It€s amazing how many names and acronyms investment bankers have invented to describe the simple act of lending and borrowing money: eurobonds, FRNs, ECP, CDs, MTNs, NIFs, RUFs, PIBs, securitisation. Prefix these with colourful adjectives such as capped, callable, convertible, inverse, junk, perpetual, zero coupon, step-down, puttable, revolving and stripped, and the resulting menu of financial instruments illustrates the boom in capital markets activity during the 1990s.
The simple act of lending and borrowing money has undergone major change as banking deregulation and globalisation opened up opportunities for financial innovation. The capital markets are more and more becoming involved in the traditional role of banking - collecting savings and making loans. Asset management products, such as unit funds and personal pensions, are increasingly being used as alternatives to bank deposits. Likewise, banks and mortgage lenders are selling parts of their loan portfolios to investors. This disintermediation process is already mature in the United States and is gaining momentum in Ireland and the rest of Europe.
1990s fundraising
Since the early 1990s, Irish financial institutions have been raising funds on the international money and capital markets through syndicated loans, bond issues and securitisations. As the country€s sixth largest retail credit institution and a major player in mortgage lending, EBS has been also active in these markets. The society launched its first syndicated loan in 1993 which was followed by other syndicated borrowing facilities, bilateral bank loans, note issuance facilities and private placements. Last year, EBS decided that 1999 was the year to diversify its funding base by issuing bonds. In preparation for this, we obtained a Moody€s credit rating (A3/P2) in December 1998.
Invariably, each bank visiting EBS last year had the ideal solution for meeting the society€s 1999 funding needs - all of which suggested we should get some independent advice. Over the years, individuals in Irish and UK building societies have built up good personal relationships and this seemed like the ideal time to renew friendships around Yorkshire.
Opting for EMTN structure
Over two days in mid-January, I visited the treasurers of Skipton, Bradford & Bingley and Yorkshire societies. They were frank and open about their experiences in the capital markets and what they would do differently now with the benefit of hindsight. The outcome of this consultation process was to recommend the Euro Medium Term Note (EMTN) structure as the means by which EBS would become a bond issuer.
The EMTN programme is a set of documentation which allows for repeat issuing of bonds over time. In investment banking speak, an EMTN is a €Debt Issuance Shelf€, but a simpler definition is €a mechanism using pre-prepared documentation to issue bonds€. The advantages for an issuer are:
l cost effective documentation -once off negotiation involving lawyers and bankers leads to a significant reduction in management, administrative and legal costs
over time;
l issuing flexibility - caters for both publicly offered, broadly distributed issues as well as privately placed, single investor transactions; and
l structural flexibility - senior / subordinated debt, fixed-rate / floating rates notes, multicurrency, 3 months to 30 year maturities, small or large transactions.
The one disadvantage is the large up-front costs associated with setting up the programme. These include stock exchange listing fees, legal fees for the issuer, the dealer banks and the trustee / paying agent, plus tax advisor and auditor fees, rating agency fees, printing costs and the arrangerís out-of-pocket expenses. The best way to ensure you get value for money from an EMTN programme is to use it as the core funding vehicle for as long as possible, thus spreading the initial costs over the life of a large volume of borrowings.
Choosing the Arranger
The next important event in the timetable was a February two week break in the sun to charge the batteries for the months ahead. Early March had now arrived and it was time to select the investment bank for the lead role of €arranger€. The role of the arranger involves:
l advising the issuer on the selection of legal advisors, trustee, issuing and paying agent, stock exchanges and printer;
l agreeing an implementation timetable;
l co-ordinating and agreeing documentation comments; and
l assisting the issuer with the annual updating of the programme.
Six investment banking houses made presentations to the EBS Asset & Liability Committee (ALCO). Since this was EBS€ first such outing, ALCO saw the arranger appointment as key to the success of the programme. Merrill Lynch€s selection was based on their long established track record in the MTN market, the level of expert resources it dedicates to the product and previous experience with Irish issuers.
In early April, EBS Treasury and Merrill Lynch held a €kick-off€ meeting to agree on the documentation timetable and to set up a Working Party group. It was also an opportunity for Merrill Lynch to get a clear understanding of the objectives which EBS required the programme to meet:
l diversification of its funding base;
l establish the profile of EBS among investors, especially those in the Euro zone; and
l a platform for ongoing and opportunistic issuance.
We also discussed the programme options requiring decision before the first draft of the Offering Circular could proceed. Most of points were not difficult, e.g. programme name, governing law and currencies, but issues such as the programme size, clearing/settlement, ratings and form of note options required fuher consideration. While the legal counsels had been appointed (McCann FitzGerald for EBS and Clifford Chance for Merrill Lynch), the other dealer banks, the trustees, the issuing and paying agent, and the listing agent had yet to be selected.
