When Natixis sought to unwind its exposure to structured credit correlation and counterparty risks, it needed an independent adviser that could combine complex valuation skills with a merger and acquisition process. Moelis fitted the bill.

There are more ‘bad banks’ around than there used to be, with plenty of assets that need to be sold or run off. One of the more proactive bad banks sits inside Natixis, in the shape of its ring-fenced Gestion Active des Portfeuilles Cantonnés (GAPC) division. GAPC has been steadily disposing of ‘non-core’ assets, with help from an unorthodox Moelis & Co team that marries corporate finance skills with structured credit trading knowhow.

With significant exposure to structured credit, Paris-listed Natixis took a thrashing from the subprime crisis and its rescue triggered the merger of its two largest shareholders, the mutuals Banque Populaire and Caisse d’Epargne. BPCE, now France’s third largest banking group by Tier 1 capital, owns 72% of Natixis and guaranteed some €35bn of risk-weighted assets when GAPC was created in 2009. Under the direction of its head, Olivier Perquel, GAPC has reduced these (mostly structured and predominantly US) assets to “significantly” less than €10bn.

The first notable disposal was of a large correlation trading book which Natixis had amassed before the crisis. This consisted of more than 300 structured credit positions – synthetic collateralised debt obligation (CDO) tranches – adding up to a total nominal position in excess of €30bn. Given the specialised and complex nature of the underlying assets, and the fact that there had never before been an orderly sale of a correlation book, the bank brought in Moelis as financial adviser.

New model advisor

Moelis is fairly new on the block. It was founded in 2007 by Ken Moelis, a mergers and acquisitions (M&A) veteran and former president of UBS Investment Bank. It might not have been the optimum year to start a financial services business, but Moelis has flourished nonetheless and, with nearly 600 employees in a dozen offices around the world, it is already outgrowing its ‘boutique’ label. It cannot lend to its clients in the manner of the behemoths but, as a proprietary trading-free zone, it makes a virtue of the true independence of its advice.

This absence of any conflicts of interest has been an important factor in the Natixis relationship. Moelis has been fairly active in France – Hubert Vedrine, a former French minister of foreign affairs, sits on its global advisory board. Its work for Natixis combines elements of risk advisory and restructuring, and it has performed especially well in league rankings for the latter. In the Thomson Reuters advisor tables for global distressed debt and bankruptcy restructuring, Moelis ranked fourth in 2011, after Houlihan Lokey, Lazard and Rothschild. It came fifth in the six months to June 2012, having been leapfrogged by Blackstone Group.

What Natixis needed in 2010, when it called in Moelis, was not a common-or-garden restructuring, however. It wanted to get rid of these assets because they had proved a costly mistake and because the bank was returning to a more conservative business model. But equally important, the positions would be very expensive to carry under the EU’s Capital Requirements Directive rules, which would come into force at the end of 2011.

Orderly exit

This would not be the first time a bank had sold its correlation book. There were a few highly distressed instances in the middle of the financial crisis. But it would be the first such transaction that was not a fire sale. “It was the first sale to be handled in a meditative way, as an organised, M&A-type auction,” says Yadin Rozov, a New York-based managing director at Moelis, formerly global co-head of the UBS structured products group.

The traded nature of the book meant that all the potential buyers – and there was a limited universe of those – would also be counterparties, which raised acute confidentiality issues. “It is quite a technical challenge to value and organise so many investment-grade corporate synthetic CDOs,” says Benoit Renon, a managing director based in London and leader of Moelis’ French effort. “The fact that we were never a counterparty to Natixis was essential. If we had been, we could never have been an adviser – it would have been too price sensitive.”

Mr Renon, a former head of European consumer investment banking at Morgan Stanley, notes that the sale process required a combination of M&A skills and highly focused technical expertise. “We brought our ability to run a classical corporate finance process, including organising an auction, getting competitive tension into the sale and running negotiations,” says Mr Renon. “And we applied that to very particular underlying assets, which required technical understanding and the ability to value them.”

The auction developed over two rounds. For the first round, Moelis created a sample portfolio, extracting all the information that could be sensitive but leaving enough detail for interested parties to make indicative bids. “These products are mathematically priced, so an indicative price on the subset can be extrapolated to suggest a price for the whole,” says Mr Renon.

A number of under-bidders were weeded out, leading to a second round, and a sale was concluded in July 2010. The process had taken about three months. Natixis never named the buyer, though word in the marketplace was that it was Morgan Stanley.

“The timing of the transaction was phenomenal,” says Mr Rozov. “At the time, Natixis got a very good price for its correlation book. Today, with the advent of Basel III [which will make the positions even more expensive to hold], it would be much more difficult to sell.”

Insurance claim

As the same time as Natixis and Moelis were discussing the fate of the correlation book, they were also broaching another matter which has only just been concluded. This concerned credit insurance which Natixis had bought, over time, from monoline insurer MBIA, referencing a portfolio of structured credit assets worth some billions of euros. Given that their value had plunged as the financial crisis took its toll, Natixis had a claim against MBIA and this also ended up inside GAPC. Moelis advised the bank in all aspects of its negotiation with the insurer.

In 2009, the situation became more complicated when MBIA restructured itself, splitting its troubled structured finance business away from its traditional municipal bond business. Eighteen banks, including Natixis, filed suit against MBIA, claiming that the split was intended to defraud them by leaving the structured finance unit undercapitalised. One by one, many of them settled, and by the start of May this year only three were left in litigation – Bank of America, Société Générale and Natixis.

“We assisted Natixis in deconstructing the value of its position, looking at the value of the underlying credit exposure and then deriving how much insurance it could claim,” says Mr Renon. “During the last stage, we assessed the creditworthiness of MBIA as, one by one, the litigating banks commuted their positions.”

Since MBIA dealings with each counterparty were deliberately opaque, this involved analysing whatever data was publicly available to ensure Natixis was not at an informational disadvantage. It also meant continually weighing the options of whether to settle or to keep litigating. “It was a joint effort,” says Mr Rozov. “We worked as a team with Natixis, constantly focusing on the day-to-day position and keeping in front of it. It was all designed to create a strategy that would maximise the outcome for the client.”

Eventually, in early May, Natixis too decided to settle, on undisclosed but “satisfactory” terms. Moelis says it is involved in “a number of other situations” with Natixis. It is also working on the possible sale of correlation books for other institutions.

“There are still legacy assets sitting on the balance sheets of most financial institutions, subject to sale or work-out as banks continue to deleverage,” Mr Renon observes. “While [such sales] require classical corporate finance treatment, they also need an innovative way of approaching corporate finance, and the ability to provide technical skills.”


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