January 31, 2014 / 3:05 PM / 4 years ago

Banks lean on reciprocity to win bond fees

* Covered bond market practice permeates to bank capital

* Banks eye large fee pool

* Some bankers complain of anti-competitive landscape

By Aimee Donnellan

LONDON, Jan 31 (IFR) - European banks, anxious to improve revenues in their DCM businesses, are adopting a form of back-scratching in the burgeoning bank hybrid bond market. Some are convinced that the practice, known politely as "reciprocity", is distorting competition.

Back-room conversations, mandates awarded for advice on M&A deals and league tables being constructed on the basis of tit-for-tat business are all making the highly competitive bank capital sector look more like the covered bond market.

For years, banks have been able to scale the covered bond league tables using billions of euros of their own issuance (and the associated mandates) as a way to ensure they were hired on other issuers' deals.

"This whole system is anti-competitive because the playing field is no longer level," said a bank capital expert. "The days of European banks giving mandates without any strings attached are totally over and we are now moving to be more like the covered bond market."

With issuance in new-style bank hybrids expected to grow to at least EUR450bn-EUR600bn in Europe in the coming years, according to Citigroup's estimates, a lot is at stake -especially given that fees on the deals can be up to 20 times higher than those from covered and senior unsecured bonds.

Banks without covered bond programmes have long complained they do not get their fair share of that business because they don't have similar mandates to give away.

As a result, banks such as Goldman Sachs and Citigroup, which are usually in the top three and four in the euro financial institutions league table, are not even in the top 10 in the covered bond table, while UniCredit, number two in covered bonds, is not in the top 10 for euro financials.

Looking at the potential for growth in the bank hybrid market (and dwindling fees elsewhere), it is easy to understand why there is such fierce competition for these lucrative and high-profile mandates.

"Bank capital trades are huge in profile and in actual size," said one capital banker. "You can get 1% fees on an Additional Tier 1 trade and around 70 cents on a Tier 2. So when you're looking at a USD3bn Tier 2 CoCo from Barclays, that's a lot of money."

Other bankers said fees can be as high as 2% on an Additional Tier 1 deal - a stark contrast to the measly 10 cents that banks usually get for short-dated senior and covered bonds.


To help keep track of who owes what favour to whom, certain banks are even said to have set up "reciprocity committees" that meet fortnightly to discuss all priority clients where they feel they may struggle to get on deals.

Other bankers have taken a more direct approach and have called up other issuers rumoured to be looking at a market window, saying: "Let's do what we did in the covered bond market, but in capital".

Of course such tactics are perhaps as old as the markets themselves, and for a gauge of how far reciprocity goes, you have to look into private placements, the equity market and M&A deals.

"All banks are said to have internal league tables for private placements and in order to win a mandate you need to be high on that list," said a banker.

"It's not a like-for-like situation where one bank issues an Additional Tier 1 bond and they put you on the top line of their next one," another pointed out.

Indeed, the surge of post-financial crisis rights issues became notorious for the level of reciprocity, with some banks with debatable credentials being hired because they had their own capital raising on the way, while others with good claims to be on deals were left out to deny them league table credit.


Top investment banks adding joint-lead managers on their own capital trades break with previous market tradition. According to Thomson Reuters data, up until February 2012 European investment banks such as Credit Suisse, UBS and Barclays were sole bookrunners on their own capital transactions.

But this all changed when UBS sold its first total write-off CoCo in 2012. Along with its own syndicate team, that deal had four lead managers on the top line.

"This was the first time you saw a large investment bank hire external leads for a bank capital trade and all got league table credit," said a hybrid capital expert. "After that you were a fool if you didn't get in on the reciprocity game."

UBS continued with the strategy, even adding 12 lead managers - Banca IMI, Barclays, BBVA, Credit Agricole CIB, Danske Bank, HSBC, ING, Lloyds, Mizuho, RBS, Santander and UniCredit - to the top line of its recent CoCo to ensure it benefited from future business.

Barclays was also said to have had reciprocity in mind when it sold its first total write-off Tier 2 CoCo and added a number of lead managers at the last minute. Similarly, Credit Suisse, which had handled its first CoCos on its own, added joint-lead managers on its 2013 capital trades.

All eyes are now on Deutsche Bank to see if it divvies out some of the EUR6bn of capital it is expected to begin raising this year.


While bankers are quick to point out there is nothing illegal about sharing business with those who have cut you a cheque in the past, some believe issuers are not getting the best advice as a result of the developing culture.

"You often have a case with five lead managers where two run the process and the other three just pick up their cheques," said one banker.

"The truth is we do very well out of the reciprocity game, but we'd prefer to be winning deals on merit and good advice," said another. (Reporting by Aimee Donnellan; Editing by Helene Durand, Matthew Davies and Julian Baker)

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