US Equity House: Credit Suisse

Plenty of banks have bought their way up the league tables with accelerated risk business. Building market share and profitability is far rarer. Yet Credit Suisse gained as others watched issuance fall – and it is IFR’s US Equity House of the Year.

As equity was bought back or doled out to finance acquisitions this year, ECM volumes slipped and IPO activity collapsed. This presented an opportunity for a canny bank to attack, carve out niches and accelerate its way up the league tables. Those that best understood risk could pump up returns by using capital judiciously. Credit Suisse was one such bank.

While it has a smaller investment-banking footprint than its rivals, Credit Suisse is also lighter on its feet – and that helped it repeatedly find the right solution for clients.

Of course, the dominance of the domestic US houses meant the Swiss bank could only rise so far. In the awards period it ranked fifth with US$19.5bn of bookrun business across 140 transactions, its best year since 2000.

Yet the momentum is clearly with the foreigner. In the first 11 months of 2015 it ranked third in the US, outpacing Goldman Sachs, Citigroup and Bank of America Merrill Lynch.

That performance was all the more impressive in a year that saw overall equity volumes decline 4.7% year-on-year to US$208bn, and US-listed IPOs slump 58% to US$38.7bn. While those figures are distorted by Alibaba’s US$25bn IPO in 2014, the declines were still enormous.

Credit Suisse proved it clearly knows how to make use of its capital. Of the US$17bn of follow-on business it completed in 2015, more than half was completed on a risk or accelerated basis.

Plenty of banks are happy to swing a big cheque book around in order to leap up the league table, ignoring profits in the process. But Credit Suisse’s cheque book is anything but big – and its moves actually enhanced the bottom line.

“The trend in blocks over the last couple of years of ‘Anything will work’ has become ‘You’d better know what you are doing’,” said David Hermer, Credit Suisse’s global head of ECM. “We try to excel in the spaces where we are most knowledgeable.”

That means avoiding widow-makers such as the US$2.7bn block sale of Hilton Hotels, the “Mother’s Day Massacre” that left the three leads with US$100m-plus in combined losses.

Instead, the bank made its own jumbos through repeated sales in stocks it knows well – notably the four secondary sales of Aramark totalling US$3.12bn – alongside notable one-offs such as the US$1.1bn sale of HD Supply.

Risk rewards

The bank’s US$9.4bn of capital-committed and accelerated sales was the highest across the market on an absolute basis. While Credit Suisse wrote plenty of cheques, there was an effort to be careful.

The bank frequently employed a “shared upside” strategy, providing a backstop in return for a fee, while sharing proceeds above that level with the issuer. This was particularly suited to the struggling E&P sector, where Credit Suisse also sought to minimise risk by employing pre-open execution.

“Execution was down to the minute,” said Trevor Reuben, VP of corporate development at Newfield Exploration, of a US$835m primary block the company completed on the morning of February 26.

“Credit Suisse’s conviction, and its ability to articulate the execution strategy, provided comfort in moving forward.”

The strategy, championed by Americas ECM co-head Robert Santangelo, was to check oil futures each morning and discuss options, launch publicly at 6am in New York, and price just ahead of the open. (In Newfield’s case, just nine minutes ahead.)

The investment grade-rated company had not sold stock publicly in more than a decade, and there were reasons for caution – not least concerns over the quality of investors that would be allocated.

Yet the outcome exceeded expectations. The deal was increased from a base 18m shares to 22m and priced at US$33, in the lower half of guidance but comfortably above the US$32.24 backstop. Pricing was relatively tight to the previous day’s close of US$36, especially considering the stock had jumped 13.7% that day on the back of strong full-year results.

A 15% greenshoe was fully exercised a few days later.

Concerns about relying on momentum investors proved unfounded. Newfield Exploration closed the IFR awards period at US$38.37 – the best-performing E&P company in the S&P 500 up until that time.

Credit Suisse had used the strategy before, first with Diamondback Energy, a long-time client, in November 2014. The US$130.2m shared-upside, pre-open trade was done on behalf of two selling shareholders, but the format was reprised for capital increases in January and May 2015 for US$121.8m and US$341.6m, respectively.

“We didn’t realise at the time that we had established a funding model,” said Diamondback Energy investor relations head Adam Lawlis. “Credit Suisse said there was a window for select E&Ps that were proactive to raise capital.”

The January deal got done despite oil prices slumping by nearly 40% between the November trade and launch. As Lawlis put it: “Nobody ever got killed outrunning a bear.”

The US$6.4bn Credit Suisse raised for 13 US E&P companies is almost half of the US$14.3bn raised by the industry during the awards period. And with oil prices now in the low 40s, the bank’s advice proved prescient.

Getting well

Credit Suisse’s success extended well beyond E&P and risk trades. Healthcare, a dominant theme of the year, was a central focus for the bank.

Spark Therapeutics, which focuses on rare genetic diseases, was an important IPO mandate. Credit Suisse and JP Morgan overcame a crowded calendar in January to place 7m shares at US$23, well above the US$15–$17 range targeted on a deal originally sized at 5.5m shares. Oversubscription would ultimately swell to more than 30 times.

The deal benefited from so-called crossover investors who took initial stakes in a May 2014 US$72.4m private round at US$8.05 per share.

Spark Therapeutics closed first-day trading at US$46 and ended the awards period at US$55.94, 143.2% above offer – the best-performing US IPO of the year overall.

Crossover-enhanced books were common on biotech IPOs.

Aimmune Therapeutics and surgical device manufacturer Edge Therapeutics both benefited from crossover participation on their IPOs. While Edge got a cool reception, both traded up from offer – not a guaranteed outcome in a post-summer period that was affected by the political backlash over drug pricing.

“There has been no shortage of IPO mandates in life sciences, but only a limited number of high-quality deals,” said Cully Davis, co-head of Americas ECM at Credit Suisse along with Santangelo.

The bank’s advance in healthcare underwriting was not coincidental. In late 2013, Hermer, then head of Americas ECM, charged Davis and John Kolz, a newly appointed managing director, to focus on tech origination and healthcare on the West and East Coast, respectively.

Sometimes the advice is not to go public. In early 2015, Immunocore sought financing alternatives. The bank’s advice was to pursue either a late-stage private funding round ahead of an IPO or a larger private round that would allow it to advance clinical drug trials.

Immunocore opted for a US$320m private placement in July, the largest-ever by a European biotech, that will fund development for five years. The outcome was achieved by pitting traditional public investors against VCs in order to maximise demand.

Although commonplace for traditional tech companies, the strategy is rarer for biotechs.

“Credit Suisse had a good read on our risk appetite as an organisation,” said Immunocore chief executive Eliot Forster. “Sitting here today, the decision to fully fund the business was a very thoughtful solution.”

Energy and healthcare differentiated Credit Suisse from competitors, but the bank more than held its own in more traditional verticals. Overall, it was a bookrunner on five of the top 10 IPOs, including wins within financials on First Data, LendingClub and TransUnion, and Univar on the industrial side, while Tallgrass Energy, the general partner of Tallgrass Energy Partners, represented a budding move into master limited partnerships.