Straight to Hell

by John LeFevre

  It’s not always easy to dance around the barrage of Twenty Questions from the investors, which can often culminate with “Dude, come on, don’t waste my time. Just tell me who it is.”

  The truth is that if we really want to have the best quality feedback on a credit or possible deal structure, and therefore be more credible in the RFP pitch, we’ll tell the investor the name of the soon-to-be issuer. What Chinese Wall?

  “All right, man, I’ll call you on your cell phone.” A couple of minutes later, I’m back on the phone, this time from the safety of a conference room. We can’t make these calls from our desks because all the dealerboard lines are recorded for compliance reasons. “Okay, between you and me, we’re looking at a $500 million seven-year deal for . What kind of appetite do you have for China property in general, this credit, and at what kind of yield?”

  This is simply how business is done. Is it legal? “Well, I’m not a lawyer” is always the running joke on the syndicate desks.

  If we don’t do it, we suffer. Our European competitors tend to be more aggressive when it comes to disregarding the rules. If we lose the mandate, the investment bankers who are directly responsible for the client relationship will argue it’s because our competitors were armed with a better read of the market, placing the blame squarely on my shoulders, which won’t be forgotten come bonus time.

  I’ve gone to plenty of pitches and confidently pounded the table, saying, “Mandate us. We’re in touch with specific investor appetite for your name and size.” This is an attempt to coax the client into doing a deal and to demonstrate to them that we’re better informed. Sometimes we just make it up; but other times, it actually comes on the heels of having sounded out the market.

  Beyond helping us win business, sounding out possible deals with investors is also helpful in terms of our relationships with them. If we’re working on a deal, or if there is an issuer considering coming to market, the investors would obviously love to know before this potentially market-sensitive information becomes public. I don’t want to receive angry calls from a hedge fund saying, “Why didn’t you tell me X Chinese property company is coming with a deal?” The implication is that he would have sold or shorted other Chinese property names on the expectation, depending on the market, that new supply will put pressure on existing bonds.

  Hence, hedge funds love helping bankers sound out deals. They get early access to nonpublic information that they can trade on. They also like that it gives them some leverage come allocation time. Hey, don’t fucking forget, I helped you when you were pitching this deal. I better get the bonds I want.

  Those “I’ll call you on your cell” messages on Bloomberg chat—the instant messaging service used by the vast majority of relevant market participants—are the greatest messages ever, because we know we are about to have an off-the-record conversation about something market sensitive. Or, if it’s not deal related, then we know we’re about to hear some out­rageous X-rated or inappropriate story that we don’t want on a recorded line or chat room.

  Most trading floors prohibit cell phones on the floor, so the usual response to “I’ll call you on your cell” is “Cool. Gimme five.”

  The other thing syndicate desks (at least the good ones) do in response to an RFP is quietly collude with one another. We’ll collaborate with other banks on the nature and specificity of our individual recommendations in order to improve our chances of winning the deal. If a client sees an identical recommendation from Citi, JPMorgan, and Deutsche Bank, it’s more likely that they’ll pick those three together over an outlier recommendation that is now perceived to be riskier or less credible.

  If I know that a specific bank is really close to a company in Singapore that is rumored to be looking at a deal, I’ll call up their syndicate guy (from a cell phone) and say, “I’m mandated with two yet-to-be-determined banks on this Korean deal. If you get me on your deal in Singapore, I’ll show you the pricing, structure, and fees that we showed in Korea so that you’re giving them the same recommendation we did. And then I’ll put your name forward.”

  One of my biggest non-sovereign trades, a US$2 billion multi-tranche deal for an Indian bank, was secured in this manner.

  It can be a dangerous game because if I’m not 100% sure I’m on that deal, and that I can trust my competitor to play fair, they could take that information, undercut me on pricing and fees, and then go team up with someone else and steal the deal.

  From the issuer’s perspective, besides the pricing recommendation (i.e., how much is this going to cost me?), one of the biggest concerns for Asian borrowers is the question of underwriting fees. In the US, markets are so established and efficient that the treasurer of General Electric or IBM isn’t going to waste time negotiating from 0.20% to 0.15% in fees ($2 to $1.5 million per $1 billion new issue), because it’s irrelevant in the grander scheme of things. They know from experience that execution is more important than trying to shop around bookrunners on fees.

  However in Asia, markets are still developing. Also, it’s a cultural thing; it’s almost like a game—issuers want to negotiate fees for the sake of negotiating fees. And banks play right along, undercutting one another as much as it takes. After all, getting in on a deal for less money is better than explaining to your boss why you missed the trade.

  There was actually an off-the-record meeting held at a hotel in Hong Kong several years ago, attended by most of the senior Asian syndicate managers from the big Wall Street firms, to try to stem the tide of banks undercutting one another on underwriting fees. I know because I was there. We covered the full spectrum, from high-yield corporates to sovereign frequent issuers—namely Indonesia, Korea, and the Philippines, where underwriting fees had dropped to as low as 0.02%. Some guys flew in from Singapore just to attend the meeting, and then following a handshake agreement, we all went out drinking.

