Failure,” he says, “was not an option.”

A testing time

Under these circumstances, the rigorous questioning and attention to detail of the Finanzagentur proved to be something of a blessing. The agency and the ministry, as newcomers to the dollar markets, repeatedly challenged assumptions and demanded justifications.

“We would make a recommendation and they would ask ‘why?’,” relates one banker. “We’d say, ‘well, that’s how you do it’. They’d say ‘why?’. We’d say ‘erm, we’ll call you back’.”

All agree that this process of continual pushing and testing was key to the deal’s ultimate success. “The agency challenged us to perform, and we rose to the challenge,” says Ms de Boer. “The issuer, the agency and the banks all educated one another, which took us and the deal to greater heights.”

For a couple of days after the Whit Monday meetings, bond markets had been volatile but they steadied by the end of the week. It was decided the launch would be on Monday, May 23, and, after a confirmatory phone call on the Sunday evening, the deal blinked onto screens at 9am Tokyo time.

The market’s response was immediate and, gratifyingly, surprised – nothing had leaked. “It’s usual for Asian accounts to take their time, evaluate the transaction and wait until London opens before taking a decision,” observes Mr Shane. Not this time. By 7.30am in London, there were orders worth $1.4bn in the book.

Record sale

The issue started at benchmark size, generally held to be $3bn for dollar sovereign paper. Shortly after 9am, orders passed the $5bn mark. By 4pm they touched $13bn, a record.

Pricing was held over until the following day. “We didn’t want to close the book just an hour after New York opened,” says Mr Northfield. And Monday was a public holiday in certain Asian countries. “This was Germany’s first US dollar bond and we wanted to be able to say that everyone had access to it.”

Price guidance had started at mid-teens over US Treasuries, came in to 12-15bp during the afternoon and culminated in a re-offer spread of 12bp. Orders worth $11bn remained undeterred, and the issue size was increased to $5bn.

A museum piece

“A sovereign deal this large has never been done before,” points out Mr Awad of Goldman Sachs. “In terms of the market’s capacity to absorb $5bn, the degree of difficulty to achieve that was very high. From the issuer’s perspective, with every extra $1bn, their savings multiplied, which was very important.”

A normal sovereign or supranational issue generates 50 tickets. “On this we had 167 different orders,” Ms de Boer says. Clients who, for one reason or another, don’t normally look at this type of transaction, were queuing up to buy.

Around 35% of distribution was in Europe, unusual for a dollar deal. Central banks came in with bigger orders than normal. Many smaller players placed disproportionately large orders for what has since been described as a ‘museum piece’.

“There was a bit of ‘irrational exuberance’ in subscribing for such finely priced paper,” admits Mr Northfield. “This is a classic trophy bond – one where you would have to explain to your boss why you didn’t buy it.”

Spot on

That, indeed, had been part of the game plan. “A key strategy was to get to that point, to get those who wouldn’t normally buy a high-quality, plain vanilla dollar bond to invest,” explains Ms de Boer.

The pricing, which made this one of the most expensive non-US bonds ever, was generally reckoned to be spot on, tightening a mere half basis point or so in the days that followed. And the cost savings to the German taxpayer were considerable.

“It was a job well done,” concludes Mr Shane. The German press agreed, and were quick to acknowledge the deal’s success. Theirs was one of the more satisfying testaments to the team’s having pulled it off.

It is an irony of the trade that failure would almost certainly have attracted a lot more publicity.

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