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Interfacing With Global Debt MarketsRole of the Underwriting Syndicate
Mark A. HaddenManaging Director, Head of Government Finance
March 26, 2015
UNDERWRITING SYNDICATE
ROLES...
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
NEW ISSUEPLACEMENT
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
NEW ISSUEPLACEMENT
SECONDARY MARKET LIQUIDITY
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
NEW ISSUEPLACEMENT
SECONDARY MARKET LIQUIDITY
INVESTOR RELATIONS
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
NEW ISSUEPLACEMENT
SECONDARY MARKET LIQUIDITY
INVESTOR RELATIONS
ANALYTICS
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
NEW ISSUEPLACEMENT
SECONDARY MARKET LIQUIDITY
INVESTOR RELATIONS
ANALYTICS
RESEARCH
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL EXECUTION
NEW ISSUEPLACEMENT
SECONDARY MARKET LIQUIDITY
INVESTOR RELATIONS
ANALYTICS
RESEARCH
CONDUIT FOR BANK
WHY IS THIS IMPORTANT?
1. MFABC IS CURRENT ON MARKET EVENTS
HELP SHAPE THE DEBT MANAGEMENT STRATEGY
KEEP TREASURY STAFF AWARE OF MARKET COMPLEXITIES
GREATER BREADTH AND DEPTH TO THE MFABC BRAND
2.
3.
4.
STRONG ACCESS TO CAPITAL MARKETS+
LOWER YOUR BORROWING COSTS
Investors Bank/ Dealers Issuers
Investors
DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM
Different types of investors, have different needs and motivations…
Pension Funds
Mutual Funds
Hedge Funds
Government Funds
Bank Treasuries
Insurance Companies
Central Banks
Corporate Treasuries
Ethical Funds
Investors
DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM
Different types of investors, have different needs and motivations…
Pension Funds
Mutual Funds
Hedge Funds
Government Funds
Bank Treasuries
Insurance Companies
Central Banks
Corporate Treasuries
Ethical Funds
What’s behind the fixed income investment decision?
View on interest rates
View on monetary policy
Relative Value against other paper
Coupon or dividend cash to deploy
View on a specific credit
View on a currency
Asset reallocation
Positive carry
Geopolitical risks
DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DERIVATIVES
ETC.....
Investors
Investors
DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DERIVATIVES
ETC.....
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DERIVATIVES
ETC.....
YIELD
%
Investors CAPITAL STRUCTURE
HIGH YIELD/ JUNK
CORPORATES
ABS/ MBS
MUNICIPALITIES
PROVINCIAL BONDS
SSAS
CMB
CANADA BONDS
DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM
CAPITAL STRUCTURE
HIGH YIELD/ JUNK
CORPORATES
ABS/ MBS
MUNICIPALITIES
PROVINCIAL BONDS
CMB
CANADA BONDS
YIELD
%
Investors
DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DERIVATIVES
ETC.....
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DERIVATIVES
CAPITAL STRUCTURE
HIGH YIELD/ JUNK
CORPORATES
ABS/ MBS
MUNICIPALITIES
PROVINCIAL BONDS
CMB
CANADA BONDS
YIELD
%
P R
O D
U C
T S
FIXEDFLOATING
CADUSD5YR10YR30YR
ULTRALONG3MOS RESETSAMORTIZING
RESIDSCOUPONSCALLABLEPUTABLEEQUITY LINKED
Investors
Variety of different ‘investor’ classes to choose from
Lots of asset classes to navigate
There’s an entire capital structure to explore
Large spectrum of products to investigate
OUR GOALS(1) Make sure MFABC has a high degree of visibility amongst investors(2) Broaden the ‘buyer’ base(3) Educate investors on the municipal sector and where MFABC fits within that.
Investors
Investors Bank/ Dealers Issuers
Trading floors - these days are LONG gone !!!
