The eurozone is now on the mend, according to BNP Paribas’ Frederic Janbon, but the new regulatory landscape will continue to change the debt business, bringing opportunities as well as challenges.

After two years of market disappointment following each summit of eurozone leaders, Frederic Janbon feels the meeting on June 29 this year broke the mould in acknowledging the risk of outright euro disintegration while launching concrete steps to prevent it. As the head of fixed income at the eurozone’s largest bank by capital and assets, where he has worked for almost quarter of a century, he is as close to the heart of these issues as anyone.

“There will continue to be debate over further European integration versus maintaining the status quo. However, we are breaking away from the usual cycle of half-hearted policy responses to market tensions, short-term market stabilisation leading to policy complacency which, in turn, leads to renewed market tensions. This is creating more investor appetite for high beta, including emerging markets, high-yield and hybrid bonds,” says Mr Janbon.

“There are more debut issuers tapping the market, and we have even seen issuers from the eurozone periphery returning since the European Central Bank’s announcement of OMT [outright monetary transactions] in September,” he says.

In this recent burst of activity, BNP Paribas was a lead manager for several deals from peripheral eurozone issuers, including Spain’s Telefonica and Portugal Telecom. In terms of new frontiers, BNP Paribas was the sole bookrunner for a debut $150m bond from Azerbaijani conglomerate Baghlan in June 2012. In October, it was a joint bookrunner for a $350m US privately placed bond issued by Canada-listed mining company First Quantum Minerals, which owns assets in Zambia and Mauritania. In the same month, the bank managed a debut $250m public bond issue for unrated French mid-cap manufacturer Plastic Omnium, which was placed with a club of five investors.

DCM strength

These ground-breaking deals highlight what Mr Janbon sees as two of BNP Paribas’ key strengths in the debt capital markets (DCM) business. The first is its speciality in what the bank terms structured finance; mostly secured transactions involving project, energy, shipping and aircraft finance. The bank has a market share of about one-third in aircraft financing deals backed by the Export-Import Bank of the US in 2012, and a broad expertise in the natural resources sector. The second strength is its vast and deep corporate client base, which extends down to small and mid-cap companies in its four eurozone home economies of Belgium, France, Italy and Luxembourg. These factors sit alongside the bank’s large fixed-income trading and distribution platform.

The debt capital market for us is being totally transformed into a much bigger debt origination platform across a larger number of smaller entities, with tremendous opportunities

Frederic Janbon

Mr Janbon says the growing disintermediation of the banking sector in Europe means that companies much further down the curve in terms of size will begin to diversify their funding away from bank loans. This also changes the business model for financing activities, with the bulk of revenues coming from distribution fees and the bank’s own capital, deployed much more selectively as an additional service to valuable clients.

“The DCM market for us is being totally transformed into a much bigger debt origination platform across a larger number of smaller entities, with tremendous opportunities in the fields of specialised financing, and growth and frontier markets, with a wider range of instruments taking in public and private placements, loans and schuldscheine [German law-tradable loans], and greater provision of debt advisory services alongside the primary market distribution,” he says.

In addition, punitive regulatory capital treatment and higher compliance and clearing costs make the long-term or exotic interest rate and currency swaps business associated with large cross-border bond deals look much less attractive for banks.

“DCM will have to look for profitability of its own, not just associated profit from the provision of derivative side-products. The business will also have to be much more intelligent about the way we structure bonds and organise the management of liquidity and credit risks – for instance, bridge-to-bonds, syndicating sensitive exposures and use of collateral – all to make sure that DCM and the associated hedging products continue to be profitable,” says Mr Janbon.

New investor base

All of which also means broadening the investor base for the fixed-income business. Mr Janbon says BNP Paribas has a large retail and private banking network to assist asset exits in the new-model primary market.

The bank is also focusing on its operational offering to expand its relationships with institutional investors and hedge funds, including electronic execution, post-trade services, collateral transformation, and providing support for managing client clearing and custody arrangements. Another previously unfashionable business that is increasingly valuable to clients is market-making in European government bonds.

“Many banks used to view trading government bonds as a low-margin business, more of a service to sovereign issuers as a strategic client group than a major source of earnings. But the eurozone crisis has meant that each individual government curve now moves in an idiosyncratic way, so our research and market-making is also much more valuable to investors,” says Mr Janbon.

While the case is clear for moving long-term risk away from banks that fund themselves short-term onto more suitable investors, this does not mean the market transition is straightforward. Mr Janbon says ultra-low interest rates and rising pensioner longevity have certainly created higher natural demand for higher yielding, long-duration fixed-income assets from pension funds. But it will still take time for them to build up their skill-set to analyse and invest in more specialised opportunities.

Moreover, many investors are currently focused on legacy assets that eurozone banks need to sell down from their balance sheet, potentially at heavy discounts, before considering any increased involvement in primary markets. To build distribution capabilities in a regulatory environment where leading fund managers hold greater financial firepower than the banks, some investment banks are looking at partnership arrangements. These would provide a specific asset manager with privileged access to the bank’s origination pipeline.

“There are interesting opportunities, but we must keep in mind that large investors will need to buy assets from multiple sources; they may be mandated to do so for best execution. So we are cautious about rushing into any partnership deal that requires complete exclusivity,” says Mr Janbon.

Ahead of schedule

Logically, banks should push for higher margins in the fixed-income business as their capital managers get to grips with the combination of higher capital and liquidity requirements under Basel III regulations. More volatile markets also make primary issuance a less straightforward business than pre-crisis. But margins are not yet improving significantly. Add these factors to the greater technology costs resulting from central clearing requirements on associated swaps business, together with increasingly sophisticated electronic execution platforms, and the result is a fixed-income landscape where more marginal players are now exiting.

By contrast, there is no sign that the commitment of BNP Paribas to fixed income is waning, and it remains one of the strongest business lines in the corporate and investment bank (CIB). Nor does the advent of the EU’s Liikanen Report prompt any wavering on the universal banking model. The CIB has been consistently allocated a third of the group’s capital and generated a third of its profits almost every year since the merger of BNP and Paribas in 2000. Underlining the importance of his business to BNP Paribas, Mr Janbon was appointed to the group executive committee at the end of 2011.

Moreover, he feels that the CIB in general derives a significant advantage from the strength and stability of the group. BNP Paribas posted a net profit of €3bn, even in the disastrous year of 2008. The bank has now completed its reduction of risk-weighted assets and increased capital to approach a core Tier 1 ratio of 9%, almost six months ahead of the January 2013 schedule it set itself and more than six years ahead of the Basel III deadline. The group has the fourth best return on equity of any global banking group, and the CIB has a cost-to-income ratio of 61%, the third best among global investment banks.

“Banks and their governments are under regulatory and financial stresses, while BNP Paribas has finished its deleveraging process and learnt the lessons from it. That, together with our position in the heart of the eurozone, gives us a great opportunity to provide advisory services on asset and liability management, and issuance,” says Mr Janbon.

While Europe remains its home market, he adds that BNP Paribas has not been an exclusively European bank for some time. Roughly half the revenues for its fixed-income business come from Asia-Pacific and the Americas. And its knowledge of how to adapt to the new world for financial institutions is clearly a product that exports well to high-growth markets. BNP Paribas was the only European lead manager for Banco do Brasil’s blow-out senior unsecured issue in October 2012, which was upsized from $500m to $1.75bn on extraordinary investor demand that reach $11.8bn.


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