Banks Offer Loans to Help Win Bond Underwriting Deals

The world’s biggest banks are offering loans to help them win places on companies’ bond deals as a 39 percent drop in sales this year, the most since at least 1998, shrinks fees.

Citigroup Inc. offered a loan with Credit Suisse Group AG and 12 other lenders to join a bond sale by Virgin Media Inc., the U.K.’s second-largest pay-television company, said Treasurer Richard Martin. Citigroup also gave Spanish builder Obrascon Huarte Lain SA 50 million euros ($63 million) of loans to join a 700 million-euro bond issue, said four people familiar with the matter, who declined to be identified as the talks were private.

Borrowers are obtaining credit from banks competing for a pool of bond deals that dropped to $1.18 trillion in the first half from $1.92 trillion a year earlier as Europe’s sovereign debt crisis pared sales, according to data compiled by Bloomberg. The number of banks on each high-yield deal has almost tripled since 2000, cutting fees by an average of 57 percent per firm.

“We’ve been very clear with our banking business partners that we’ll take care of those who are good to us,” said Martin of London-based Virgin, which enlisted a record 14 banks to sell debt in January. “If you want to be in the bond, we need you to give us your balance sheet as well.”

Martin included Credit Suisse, Citigroup, Barclays Capital and HSBC Holdings Plc in Virgin Media’s bond offering, along with 10 other managers, after they agreed to join a 1.925 billion-pound ($2.9 billion) credit facility. The four banks, whose spokesmen declined to comment, ultimately weren’t needed on the loan.

‘Eggs in One Basket’

“Banks and corporate treasurers don’t want to put all their eggs in one basket,” said Tom Jenkins, a credit analyst at Jefferies International Ltd. in London.

More than half of this year’s 321 high-yield bond offerings were handled by three or more underwriters, compared with 32 percent in 2007 and 3 percent in 2000, Bloomberg data show. About 20 percent of the issues were managed by a single bank, compared with about 66 percent a decade ago. High-yield, or junk, bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

“The era of the sole-book-managed deal is long gone,” said Malcolm Stewart, the former head of European leveraged capital markets at Merrill Lynch and Citigroup who’s now the London-based managing partner at North Sea Partners LLC, a closely held investment bank.

48 Hours

Citigroup, the third-biggest U.S. lender by assets, provided Obrascon with a loan 48 hours before the bond sale was announced and after managers Banco Santander SA, Credit Agricole SA, RBS and Societe Generale SA had done six months of work, said the people familiar with the financing. Citigroup convinced the builder that the bond offering would be more successful with a U.S. firm, according to the people involved in the deal.

Because of the financial crisis, “issuers of new bonds may be more amenable to looking for a relationship with a strong lender,” said Kathleen Shanley, a senior bond analyst at independent debt-research firm Gimme Credit LLC in Chicago. “Before the credit crisis, many issuers may have thought they could rely exclusively on the capital markets to cover financing needs,” she said.

Obrascon’s bond issue in April “could have gone out with two or three banks, but we decided to add two additional banks,” said Francisco Melia, deputy chief financial officer at the Madrid-based company. “It’s more important than ever since the credit crisis that banks support us with other operations such as lending.”

Spokesmen at the banks declined to comment.

Lower Fees

The number of banks managing each high-yield bond averages 3.1, the highest ever, while the typical fee on so-called junk bond sales fell to 1.82 percent this year from a six-year high of 1.98 percent in 2009, according to Bloomberg data. That’s 0.59 percent for each underwriter, down from 0.71 percent in 2005 and 1.38 percent a decade ago.

Underwriters’ share of fees have dwindled along with high- yield sales, which plunged in May to the least since March 2009. Companies sold $10.5 billion of debt globally last month in 24 offerings, the fewest since April 2009, following 27 deals worth $8.61 billion in May, according to Bloomberg data. That compares with an average 68 bond sales totalling $32.4 billion in the previous four months.

Syndicated loan borrowings in Europe and the U.S. rose to $734.2 billion in the first half, from $528.7 billion a year earlier, Bloomberg data show.

Virgin Media included the 14 underwriters when it sold $2.4 billion of bonds in dollars and pounds in January to boost participation in the loan, Martin said.

“We decided to defer a portion of the bond fees until we understood the participation in the bank loan,” he said. “Ultimately, we didn’t need all 14 banks for the bank loan, we only needed 10 to fill out the syndicate, but it helped create competitive tension.”

To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Kate Haywood in London at khaywood@bloomberg.net

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