by John LeFevre
“Wait, wait. Where’s Peter? Did he miss it?” someone shouts. My colleague Peter, who is in the bathroom, had missed the dick-in-a-bread-basket gag.
Upon his return, he is courteously offered a roll from the soiled basket, which he immediately devours. That’s his punishment for being suspected of pretending to go to the bathroom just so that he could use his phone without having to do a shot. Also, no one likes or respects him. As he reaches for his second roll, we’re rolling on the floor laughing.
“What’s so funny?”
Since no one else is going to eat the bread, there isn’t much we can do with it except hurl it back and forth from one end of the table to the other. As we see it, hitting someone in the face is tantamount to slapping him with a cock.
We haven’t even ordered food yet, and people all around us, having been overwhelmed by ricocheting bread rolls and every imaginable combination of profanity, are requesting to be relocated to tables in far corners of the restaurant. Tonight, “Siberia” is the best seat in the house.
One complete stranger makes the mistake of pleading with us to keep it down. Not only is he heckled as he scurries away from the table, but he is subsequently followed into the bathroom by two managing directors, pushed into a stall, and reminded to mind his own FUCKING business.
The final tab—including the tequila, miscellaneous beers and cocktails, and at least two dozen bottles of wine—is split by the three most senior guys (who would have the least difficulty expensing it). Still new to Asia, I’m not quite in the inner circle yet and am therefore NFI (Not Fucking Invited) to the post-dinner activities, which include an ample supply of narcotics and love monkeys (prostitutes) galore.
The festivities don’t end there. The last person into their respective office the next day, as measured by their Bloomberg login status, has to pay for the liquid lunch that follows, where we spend three hours nursing our hangovers and reliving the events of the previous evening.
Subsequent syndicate dinners are moved to private rooms, and for good reason. As the tradition continues, so do the antics—bowling with wineglasses and ashtrays, fistfights, BlackBerrys mysteriously ending up in wine buckets, suit jackets finding their way into urinals, communal stashes of cocaine, and at least one trip to the hospital.
This deviant mentality isn’t simply a by-product of living up to the “work hard, play hard” cliché; it is firmly engrained in how bankers act and how business is conducted. The people are the same. The mentality is the same. Asia just happens to be the place where we can show our true colors without accountability or consequence.
Against this backdrop, and with the help of a bull market, the deals continue to flow. We did a roadshow for a government-related Korean entity and frequent bond issuer. The finance director cared more about the hotels and dinner plans than he did about the lineup of investor meetings. He famously strolled through the duty-free store in the Heathrow concourse, pointing out luxury items that caught his eye: a classic blue Ferragamo print tie and a Montblanc fountain pen. By the time the roadshow team landed in New York and checked into the Palace Hotel, he had two ties and two pens waiting for him in his room. Both relationship managers at and had sent their junior bankers scrambling back to make the purchase—whatever it takes to increase your chances of being on the next deal.
A Ferragamo tie is a small price to pay. We once lost a high-yield mandate to because their head of debt capital markets sent an analyst to Jakarta to personally deliver a sought-after Hermès Birkin bag as a gift for the CEO’s wife.
On one very memorable deal, we’re trying to price a $1 billion five-year bond for , one of the government-related Korean banks. They are by Asian standards regarded as a frequent borrower and are crucially important to the franchises of any top-tier bank in their region. These deals don’t pay much in fees, but they help put you on top of the league tables. Moreover, the team that runs ’s borrowing program also advises the Republic of Korea on their capital markets activity. For all syndicate managers, winning the trust and faith of the team can mean the difference between having an average year and a great year.
Given their frequent borrower status, they are also well known to the global investor base. They could theoretically announce a transaction in the morning and price it that night, significantly reducing their market risk, like a big move in rates, equities, or investor sentiment, and headline risk, like North Korea deciding to test-fire a new rocket. Either scenario represents an event that could derail their ability to borrow money attractively from the international capital markets.