Government Finance
Bond Sales Desk
Investors
Issuers
Banks/ Dealers
*PRIMARY MARKET*
Flow of MFABC debt (PRIMARY)
Bond Trading1. Agency 2. Inventory
Investors
Banks/ Dealers
*SECONDARY MARKET*
Flow of MFABC debt (SECONDARY)
Bond Sales Desk
Government Finance Bond Trading1. Agency 2. Inventory
Investors
Issuers
Banks/ Dealers
*PRIMARY MARKET*
*SECONDARY MARKET*
Flow of MFABC debt (PRIMARY + SECONDARY)
Bond Sales Desk
Banks/ Dealers
CDN Government Credit (C$ Primary Issuance)
0
20
40
60
80
100
120
140
2005 2010 2011 2012 2013 2014
C$
Billio
ns
CDN Government Credit (C$ Secondary Trading *PER DAY*)
Source: Bloomberg League Tables
CDN Government Credit = CMB + Prov + Muni + Other
?How many $millions of government credit paper do CDN dealers trade PER DAY?
Banks/ Dealers
CDN Government Credit (C$ Primary Issuance)
0
20
40
60
80
100
120
140
2005 2010 2011 2012 2013 2014
C$
Billio
ns
0
2
4
6
8
10
12
2010 2011 2012 2013 2014
C$
Billio
ns
CDN Government Credit (C$ Secondary Trading *PER DAY*)
Source: Bloomberg League Tables Source: IIROC trading statisticsCDN Government Credit = CMB + Prov + Muni + Other CDN Government Credit = CMB + Prov + Muni + Other
CDN Government Credit = CMB + Prov + Muni + Other
Banks/ Dealers
0
2
4
6
8
10
12
2010 2011 2012 2013 2014
C$
Billio
ns
CDN Government Credit (C$ Secondary Trading *PER DAY*)
Source: IIROC trading statisticsCDN Government Credit = CMB + Prov + Muni + Other
What The Street Holds Primary Dealer Positions By Asset Class (US$ Bln)
CDN Government Credit = CMB + Prov + Muni + Other
Source: NY Fed, Haver Analytics
Banks/ Dealers
What this means….
Trading levels remain elevated
…but dealer balance sheet limitations and inventory costs are becoming more difficult
Regulatory/ Compliance related issues are negatively impacting inventories too
Growth of issuance versus dealer limitations – will be an important test for liquidity.
What The Street Holds Primary Dealer Positions By Asset Class (US$ Bln)
Source: NY Fed, Haver Analytics
CDN Government Credit = CMB + Prov + Muni + Other
Banks/ Dealers
0
2
4
6
8
10
12
2010 2011 2012 2013 2014
C$
Billio
ns
CDN Government Credit (C$ Secondary Trading *PER DAY*)
Source: IIROC trading statisticsCDN Government Credit = CMB + Prov + Muni + Other
Secondary Trading Characteristics
Ontario is the most traded (~C$3.5Bln traded per day).
Ontario is the bell-weather, with most CDN government credits referenced against it (yield versus yield)
Ratings are bucketed by capital structure, pricing (by yield) follows.
MFABC’s ratings, brand exposure, investor depth, and size helps position itself as a hybrid between provincial and municipal paper.
Banks/ DealersBonds trade on a price basis BUT for simplicity they’re generally evaluated on the spectrum on a yield basis
05
1015202530354045
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015
BASI
S PO
INTS
MFABC Spread Relationships (10yr term; basis points)
NBMFC-NB MFABC-ONTARIO MFABC-BC
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2010 2011 2012 2013 2014 2015
MFABC 10yr Bond Yields
MFABC Secondary Trading-Borrowing costs continue to drive lower, alongside global interest rate markets-MFABC bonds trade at the strongest end of the municipal spectrum, also trading stronger than some provinces.-MFABC debt continues to trade with reasonable liquidity
Banks/ Dealers
Fluent primary and secondary markets remain important for MFABC performance.
Liquidity is becoming a greater challenge for banks/ dealers.
