Photographer: Xaume Olleros/Bloomberg

Look, No Fees! Banks Do Bonds for Free to Win Emerging Deals

  • NTPC bookrunners worked for free, paid $40,000 travel costs
  • Fees earned by banks on dollar deals at 7-year low: Freeman

When Indian state-owned power company NTPC Ltd. sold $500 million of Eurobonds in February, a deal that could have incurred banking fees of more than $1 million cost a couple of cents.

NTPC executives even sent the bill for meeting investors in London and Singapore to Citigroup Inc. and the four other underwriting banks, according to a person with knowledge of the transaction.

The episode is a testament to an increasingly desperate struggle between banks for deals in a market for emerging-nation Eurobonds that shrank 29 percent last year to $344 billion. Though underwriting fees have been falling for a decade, the rainmakers of the world’s biggest financial centers are now taking the contest a step further, doing transactions for heavy discounts and in some cases for no charge, effectively taking a hit to profits in order to buy market share.

“It’s a fight for deals,” said Lutz Roehmeyer, a director at Landesbank Berlin Investment GmbH, which manages the equivalent of about $12 billion in debt, including holdings of the new NTPC bonds. “Bankers are ready to take smaller fees as there are fewer deals. Competition is big.”

It’s not just emerging-market corporations that have benefited. From Malaysia to Kenya, governments have also issued bonds in which fees were waived, according to data from New-York based Freeman Consulting Services taken from regulatory filings.

Price War

Slowing growth in China, slumping commodity prices, economic sanctions against some Russian companies and political uncertainty in countries such as Turkey and Brazil have all combined to sour the mood of potential issuers and deal volumes have declined as a result.

In the first three months of 2016, bond sales denominated in dollars and euros from the emerging world dropped to a six-year low of $91 billion.

Shrinking demand has in turn prompted a banking price war.

Last year, sovereign and corporate issuers paid banks a median of 0.15 percent in underwriting fees on each fundraising, according to data from Freeman based on a sample of 7,000 deals over a decade. In 2006, the median was 0.28 percent.

Profit Squeeze

Providing services on the cheap, or even for free, may amount to a prudent investment for banks. By establishing a relationship with governments and state-backed companies now, they might be in a better position to bid for more lucrative work advising on future privatizations and mergers.

For now, the trend is putting a dent in bank profits, particularly among European lenders. Investment banking and trading revenue at European firms will probably fall 30 percent this year from last, Piers Brown, an analyst at Macquarie Group Ltd. in London, said earlier this month.

“Just about every bank is seeing declining revenue from Eurobonds,” said Jeff Nassof, a director at Freeman in New York. “It is also true that the issuers that are in the market now are higher quality, more seasoned issuers that tend to pay lower fees or no fees in some cases.”

While the volume of fees for euro-denominated deals in 2015 was roughly in line with 2013 levels, charges on dollar offerings declined overall to a seven-year low, a trend that will probably continue, Nassof said.

Free Travel

Underwriters agreeing to reimburse NTPC its travel expenses for visiting investors ultimately saved the company $40,000, according to the person, who asked not to be identified because the details are private. The syndicate included Citigroup, Deutsche Bank AG, HSBC Holdings Plc, Barclays Plc and SBI Capital Markets.

Spokespeople for Citigroup, Barclays, HSBC and Deutsche Bank in Mumbai declined to comment when contacted by Bloomberg this week. SBI couldn’t immediately make anyone available for comment. An NTPC press officer declined to immediately comment when contacted by phone on Wednesday.

Some bankers say the current era of low fees may be coming to an end. Trading conditions have prompted some lenders to consider withdrawing from the fight, according to Cecile Camilli, head of debt capital markets for central and eastern Europe, Middle East and Africa at Societe Generale SA in London.

Issuers’ Market

“There has been some bank retrenchment already, which should help as there will be less competition,” she said.

For now, it remains an issuers’ market. Kenya paid no fees in November 2014 when the African nation sold more of its two debut Eurobonds, according to a statement on the Treasury’s website. Malaysia paid almost nothing to its underwriters when it raised $1.5 billion from two Islamic-bond tranches in April 2015, Nassof said.

Kenya’s Finance Ministry wasn’t available for comment when contacted by Bloomberg News. Malaysia’s Finance Ministry said in an e-mailed statement that fees were "negotiated and agreed by all banks," without elaborating.

“With fewer deals there is more competition,” said Richard Segal, a London-based emerging-market analyst at Manulife Asset Management. Fees “will rise at some point, but will stay well below historical averages," he said.

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