However, a one-day execution process isn’t much fun for a bunch of Korean bureaucrats. So, of course, we all tell them what we think they want to hear if it will help us win the mandates—a global roadshow is in order.
One bank gets into the deal by adding Paris to the recommended roadshow schedule—ostensibly for sightseeing and shopping, because there’s not a single investor in France (besides Dexia, but they don’t need a meeting) that buys their bonds. Another bank impresses the client by pitching a roadshow schedule that straddles a weekend, so they can spend two days golfing in New York.
Midway through the roadshow, it comes time to release initial price guidance to investors, letting them know where we think this new $1 billion five-year bond is likely going to price. This isn’t rocket science—we have investor feedback, trading levels of existing comparable bonds, and a sense of investor sentiment and overall market backdrop, all of which gives us a fairly precise idea of where a new deal should price.
We recommend Libor +20 basis points area. “Basis points,” or “bp,” represent one hundredth of a percent, in reference to the yield, or cost of borrowing. “Area” is a term that simply means “plus or minus”; sometimes it is quantified and sometimes it is left intentionally undefined. This gives us scope to price tighter than +20 bp if the market backdrop is constructive, or slightly wider than +20 bp if the market is adverse, therefore allowing the company optimal flexibility.
Price guidance is also an important tool for us in generating deal momentum so that we can still entertain reflections of interest at wider levels than our intended final outcome. Our strategy is simple: generate strong interest at that guidance, and then aim for a final outcome in the context of L+18 bp. All the investors who were initially reluctant at anything inside of L+20 bp will usually end up staying in the deal.
That’s all the company hears. They don’t want to even consider a scenario whereby the end result could be anything less than stellar.
Director Park speaks up on behalf of . “We don’t agree with that +20 area recommendation. If you are so confident that +20 area gets us to +18 as a final outcome, then let’s just go with +18–20 now.” In their minds, this removes the possibility of pricing wider than +20.
The syndicates hold the line and refuse to accept the counterproposal. Our response is simple: “Starting at +20 area has a better chance of getting to +18 as a final result. If you squeeze too early and go out +18–20 then it will scare away the momentum players and push large accounts into putting limit orders in at the wider end of that range.
We’ve been on the phone for more than two hours now—thirty bankers and five stubborn Korean clients—and it’s really starting to jeopardize the viability of the execution timeline. It’s imperative to convey a number that the market receives favorably as soon as possible into the Asia morning, so that orders can be confirmed and momentum can be reflected into the European investors in the afternoon. It’s already after 10 a.m., and the radio silence is letting investors know that we’re having issues; they’re smart enough to know that it’s usually the result of a disagreement on pricing.
After much back and forth, Director Park breaks the deadlock. “Fine. I will reluctantly accept your recommendation of Libor +20 bp area, but only if you agree to backstop the deal at that level.” Thus, he wants to lock himself in at Libor +20 bp, keep any
upside, and give all the downside to us.
Having expected this kind of scenario, we’re quick to respond.
“Barclays agrees.”
“Citigroup agrees,” I chime in, caveating our commitment with some language to protect ourselves in a worst-case scenario, like a North Korean invasion or another 9/11. Otherwise, I’d have to reach out to New York for approval.
“Deutsche Bank agrees.”
After a long pause, “Um, this is UBS. Can you all please hold on for just one moment?” It’s Sam, the junior syndicate banker at UBS. He’s not in a position to sign off on underwriting the entire deal without the approval of his boss, the managing director and head of syndicate at UBS, Johan Hanson.
“Okay. Hurry up.” Director Park is agitated.
Of course, we all seize on this opportunity to throw UBS under the bus, trying to make sure they get excluded from the next or Korea sovereign deal.
“Sam. Hurry up,” Deutsche Bank pipes in. “We’re losing valuable time. We’re dead if we don’t give Asia enough time to confirm their orders before Europe gets in.” It sounds silly, but it’s important when dealing with clients whose first language is not English to speak in memorable bullets, using easy-to-comprehend (and scary) words like “dead.”
