* People & Markets
* Private placements at heart of latest bond push (Adds Lewellen’s title in 11th paragraph)
LONDON, Nov 1 (IFR) - Five years ago, Deutsche Bank’s bond franchise was riding the crest of a wave. After a period of post-crisis restraint, clients had once again begun to take on debt to invest or make acquisitions. Deal volumes were surging and, with many rivals still distracted by ongoing clean-ups, Deutsche seemed best placed to profit from the boom.
The business posted a record year in 2014, earning €1.6bn in underwriting fees, more than any other European bank and 50% up on three years earlier. With the European Central Bank set to start a €1trn bond buying programme the following spring, the future looked even better. Deutsche, the region’s pre-eminent bond house, was widely expected to be the biggest beneficiary.
But while the bond party has got into full swing since then, Deutsche seems not to have been invited. Deal volumes and fees hit new highs in 2017, and banks are on track to break that record again this year. But, at Deutsche, the reverse has happened: bond revenues fell by a third between 2014 and 2018 and are tracking another 9% lower so far this year.
Unfortunately for Deutsche, the bond market boom coincided with a deep crisis at the bank that has seen it work through four CEOs, umpteen overhauls and a collapse in its share price.
Uncertainty over strategy and – at least for a time – even its future existence hit the bank hard; the bond franchise, like the rest of the firm, suffered as a result.
TURNING A CORNER? After another strategy overhaul in July, when the bank made its deepest cuts yet, shuttering equity trading and earmarking €288bn of assets for sale or winddown, the hope is that a corner has been turned.
Debt capital markets will be at the heart of a new slimmed-down investment bank, with Deutsche’s bond bankers now tasked with recouping lost ground.
The first step in that process was the closure of the financing and solutions group. Although only formally set up in 2015, the philosophy underlying it was a long-standing one at the bank, heavily incentivising bankers to push bespoke, highly lucrative – but often risky and long-dated – financing to clients. With that gone, DCM will go back to basics.
“Coverage teams were prioritising these innovative financing solutions as opposed to doing core day-to-day DCM work,” said Frazer Ross, head of investment grade DCM syndicate for EMEA. “What we’ve done is re-focus the coverage. It is much better - in an area which is a highly commoditised, high flow - to have people at the coalface who are paid to originate bond deals, full stop.”
Mark Lewellen, Barclays’ former global co-head of DCM, has been brought in as head of investment grade DCM origination for EMEA to help revive the corporate bond franchise in Europe. Deutsche has long been a top player in the region, but there are signs that the bank’s troubles have dented its standing. After ranking second for corporate bond deals in euros for six years running, it has slipped to third this year.
PRIVATE PLACEMENTS Under the new strategy, Deutsche faces the difficult task of winning market share from larger rivals that have more resources at their disposal. Its investment bank has a loan book of just €71bn, compared with €150bn at BNP Paribas, number one in the euro league table. To address that disadvantage, Deutsche has opted to grow its private placement desk within the bond syndicate.
“It’s a quirky little business, but we have invested in it as clients really value it and, in many cases, it is either a substitute for lending or standalone profitable for us,” said Henrik Johnsson, global co-head of capital markets.
“If you get into the flow as to what’s going on, and start climbing the league tables, then all of a sudden you find opportunities that you didn’t think existed.”
The bank hired David Costa from Goldman Sachs to run the team, which will be tasked with identifying pockets of demand for particular maturities or currencies and then presenting trades to clients. The hope is that such solutions will be not just lucrative, but also might open the door to winning future bond mandates from happy clients without Deutsche having to lend its way onto bond mandates.
In recent months, the private placements desk has struck some big deals. In the sovereign space, it did a €500m 50-year deal for Israel, the country’s longest tenor, and a €105m 100-year deal for Ireland. In corporates, it placed big Norwegian krone deals for Deutsche Bahn and Aroundtown - as well as a Hong Kong dollar placement for the latter.
“The team is incredibly proactive, they understand the investor base very well, and have very good direct access,” said Lewellen. “It relies on reverse enquiry from investors, so it’s important that sales people are close to the market as they need to be able to spot pockets of demand – for maturity, for currency, for issuer type – and then match that to the issuer’s needs.” US SLIDE Deutsche hopes the strategy will also help it in the US, where it is hard to fight toe-to-toe the big US banks. Deutsche once ranked seventh for US investment grade bonds but has steadily dropped back in recent years, falling to 13th last year with just half the market share it had in 2014. This year is slightly better, but the bank is still outside the top 10.
The strategy has nonetheless yielded some fruit: last year, Deutsche was sole books on a €2bn private placement for AT&T. It believes that, rather than go after every US dollar deal, it needs to pick its spots such as taking US corporates overseas for funding. While it may lose places in the US league tables, it can still make money from US clients elsewhere.
“We’re not going to try to cover every sector, we’re not going to try to cover every client,” said Marc Fratepietro, the US-based global co-head of DCM. “We’re going to pick our spots and go deep with those clients where we have sector banking expertise and, or if, they have a business profile that aligns with our global footprint and product strengths.”
Another area where the bank has lost ground is in high-yield: globally, it was second just a few years back, behind only JP Morgan. But low rates, the ongoing search for yield and an explosion in private equity-led financings has tempted many banks into the space. While Deutsche remains a leader in European high-yield, globally it has fallen to fifth this year. PRIVATE EQUITY LINKS For Johnsson, a former high-yield banker, the space needs to remain a focus for the bank despite the increased competition. He believes that Deutsche’s long and deep history with private equity clients stands it in good stead. According to the bank, it the only one of its peers to underwrite every distributed €1.5bn-plus LBO financing in Europe over the past three years.
“We have always been strong in high-yield, but it’s become a lot more competitive,” he said. “The reason why we like these clients and this business is because there is a certain life cycle. Sponsor activity is predictable in the sense that they buy and sell assets along a certain schedule. This means you can concentrate on a smaller group of clients and be very deep with them.”
In emerging markets, too, the bank has lost ground. A pullback from emerging markets in 2015 – in part linked to past scandals and increased pressure from regulators to have better oversight over its clients – has led to it losing a lot of business in once-lucrative places like Mexico and Russia. The bank is looking at tentatively - and carefully - moving back into those countries.
Third-quarter results on Wednesday indicate the bank is moving in the right direction – DCM revenues at €321m were the best in five quarters and 14% up on the same point last year. But with the new strategy just three months old and the new set-up really only in place for a few weeks, the jury is still out on whether Deutsche can reclaim its former DCM glory.
“Of course, clients want to see the proof in the pudding of the new strategy,” said Ross. “But, most importantly, no-one is talking about the viability of Deutsche Bank or the credit risk of Deutsche Bank. They are listening to our ideas. It is early days, but we are starting to see a shift in attitude from clients.” (This article will appear in the November 2 issue of International Financing Review; Reporting by Gareth Gore)