AIG sale introduces world to passive global coordinator

Euromoney, April 2012

When American International Group (AIG) raised HK$46.7 billion (US$6 billion) from a block trade in early March, it did several things. It provided the clearest sense yet that Asian equity issuance markets are reviving. It shifted almost half of AIG’s remaining stake in Asian life insurer AIA. And it introduced the world to the concept of a passive global coordinator.

First, the deal: an undeniable success. Although it priced at the bottom of the range with a maximum 7% discount to the stock, there is nobody in the Asian banking community who is complaining about the deal; there is instead relief that a big trade – indeed, the second biggest block trade ever in Asia after China Mobile – had been completed without catastrophe, giving confidence to brittle markets.

“The fact that we are able to do a $6 billion trade on an Asian underlying, and get it done robustly in a manner where the seller and the investors are happy, tells you about the depth of the capital markets here right now,” says Dixit Joshi, head of global markets equity for Asia at Deutsche Bank.

The deal traded down briefly in the aftermarket, but as Joshi says, “that was a buying opportunity for many investors”; the stock swiftly passed the strike again, outperformed the market, and remains well above the sale price at the time of writing. Dan Dees, co-head of investment banking for Asia Pacific at Goldman Sachs, says the deal “will give other people the confidence to enter these markets and do transactions.”

That said, one of the reasons that nobody in the industry has anything bad to say about the deal is that pretty much everyone in the industry was on it.  Deutsche Bank and Goldman Sachs were joint global coordinators and joint bookrunners, but alongside them were seven other banks, with Citi and Morgan Stanley as joint global coordinators, and Bank of America Merrill Lynch, Barclays Capital, Credit Suisse, JP Morgan and UBS as joint bookrunners.

It’s not in doubt that Goldman and Deutsche were the ones in charge of the deal; it’s below that level that the precise role gets murky. “They will all tell you they were on the ticket but ask them when they were notified,” says someone close to the deal. “On Monday morning they were told: the deal’s getting done, you’re getting a cheque.” By that time the deal was apparently half covered already through the leads speaking to investors on the Sunday.

Citi and Morgan have the titles of joint global coordinators, yet don’t appear to have been taking orders. “Passive global coordinator? That’s the worst twist of the knife, really,” says one banker, not on the deal. “It’s almost a contradiction in terms.” Citi and Morgan, in turn, are thought to be unhappy that some at the top of the syndicate have sought to exclude them from league table recognition; in fact, there is a long track record of bankers getting a share of the table credit for relatively small roles.

What’s this about? It’s not so strange to have multiple bookrunners on a deal as big as this, but in fact a recurring facet of Asian investment banking recently – ECM and DCM alike – has been a multiplicity of bookrunners appearing on reasonably small deals.

Bankers are not enamoured with this development. “Whereas you were part of a three or four handed deal, now you’re part of a seven, eight, nine handed deal, and the effective pressure on revenue is significant,” says Robin Phillips, head of global banking and markets Asia Pacific at HSBC.

Quite apart from the pressure on economics, bankers don’t like the fact that it reduces accountability. With two or three bookrunners, if something goes wrong, it’s easy to know who to blame. “Once you get beyond two or three, nobody is responsible,” says one banker. It makes it harder to put out a coherent message to investors. And international banks moan that when local banks appear – as is often the case on dim sum bonds, for example – they’re often there chiefly as investors rather than bookrunners, so they don’t really broaden distribution and also don’t step in to support the deal in the aftermarket. As Dees says (about the broader trend, and not the AIG deal): “There’s a perception that more banks equals broader distribution. The reality is quite the contrary. It can lead to the degradation of the quality of execution in deals, and most importantly the degree of accountability that bookrunners feel and need.”

So why is it happening? “It’s an easy give, from the company’s point of view, although it makes the deal much more difficult to manage,” says Phillips. “How do companies reward their banks? Expand the number of bookrunners.”

That said, the true global coordinators are still likely to get the lion’s share of a fee on any deal, and the precise economics are not always clear from the outside. “There are more bookrunners appearing both on ECM and DCM,” says Matthew Hanning, head of investment banking for Asia Pacific at UBS. “But some are more equal than others, if you want to be Orwellian about it. Doing the arithmetic by saying there used to be three and now there’s six so I assume your fee has halved – that would be the wrong arithmetic.”