  Just to quantify that, I could do a $100 million sole-­bookrunner Indonesian palm oil high-yield deal that paid 2.0% in fees and make $2 million. Or I could do a $3 billion multi-bookrunner deal for the Republic of the Philippines that paid 0.02% in fees and, after splitting it with the joint books and paying expenses, I’d actually lose money. This was the nature of the business. Why would we consciously do deals that lose money? Sometimes, it’s in the long-term interests of the firm’s relationship with the client, and we know we can make money from them in other areas of the bank—although that doesn’t help me come bonus time. For us, as a firm that defines ourselves as a bond house, we had to be in on those deals for the league table credit. Big banks take their league tables—the rankings of banks based on the number of deals they have led—very seriously. Being able to advertise to prospective issuers that we are the number one bond underwriter in Asia helps us win more business, which is why we’re happy to lose money on large benchmark deals for frequent borrowers to boost our league table position. Also, even if we lose money underwriting a deal, we can make money trading those bonds as a market maker in the secondary market. Being an active market maker also gives us better market information and traction with investors.

  The secret syndicate meeting was long overdue. We needed to find a better way—there wasn’t enough lucrative business to go around to sustain or subsidize doing deals for free, especially once we started cutting high-yield fees down under 1%. During this meeting, all the bankers agreed to set fees at minimum levels, and we all promised to not be the ones to break the agreement. Of course, a truce like that was never going to last long; I’d rather explain to a competitor why I welshed on a secret illegal agreement than explain to my boss why I was stupid enough to think they weren’t doing the same thing.

  Once an RFP is finalized, the bankers are summoned by the issuer for a little dog and pony show, also known as a “bake-off.” Syndicate guys usually don’t have to attend the pitch; our job is to stay glued to our seats on the trading floor and keep our fingers on the pulse of the market.


  One time, I received a frantic call from one of my coverage bankers: “Hey, I just heard that Deutsche Bank and Credit Suisse are bringing their syndicate guys to the pitch. Can you please get on a plane first thing tomorrow morning?”

  I couldn’t say no to that. If we lost the deal, I was the one getting thrown under the bus. So I caught the 8 a.m. to Jakarta and flew four hours for a forty-five-minute meeting, during which I might have spoken for five or ten minutes. As it turned out, the Deutsche Bank and Credit Suisse syndicate guys had in fact flown in, but that was just to go whoring and play golf the following day. For them, the meeting was an excuse to expense the trip.

  I’d rather go to the dentist than attend most bake-offs. But it’s always funny to see what ends up in the final version of the presentation, because the bankers usually assume that we won’t be in the meetings. After all of my credit work, sounding out a handful of savvy investors, and even checking a couple of close hedge fund relationships on the specific credit, I make my recommendation: $200 million five-year note at 9.5%. I get to my slide—the most important one—and my page says $300 million seven-year deal at 8.75%. The bankers will say and do anything to win the deal, including drastically overpromising the client with respect to market access. Pitch after pitch, the response is always the same. “Bait and switch.” “Let’s just get them pregnant.” “We’ll moonwalk them back once we win the deal.” So I just embrace it and accept the fact that come execution, it’s going to be me doing the moonwalk.

  “Getting them pregnant” is the easiest part. All we have to do is announce the deal and get them on a roadshow. Once a treasurer or CFO gets board approval to go out and raise hundreds of millions of dollars, they’re not inclined to go home empty-handed, especially after a lengthy roadshow. So what if it’s not the deal they signed up for—it’s still better than looking totally incompetent. We’re quick to remind them: “If you walk away from this deal, it’s going to be much more expensive for you next time just to reengage the investors.”

  Once we’re mandated and the deal is announced, my focus shifts from the issuer client to the investor clients. Along with our sales force, I now need to go out and build a big enough order book at the right price.

  Occasionally, when a deal is announced, a second-rate hedge fund client will call up and say, Dude, I spoke to you yesterday. Why didn’t you fucking tell me this deal was coming? I’m long a shit ton of this paper. The answer should be pretty simple, “That would be illegal.” But it comes out more like, “Sorry, bro. Things were moving quickly. I’ll make it up to you.” The reality is that if he didn’t know about it, he’s probably not that important to us. After all, many of the other guys whom we had “sounded out” the deal to ahead of time have no such complaints.

  The book-building process varies significantly from a single-day drive-by to a heavily marketed two-week roadshow. The simple idea is to work with the sales force to bring in orders and solicit price sensitivities and feedback from the investors. This “market color” is reflected by me to the issuer. It’s then my job to convince the issuer to agree to a price that reflects where a market-clearing deal works. Once we get the issuer to sign off on the deal terms, we’re ready to allocate bonds to investors, get the deal across the finish line, and then move on to the next one.

  The allocation process is one of the most nuanced and contentious aspects of the execution process, and probably the most important. Our primary focus when it comes to allocating bonds is to do what’s in the best interests of the deal—place the bonds in safe hands (i.e., serious long-term buy-and-hold accounts who are participating in the deal because they know and like the credit, not because they think it’s a hot deal and they can “flip the bonds on the break,” or sell them immediately after the deal prices). However, it’s not always as straightforward as that. Part of what makes the allocation process such an art form is that we have total discretion to allocate bonds to whomever we choose and for whatever reason. Some of this is fairly benign and is in the best interests of the deal. Investors who met the company on the roadshow, or helped drive the pricing discussion, or supported the deal early on all expect to be rewarded for that.