A documentation timetable of ten weeks was set, with the signing scheduled for mid June so as to launch a possible debut issue by early July before investors went on holiday. I acted as EBS project manager while Bob Harker, ably assisted by Fiona McGinley, co-ordinated the Merrill Lynch team. The first few weeks involved a lot of contact with lawyers until a reasonable first draft of the Offering Circular was ready for circulation. During this period, EBS decided the size of the programme should be one billion Euro and selected a panel of five dealers to launch the programme - Merrill Lynch (the arranger), Barclays Capital, Dresdner Kleinwort Benson, Salomon Smith Barney, and SG Investment Banking. The geographical mix of the group - two international houses, one UK, one French, and one UK/German - reflected our bias towards continental investors. Other appointments were also made: Chase Manhattan (trustee / issuing and paying agent); Ernst & Young (taxation and auditors); and the Regent Group, London (printers).
DAUNTING DOCUMENTATION
The full set of EMTN documentation is daunting for all involved except the lawyers, of course. Besides the Offering Circular, there are the following documents: the Programme Agreement which deals with the relationship between EBS and the dealer banks; the Agency Agreement; the Trust Deed; and an Operating & Administrative Procedures Memorandum. The documentation €bible€ contains just over 400 pages. Most of May and the early June was taken up reading, correcting and negotiating amendments to the agreements.
As with most things in life, timing is everything. The decision to go for a July inaugural issue was made during May as a result of soundings we took from the dealer banks. The alternative was to wait until September. However, the bankers suggested that due to the Year 2000 phenomenon, issuers were likely to be very active in September, a situation which would make it difficult to properly feature and market a first time issuer. So, not wishing to take any unnecessary risks, the society opted for the earlier launch date. We also decided to undertake a four centre roadshow which would include group and one-on-one presentations. To complement the roadshow, Merrill Lynch also recommended using the Bloomberg Road Show, a slide show with synchronised audio which is made available to investors at their desks.
In late May, a credit analyst from Merrill Lynch spent a day in EBS preparing a research report for distribution to potential investors.
A few days before the formal signing, representatives from the dealer banks participated in a due diligence conference call with questions for EBS management. The purpose is to ensure the information in the Offering Circular about the issuer is correct and up to date. As usual the final week was hectic, but eventually everything was ready for signing on Friday, 18th June.
Roadshow
Since the roadshow was an opportunity for EBS to interact directly with investors, it was important to properly prepare for it. From the arrangerís perspective, there may be some risk allowing the issuer free rein in front of investors, but the level of confidence built up between EBS and Merrill Lynch was such that they were happy to concentrate on the housekeeping arrangements and to leave the presentation to us. We began in London on 22nd June with EBS senior management taking one-to-one investor meetings in the morning followed by a luncheon presentation by Chief Executive, Pat O€Reilly. Following Pat€s recording of the Bloomberg presentation, we departed for Frankfurt where the next day€s format was similar to London. It was Paris next where investors prefer breakfast presentations. Generally, the attendees wanted to ask about the performance of the Irish economy. We finished the week back in Dublin with a series of individual meetings in the IFSC and a lunch presentation at the St. Stephen€s Green Club, which attracted a large turnout.
Did the roadshow add value to the marketing effort? It€s difficult to judge, but I got the distinct impression that investors like supplementing credit reports issued by rating agencies and investment banks with direct contact, especially in the case of new issuers.
Merrill€s Bob Harker advised us to strike while the investors were hot, so we launched our debut issue the following week. The objective was to raise Euro 250 million on a floating rate basis (FRN) for a period up to five years. As lead manager responsible for placing 80% of the FRN, Merrill Lynch played a pivotal role in advising EBS to get the most advantageous terms and distribution spread. Based on reaction from the roadshow and other investor activity at that time, the FRN was launched on July 1st for a term of four years with a yield of 0.23% over three month Euribor. The dealer banks generated orders amounting to Euro 365 million from 29 investors. On the morning of the launch, EBS took advantage of the over-subscription by increasing the amount to €300 million. 74% of the issue was placed with investors in six continental countries with the balance going to the UK and Ireland.
After six months of preparation, it was very satisfying to see the high level of demand for the inaugural issue. Undoubtedly, the roadshow and premarketing undertaken by the dealer banks contributed to its success. So too, did the maturity of the EMTN product and its familiarity to international investors. The society€s second issue under the programme - a three year FRN for Stg£100 million launched in early October - can be also attributed to the EMTN€s flexible structure. This was an opportunistic deal which HSBC Markets had worked on for some time before approaching EBS. The EMTN programme, once it€s up and running, lends itself to proactive and reactive activity. We anticipate using it regularly over the coming years. |