Everyone on the line sits in silence as UBS tries to get approval internally. All of a sudden, we hear ringing, followed by a voice. “Thank you for calling the Mandarin Oriental, how may I direct your call?” Then we hear Sam again. “Room 1312. Johan Hanson, please.” It’s now clear that instead of calling his boss on a different line, he has inadvertently patched the call directly into the conference line.
We hear ringing again. And ringing. And ringing.
Finally, a voice answers. It’s Johan. “Heeelllllo?” He sounds like he’s on his deathbed. More important, he has absolutely no idea there are thirty bankers and five high-level clients from listening on the call.
“Johan. Johan.”
“Sam? What the fuck do you want?”
“You didn’t answer your cell and I need your help on .”
“Dude . . .”
“Johan?” Director Park interjects.
“Director Park?” It’s obvious that Johan has just woken up and is thoroughly confused.
I jump in. “Good morning, Johan. Yes, that is Director Park. In fact you’ve got the entire deal team on as well.”
“Time-out. Sam, did you just fucking patch me into a conference call?”
Sam doesn’t say a word. Johan pauses to clear his throat and jump-start his vocal cords. “Good morning, Director Park. Is this an important call?”
“Yes. Yes. We need to agree on price guidance urgently.”
“Okay. Hang on. Let me kick this girl out of my room.”
We wait patiently for about thirty seconds, listening to a barely audible conversation between what sounds like Johan and a prostitute. My line is muted, but some of the Korean bankers on the line can’t help but snicker.
“Okay, now I am ready. What’s up, guys?”
We succinctly explain to Johan that the joint syndicate team had recommended Libor +20 bp area price guidance with the hope of getting to +18 as a final result. wasn’t happy with this recommendation and is only willing to accept it if each bank agrees to underwrite the deal at +20 in the unforeseen event that we price at a wider level than that.
“Yeah, fine. Whatever. We’ll backstop the deal at that level you just said.” And just like that, Johan now owns $250 million five-year bonds at Libor +20 bp.
“Director Park, now I have a question for you.”
“Yes, Johan?”
“Can I go back to bed now?”
“Yes. Yes you can.” The line erupts in laughter.
The client loved it. For all subsequent calls that required a syndicate decision, Director Park would say, “Wait, we can’t begin without Johan.” They loved his honesty and lack of pretense.
After my trip to Jakarta, the banking team spends the next two months working through the due diligence and documentation process for the Mulia deal.
Once we start the roadshow, I know that I’m going to have my hands full. We have a few serious hurdles with trying to help them raise the $150 million.
International investors have had a contentious relationship with Indonesia ever since the default of Asia Pulp and Paper in 2001, which caused a collapse of asset prices in Indonesia and across Southeast Asia. It was a painful and expensive shock to the bondholders given the reputation of APP’s management-owners, the well-connected Widjaja family, and the deal’s bond underwriters, Credit Suisse, Goldman Sachs, JPMorgan, and Merrill Lynch.
As a result, many emerging market investors still refuse to participate in any Indonesian corporate bond deals. This disdain goes beyond APP; the Indonesian courts are notoriously corrupt and have a long history of disregarding international law.
For our Mulia deal, there really isn’t much recourse for investors in the event that the company decides to stop making interest payments. In this case, we have securitized the bond by ring-fencing some of the hard assets into a newly created offshore entity. Theoretically, in the event of a default, the investors would own the Hotel Mulia, the condo towers, and the shopping mall, but good luck getting a court in Jakarta to enforce that.
Then there’s the small issue of the CEO’s nefarious reputation as a “crook” or “Suharto crony.” We try to address this by pointing out that we, as a firm, have conducted thorough due diligence and have received internal approval from our New York–based commitment committee to proceed with the deal—so investors are buying into our reputation as well. “Hey, we wouldn’t be doing this deal if it wasn’t legit.”
