Five a day keeps Barclays bond team healthy

While Barclays has been getting recognition for overall achievement in the debt capital markets, its sovereign, supranational and agency (SSA) team surpassed itself this summer when it was joint bookrunner on no less than five benchmark deals on the same day. To do it, Barclays had to convince itself that this was not only feasible but also fair to its clients.

It has been an uneven year in the bond markets, to say the least, reflecting the ebb and flow of fears about the world economy in general and the eurozone crisis in particular. The first quarter saw an explosion of issuance after the European Central Bank (ECB) deployed the first of its long-term refinancing operations (LTRO), to provide more liquidity for banks.

The euphoria did not last, however, even after a second round of LTRO, and by the start of the second quarter doubts were again gripping the market. “The palliative of LTRO began to wear off, and the patient started to get jumpy again,” says Charlie Berman, head of public sector, Europe, Middle East and Africa (EMEA), at Barclays.

Adding up the numbers

But at least one element of the crisis had now been dealt with, as Lee Cumbes, Barclays' head of frequent borrower origination, points out. “One key tail risk had been removed,” he notes. “If the ECB could do two LTROs, why not three?” So, as the fear gauge started once again to rise, the Barclays team bent to the task of working out in finer detail exactly what it was the market wanted. It could then feed that knowledge into the origination of subsequent deals. One thing was clear – with yields on ‘supersafe’ haven benchmarks extremely low, SSA investors wanted to increase their returns. It was also clear that, since they now acknowledged some progress in the management of the eurozone crisis, they were prepared to take a small step up in risk.

The second quarter was altogether more patchy than the first but as it neared its end, the mood lifted somewhat. An inconclusive Greek election, revealing an unsettling voter appetite for a ‘Grexit’, was superseded in mid-June by a narrow victory for the pro-euro New Democracy party. An EU summit scheduled for June 28 and 29 held out some hope for agreement on bank recapitalisation. All in all, the last week of June seemed to start well.

“On the Monday [June 25], we had several calls with borrowers, because rates had rallied and that is not always conducive to issuance,” Mr Cumbes recalls. “We spoke to investors about their general appetite and confirmed that Tuesday would still be a great day to issue.” Barclays had a number of clients in the frame. Could the team bring all of its deals to market on the same day? And – a different matter entirely – should it? One factor that encouraged the team to consider the possibility was that each one would target a slightly different investor base.

“The market was, theoretically, about to go on holiday, which added to the pressure,” says Mr Berman. “For some of the issuers there were only a couple of days to get things done or they would have to leave it until after they got back.”

Careful decision

Mr Berman is at pains to emphasise that the decision to press ahead with all five deals was not simply a mad rush for a market window. Some had been in gestation for a while and had required careful planning. “This was not a cavalier ‘let’s bung on another deal’ exercise,” he insists. “We know that getting the right execution for our issuers and investors is critical for our long-term franchise. We had to feel that we were able to act in the best interests of everyone.”

So the internal discussions that took place as June 25 unfolded were partly about what was physically possible but also about what was the right thing to do. Barclays knew it had to be completely transparent with all the clients involved. With all the confidentiality issues that tend to surround these transactions, this gave rise to what Mr Berman calls “a complicated set of conversations”.

The issuers were understanding, and so began a remarkable 24 hours at Barclays. The bank has 'a strong bench' on syndicate and capital markets, so each deal had a separate team.

On Tuesday, June 26, Barclays acted as the bookrunner on five separate transactions (two of which comprised a dual-tranche issue). One was a 30-year benchmark for the Republic of Finland, which had been under discussion for some time. Finland had issued to 15 years before now, but never to 30. A number of debt management issues had to be resolved beforehand and various approvals sought, so the deal had been some time in the making. Finland had also had to ponder the effects on other parts of its curve – would a 30-year benchmark dilute liquidity in other benchmarks that it had worked hard to establish?

The books were opened by Barclays and fellow bookrunners on Tuesday morning, with initial price thoughts of mid-swaps plus 45 basis points (bps). More than €2bn of orders came in and the transaction was sized at €1.5bn, with a coupon of 2.625%. Most of the investors were European, with 25% going to the Nordic region, 47% to the UK and 25% to the Benelux countries. A full two-thirds went to funds, insurance and pension accounts combined. 

Different investors

The Republic of Austria, on the other hand, moved very quickly to announce a two-tranche deal, raising €5bn in all, and attracting a rather different investor base. One tranche was a seven-year bond with a 1.950% coupon, priced in line with guidance at 42bps over mid-swaps. It attracted €3.5bn in orders in the first half-hour, reaching a total book size of €4.3bn. Bonds worth €3bn were allocated, the largest share going to banks (37%), followed by central banks (35%) and fund managers (17%). Asian investors bought 30%, UK 22% and Austria 15%. German investors, staying closer to home, took 14% and France 5%.

The second Austria tranche had a maturity of 32 years, with a coupon of 3.150% and priced at midswaps plus 100bps, as first intimated. It too was popular with banks (37%), followed by insurers (31%) and fund managers (29%), though pension funds only bought 2%. Germany took 36% of this longer-dated issue, followed by the UK (31%) and Austria (21%).

The EU’s long 15-year issue triggered another fast book-building process. This was its fifth benchmark of the year – Barclays had lead managed three of them. The books closed after two hours with €3.7bn in orders from more than 90 investors, dominated by pension funds and insurance companies, and the eurozone, respectively. The size was capped at €2.3bn, with a 2.875% coupon and a re-offer spread of 68bps over midswaps.

The market differed once again for a three-year Reg S/144A benchmark from Caisse d'Amortissement de la Dette Sociale (Cades), the French social security debt management agency, not least as it was denominated in US dollars. “The appetite for French credits has peaks and troughs,” says Jeremy Shaw, co-head of rates syndicate at Barclays. “There was a trough at the end of 2011 and another at the beginning of the second quarter. The fact that this priced tighter than Cades’ last three-year deal was a demonstration of improved confidence in the credit.”

The $3bn deal, equal to Cades’ largest dollar benchmark to date, pays a coupon of 1.625% and was priced at 105bps over midswaps. The buyers were overwhelmingly banks (62%) and central banks (28%) from EMEA (70%) and Asia (24%) – Asian central banks have been anchor buyers for Cades’ previous dollar issues.

It was all quite a feast for Barclays, but it was also quite a feat, given that these were demanding, high-quality issuers who all felt they had successful transactions. “Any one of these deals on its own would have been a highlight of the quarter,” says Jonathan Brown, head of bond syndicate, Europe.

“A lot of it comes down to trust,” Mr Berman concludes. “It was a big trust call from our clients, for which we are very grateful.”