Same players, different games

Equity’s rise to prominence has coincided with the contraction of borrowing options and a need to reduce leverage. The need to issue has provided ECM teams with a boost in fees from rights issues and accelerated deals to offset the lost revenue of IPOs. The rise in underwriting has also given banks with a balance sheet an opportunity to punch above their weight. Owen Wild reports.

Take a glance at the headline numbers for ECM in the first half of 2009 and you won't be surprised: the top names in the US, EMEA and Asia appear to be the same. Yet there has been a dramatic change in the make-up of the deal flow, while few firms are looking at a similar share of the fee pot as before.

Europe has offered a particularly good opportunity for banks to make their mark as underwriting capacity was an important factor. JP Morgan finished 2008 with its reputation intact, turning its perceived financial strength into its unique selling point when pitching clients.

In just the first two months of 2009, JP Morgan - in both its JP Morgan and the UK’s JP Morgan Cazenove guises – had underwritten a total of US$7.5bn in issuance. At that point the next most active underwriter was BNP Paribas with US$3.9bn. That dominance has been maintained throughout the first half: at the end of the period JP Morgan accounted for over 25% the market – a position of extreme dominance.

Initially, much of the credit came from JP Morgan Cazenove and its strength in the UK. As continental European issuance grew in Q2, its rivals hoped to win back some market share. But it has been equally successful at winning roles across Europe.

The league tables disguise the level of actual underwriting in Europe as credit is shared among the bookrunners. However the imputed fees tables illustrate how active some banks have become in 2009 by taking positions below the top level on some deals. BNP Paribas ranks as the second highest fee earner in the first half of the year. RBS is ranked sixth. Neither is in the top 10 based on bookrunning credit.

RBS wants to be on the top line, but as a majority state-owned institution is incentivised to take the maximum share of wallet available. It is very important to grow revenues every year, which can be done by underwriting and accepting a lower profile. In some cases that has earned very high fees. On HSBC’s rights issue, Morgan Stanley and Goldman Sachs wanted to share the risk but not the credit, leading to a very well paid group of co-bookrunners, including BNPP and RBS.

A conspiracy theory among the ‘old guard’ persists that some of the more suddenly active banks underwriting and sub-underwriting deals are not pricing the risk correctly. Taking on underwriting puts a bank at the mercy of the bookrunners when it comes to pricing and further distributing the risk. Yet those firms argue that when regularly taking the lead role in deals it is much easier to take an independent view on other risks in that sector or country.

These banks, such as the national champions and new entrant Barclays Capital, are using their lending relationships to win mandates in a way that hasn’t been seen before. Lenders have found themselves in a position of strength as companies seek to recapitalise. 'In a downturn it is easier to turn relationships elsewhere in the bank into ECM mandates,' said one global head of ECM.

Some banks, notably UBS, maintained a dialogue with potential sellers of equity, disposals or small new issues throughout the first half, showing them prices on a regular basis. Often it did not hit the bid, but it did ensure UBS was considered for any ECM activity that did materialise. It clearly helped the bank’s deal roster: 50 across Asia in 1H, compared with the next highest of 32.

UBS has also been strong in China. It successfully leveraged its A-share business (where the market is closed) into similar success in the H-share market, which has barely paused for breath.

The blocks and backstopped business can be expensive for banks. Many conclude that being active here will lead to inevitable losses. Those that are most active argue that the risk/reward is still balanced in banks' favour: reasonable losses in 2009 - of up to US$10m a deal – can be absorbed for the sake of what is a US$150m–$200m revenue business in both Europe and Asia.

The US market has showed impressive stability. The top four banks – JP Morgan, Morgan Stanley, Bank of America Merrill Lynch and Goldman Sachs – dominate the market. Each firm has a market share of over 10%. Combined they account for 50% of the market. Again, financials themselves have been the biggest source of issuance, but whereas 2008 it was all about structured equity, in 2009 it has been straight equity.