Another issue we have is over the stated use of proceeds. The company wants to borrow $150 million from investors for the purpose of repaying loans. The fundamental problem is that these loans are from a handful of their principal shareholders (i.e., themselves), all through dodgy British Virgin Islands shell companies with suspicious names that would make the Enron lawyers who dreamed up the infamous JEDI, Chewco, and Raptor SPVs blush. Unfortunately for us, we actually have to detail each of these shell companies in the offering circular. It’s a good thing many investors never bother to read the bond documents anyway; in a bull market for credit, all they care about is yield and if the order book is oversubscribed.
This is going to be a very challenging deal, but there’s a price for everything. However, that leads to yet another fundamental problem. Looking at the cash flow of the company, there is no way they can support a coupon payment of anything above 12%. Anything above that and default becomes self-fulfilling. And Djoko Tjandra sure as hell isn’t going to give away any equity to add a “kicker” to boost the yield.
I’d rate this deal somewhere between challenging and impossible. But no one internally wants to be the person to say no to doing it. The banking team in Jakarta is just so happy to be doing a deal that pays real high-yield fees (2%), compared with what we might make on an Indonesian sovereign deal (0.05%). And Babar, our head of high yield, is happy to slash and burn his way through as many deals as possible, hoping that if a handful of them get done every year, he’s a hero—a well-paid hero.
After the first day of investor meetings in Singapore, the Mulia team flies up to Hong Kong. Feedback from the meetings is not great; apparently, they are terrible at presenting and are ill equipped to answer investors’ questions. That’s when Babar tries to pawn the Hong Kong portion of the roadshow over to me. “Hey, man, I’ve got another deal kicking off. Can you step in and take them to the one-on-one meetings?” Once again, this is not a good sign.
Ahead of our first investor presentation, I meet the team for breakfast to give them a market update and an overview of the meeting schedule that is ahead of us. A presenting delegate of the Mulia team shows up wearing a garish Chanel suit, accentuated by
gold Chanel-logo buttons. To complement the suit, she has an all-diamond Cartier watch, diamond bracelet, and jeweled rings on at least four of her fingers. It’s going to be a shitty day.
She is asking investors to effectively lend her $150 million so that she can turn around and repay loans she and her cohorts have allegedly made to the company. At the first meeting, she gesticulates wildly as she leads a portfolio manager through our meticulous PowerPoint presentation. I’m not sure they hear a word she says; they’re hypnotized by all the bling adorning her hands and wrists.
Now I know for sure, this deal is never going to work. But I still don’t want to be the one who gets blamed for killing it. At the end of the second day of meetings, I try to gradually reset their expectations. “Look, we’re facing a fairly challenging market backdrop, so there’s no point getting on a plane tonight and going to London until we have more feedback and hopefully some indications of interest from the Asian investors you met with.” In reality, I know they’d get laughed out of the room in London.
To alleviate the situation, I offer to take the team out to dinner.
We have a delightful dinner sitting on the terrace at Dragon-i. From my experience, the rich and unscrupulous tend to make for entertaining company. And we’re in the perfect venue: an infamous restaurant, owned by the son of a reputed gangster, that turns into one of Hong Kong’s hottest clubs as the evening progresses.
Toward the end of dinner, we’ve all shifted our focus from eating to drinking. I need them to get loose before I ease back into the discussion of the increasingly low probability of a successful deal. Just as I start talking about the deal, the waitress comes over and drops off the bill in front of me, and then just stands there next to me. My guests look confused. I pull out my corporate card and tell them it’s not a big deal, that our table is probably reserved for later, and that we can go drink somewhere else, but they don’t want to leave.
It’s obvious that they’re not used to being told they can’t do something. To them, it’s a reflection of status. Who could be more important? One of them starts berating the waitress, who is just staring at me helplessly. I didn’t want it to come down to this, but I am forced to step in. “Guys, guys. Technically, it’s my fault. I’m actually not supposed to be here after eleven p.m.”