  Obviously, if we give every big-name investor all the bonds they want, there will be nothing left for most of the other investors—and they’re our clients too. For example, a hedge fund might mean very little to my business, but they could be important to the equities or foreign exchange guys. So generally speaking, in most deals, we’ll spread bonds around, even to accounts that we know are going to try to make a quick buck, otherwise known as spivs. If all the bonds disappear and get locked away, we don’t make as much money trading them.

  This isn’t entirely self-serving. By leaving some quality accounts hungry for more, the expectation is that they will come back in the secondary market and scoop up any loose paper, which helps ensure that the deal performs well, just as you’d want an IPO to go up in value on the first day it’s listed. This helps solidify the issuer’s reputation in the market for doing good deals and keeps investors happy with us as bookrunners.

  Side deals and favor trading are still a huge part of the allocation process. It’s amazing the number of times I get invited out by a hedge fund in the days leading up to the pricing of a hot deal. Sure, a nice bottle of wine over lunch will probably get him a few extra million bonds the next day.

  If an investor is considering being an anchor order (early and sizable) in an unrelated high-yield deal, or is doing his homework on a lucrative private placement I’m working on, then we will definitely hook him up on a few hot deals when it comes to allocations—using one deal to help make other deals easier.

  However, much of our allocation pressure also comes from within. If prime brokerage is wooing some hedge fund and they want to impress them, they call us and say, “Take care of my guy on this deal, and then tell me before you release allocations.” Their intention is to front-run the news by calling the hedge fund and taking credit for hooking them up with a generous allocation. Or if the equity or credit derivative desk owes a guy a favor, they might ask us to repay him via a generous allocation. On one deal, a more senior New York counterpart asked me to “take good care of” a new hedge fund because our senior management had invested their own money in the fund.

  Considering that the vast majority of deals are done with at least two bookrunners, we also have to contend with the allocation pressures that our joint bookrunners have as well. All allocations have to be agreed on by all syndicates before a deal can be priced, which is why some allocation conference calls can last several hours, often delaying the pricing of the deal—and exposing the issuer to unneeded market risk.

  The process is generally pretty smooth; the syndicates have a vested interest in ensuring the success of the deal, and we all have a similar view with respect to the quality of the ­investors—long-term buy/hold vs. short-term trading/flipping. But at the same time, we each have our own agenda to contend with. So when my bookrunning counterpart at JPMorgan asks me, “Why do you want to give that shitty hedge fund more bonds than we’re giving this real money asset manager who participated in the roadshow?,” I can’t simply say, “Because he bought me a 2008 Grange and a lap dance three nights ago.”

  The smoothest way that we have found to address our respective axes (priorities) is to formally assign each bank a number of bullets that they can use on the allocation of each deal, no questions asked.

  Once the allocation process is done, we’re ready to price the deal, which all the joint-bookrunner syndicates do together on a ceremonious call with the client. Then we meet at a bar and drink.

  Networking

  As I said my good-byes in the London office, one of the traders pulled me aside. Artie had not only been a colleague but also a close friend during my time in the UK. Our shared interests include golf, drinking, and posh British chicks (specifically Sloane Rangers).

  We lived wit
hin blocks of each other in Chelsea and would spend several nights a week rotating between the Big Easy, the Admiral Codrington, and any number of regular spots on Walton Street, fending off the semipros and cougars who dominate that scene.

  “Listen, when you get to Hong Kong, I want to set you up with a friend of mine,” Artie said. “She comes from a prominent Hong Kong family, so she’s rich. She’s hot. And I think she went to Hotchkiss or one of those prep schools, so you might have a lot in common. More important, she’s just a good, cool person to know. Trust me, she knows everyone and can definitely plug you in with the right people.”

  “Definitely. Hook it up,” I said. “I’d love to meet her.”

  It’s like when you run into an acquaintance on the street, and they say, “Hey, we need to get together soon,” and you respond with “Sure. I’ll give you a call.” It’s a lie for a lie. I’m not sure if he’s just trying to be polite, but I know I had no real intention of ever connecting with her, not because she didn’t sound great, but just because I’d grown so tired of these tedious American-abroad, name-game, find-some-common-ground unsolicited introductions that are almost always a huge waste of time. “Oh, you’re from the South? You should look up my friend.” Fuck you. “You went to boarding school? When you get to Paris, call my old roommate to show you around.” No thanks. But then again, Artie is a good friend of mine, and he’s never steered me wrong.

  After one month on the ground in Hong Kong, I’ve completely forgotten about his offer. So far, the only people I have met socially, as expected, have been fellow expats and investment bankers. Most of my socializing has been with colleagues or clients. I’ve been working long hours and then going out and partying until two or three o’clock in the morning. I’ll catch a few hours of sleep and then make it back into the office at 7:30 a.m., where the process will repeat itself.