The JP Morgan team that chased its triple-A ‘trophy’ dream deal for three years explain how they won the waiting game. Geraldine Lambe reports.Investment banking can be a dynamic, sometimes transient, business. People come, people go. Often, no sooner have bankers made a name for themselves at one firm than they are head-hunted to shine a little of their light at another.

It is rare, therefore, to find a talented team that is still intact after several years. It is even more rare if that team comprises members from various disciplines.

But in the landmark convertible bond deal recently completed for Kreditanstalt für Wiederaufbau (KfW) into Deutsche Telekom shares, co-led by JP Morgan and Deutsche Bank, the team that eventually got the paper away at JP Morgan was the same one that had been pitching for the business for the previous three years.

Largest deal of its kind

“This is one of the strengths of our business,” says Viswas Raghavan, managing director and co-head of equity capital and derivatives markets at JP Morgan. “We couldn’t have got the deal without the team effort. There were a lot of constituents on the client side, and we had to mirror the client coverage set up on our side.”

Ina De, managing director of equity capital and derivatives markets, agrees. “It was one of the most satisfying elements of this deal – building KfW’s trust as a team,” she says. “It required people who understood the German government and KfW, product specialists, and those with Deutsche Telekom expertise. Bringing it all together was immensely satisfying.”

The team then comprised: Mr Raghavan; Ms De; Eva Lindholm, managing director for investment banking; Klaus Hessberger, vice-president, equity capital and derivatives markets, and part of the team covering the German government; and Roland Sand, managing director, investment banker for the telecom sector, who is also head of the Deutsche Telekom account.

The deal they forged was the largest equity-linked bond ever, at E4.5bn with a E500m green shoe (provision for extra shares) that was exercised within three days of the launch.

And the prestige of the triple A-rated, government-owned issuer was buttressed by the quality of the underlying company. Deutsche Telekom is one of the most liquid blue chips in Europe.

Worth the fight

Pundits have described the deal as lending a new type of respectability to the convertible market, which many blue chips have dismissed as being the preserve of low-grade borrowers. Bankers certainly believe it was worth the years of fighting for the mandate.

“This was a trophy deal,” says Ms Lindholm. “Everyone wanted to do it. It was a benchmark, both in terms of the size of the deal and the market: the first exchangeable for the German government into one of the most liquid stocks. That was worth the wait.”

According to Mr Raghavan, one of the drivers behind the structure of the deal was the dilemma facing most governments: whether to continue with their privatisation programmes given the recent equity market environment.

“Following recent share price declines and equity market volatility, some governments have expressed concern that they may be selling off equity at depressed levels and in some cases below IPO [initial public offering] prices,” says Mr Raghavan.

“So most governments are looking at ways to sell equity at a premium. An exchangeable product therefore fitted KfW’s requirements well. Benign interest rates, high share price volatility and unprecedented liquidity for equity-linked paper have all enabled issuers to secure extremely attractive financing terms.

“This transaction demonstrates how plugged in KfW is to the market. They were ready to issue where the liquidity was. They were quick enough to be first off the mark,” he says.

Innovative privatisation

The German government had already transferred this portion of Deutsche Telekom shares to KfW. And the availability of cheap funding for the reconstruction bank, at a time of stronger bids for equities, was seen as an innovative way of privatising the Deutsche Telekom stake, as well as offering an appealing product for investors.

Certainty of disposal was key to the issue’s pricing at the wide end of both the coupon range of 0.25%-0.75% and the conversion premium range of 38%-43%, says Mr Raghavan. Some corporates that have recently issued super-high premium convertible structures were using the equity-linked market simply to raise non-dilutive cheap debt.

“It was equally important to KfW that the bond converts because its other major purpose was to monetise its stake as part of the privatisation programme,” says Mr Raghavan. “We had to structure a deal that struck the right balance between those two objectives.”

There has also been much interest in the fees charged, which have been described as among the lowest for equity-linked debt in Europe at just 60 basis points (bp), considerably lower than the more usual European range of 100bp to 150bp.

Fees match the mission

But Ms De says KfW would probably say this was too high; it is accustomed to getting 10bp to 15bp on bond deals. “It is almost a government’s prerogative to look for these sorts of fees; it cannot be compared with a corporate issue,” says Ms De. “Similarly, it was unlike any other deal because of its sheer size.”

Ms Lindholm says: “The fee structure has to be judged against the mission of the deal. And anyway, KfW was very good at managing fee expectations. It is a hugely sophisticated and professional organisation, being not only a big borrower, but also running a large asset side of the balance sheet. So it has long-standing experience of facing the market, right across the board.”

After three years of working towards a ground-breaking deal, the execution of the mandate was fluid to the last. JP Morgan was working on the exchangeable before the end transaction had been set in stone. “KfW approached us around June 25 to help structure and execute a potential transaction and to work through the steps that needed to be taken ahead of a possible launch,” says Mr Raghavan.

Frenzied activity

Despite not knowing if it definitely had the mandate nor when the launch would take place, JP Morgan appointed lawyers on June 26.

The following 10 days were spent in a frenzy of agreeing structure, preparing documents, terms and conditions, and writing the press release so that KfW could tap into the market when it was ready. According to the team, little sleep was had and not much food either. “There wasn’t time to eat,” says Ms Lindholm.

In the run-up to the launch, the previous two weekends were spent in the office. The KfW team, led by director Dr Günther Bräunig, was patched in on all the conference calls, weekend or otherwise. “This is pretty typical for a convertible deal because it has to be done quickly in order to guarantee the element of surprise,” says Ms De.

Late on Monday July 7, JP Morgan was told there was “another” book-runner, Deutsche Bank, and that KfW wanted to proceed with the transaction that night, after market close.

Pricing it right

“We were very wary of any information leaking out into the market,” says Mr Raghavan. “We absolutely wanted to avoid the nearly 10% decline in Deutsche Telekom’s share price following its mandatory convertible in February this year.”

The team was briefing the sales and trading team early on July 8 and was ready to roll before 8am. The books were closed by around noon. Aside from the bumper size of the deal, the speed of execution was also notable. “We had the entire sales force, cash and convertibles, working on the deal,” says Ms De.

By Friday July 11, it was clear that the bond was tracking the underlying – verification that the team had got the pricing right. “KfW did not want an issue that traded below par, therefore the pricing had to be spot on,” says Mr Raghavan. “We felt totally justified when we saw the bonds trading at the issue price and just above in the after market.”

Keeping the team on the boil

The sense of excitement and achievement felt by the JP Morgan team is palpable.

This is hardly surprising. It must have been difficult to sustain the interest of this prestigious issuer for three years; by anyone’s measure, this is a long time in which to consistently present the sort of innovation, new twist or fresh nuance that will clinch the deal.

But Mr Raghavan says it was not difficult to keep the team on the boil. “Each of the constituents were well plugged in to the product,” he says. “It’s a combination of relationship, tenacity and creativity that wins the day.”

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