Trading volumes remain elevated, however pressure on inventories remains a concern.
Strong commitment by the banks/ dealers to have MFABC bonds trade with a high
level of exposure and profile (domestic and international)
OUR GOALS(1) Provide liquidity and market making for MFABC bonds(2) Continue to educate the market on the MFABC brand(3) Focus on initiatives to reduce borrowing costs for MFABC(4) Help to design approach strategies to funding in the market
Investors Bank/ Dealers Issuers
Issuers
Background
Majority of government credit deals are underwritten.
Transaction time from start to finish is 10-15 minutes.
Issuers are generally planting ‘buzz’ in the market to better understand investor demand profile (happens 1-3 weeks in advance).
The treatment of ‘large sized’ orders is taking on greater concentration within the issuer community.
Over the last few years, deals are seeing greater international take-up.
The process takes 10 minutes start to finish
CAPITAL STRUCTURE
HIGH YIELD/ JUNK
CORPORATES
ABS/ MBS
MUNICIPALITIES
PROVINCIAL BONDS
SSAS
CMB
CANADA BONDS
I S S
U E
R S
P R
O D
U C
T S
I S S
U E
R S
FIXED
FLOATING
CAD
USD
5YR
10YR
30YR
ULTRALONG
3MOS RESETS
AMORTIZING
RESIDS
COUPONS
CALLABLE
PUTABLE
EQUITY LINKED
Purpose
INFORM investors about the issuer’s storyGOAL is to entice buyers and lower borrowing costsINVESTORS CONCERNS that need to be addressedBROADEN the base of global investors is a core program objectiveTHANK THEM for their time and support of the borrowing program
Give
UPDATE on the issuer’s storyFORWARD OUTLOOK on finances of the issuerBORROWING strategy education
Receive
FEEDBACK on the issuer’s story and outlook COMMENTS AND IDEAS to help with the borrowing strategyAPPRECIATION for your time discussing the issuer’s program in a closed setting.
ROI~$3,000
~$900,000
Value of ONE 10yr basis point on $1B
program
IR Trip Cost
Reach a broad range of investors, and it’s cost effectiveUseful for developing contactsFormal Q&A often limited to a short time frameRaises the public profile of the issuerShould be followed by numerous one-on-one discussions
Often the best way to make a solid impression for the creditInvestors appreciate the initiative to attend meetings face-to-faceDialogue tends to be quite open. This contributes to the building of
credibility between the investor and issuerIt takes added logistical efforts to book several meetings
Having an IR pitch on your website is a great convenience for investors to learn about the credit
An active list of bond debentures in the market is helpful too for those looking up securities
Credit ratings reports readily available are appreciated by investors – at a minimum the ratings themselves.
Any financial statements are an asset to making the lives of investors easier
Cost effective way for meeting investors and answering any questionsCan cover a variety of clients in a short period of timeGenerally convenient for investors as any cancellations don’t have a
large impact on either one’s day
In Person Meetings
Phone One-on-Ones
Conferences
Website
The ‘issuer’ field is highly competitive, both in terms of names and products.
Contact with investors is key towards positioning yourself for sector outperformance.
Investor relations work requires a ‘cyclical’ approach, and a structured strategy.
Investor relations work typically has a significant skew when comparing cost versus potential rewards.
OUR GOALS(1) Help to design an effective investor relations strategy(2) Help to identify opportunities for MFABC to meet new investors(3) Advise the MFABC on how to best educate the market about the product.
Issuers
Conclusions
The underwriting syndicate works with MFABC to enhance profile and lower their cost of funds.
Fully functioning primary and secondary bond markets ensure (1) fluent access to funds, and (2) investors return to the product following a positive experience.
Potential capital markets headwinds comes from thinner liquidity and regulatory pressures on the banking sector
The issuer landscape remains highly competitive. MFABC has been rewarded for their investor relations strategy, distinguishing themselves from the issuing community.