Interfacing With Global Debt Markets
Role of the Underwriting Syndicate
Mark A. Hadden
Managing Director, Head of Government Finance
March 26, 2015
1
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 ISSUE
PLACEMENT
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL
EXECUTION
NEW ISSUE
PLACEMENT
SECONDARY MARKET
LIQUIDITY
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL
EXECUTION
NEW ISSUE
PLACEMENT
SECONDARY MARKET
LIQUIDITY
INVESTOR RELATIONS
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL
EXECUTION
NEW ISSUE
PLACEMENT
SECONDARY MARKET
LIQUIDITY
INVESTOR RELATIONS
ANALYTICS
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL
EXECUTION
NEW ISSUE
PLACEMENT
SECONDARY MARKET
LIQUIDITY
INVESTOR RELATIONS
ANALYTICS
RESEARCH
UNDERWRITING SYNDICATE
ROLES...
MARKET ADVICE
NEW ISSUE DEAL
EXECUTION
NEW ISSUE
PLACEMENT
SECONDARY MARKET
LIQUIDITY
INVESTOR RELATIONS
ANALYTICS
RESEARCH
CONDUIT FOR BANK
WHY IS THIS IMPORTANT?
1.
MFABC IS CURRENT ON MARKET EVENTS
2.
HELP SHAPE THE DEBT MANAGEMENT STRATEGY
3.
KEEP TREASURY STAFF AWARE OF MARKET COMPLEXITIES
4.
GREATER BREADTH AND DEPTH TO THE MFABC BRAND
STRONG ACCESS TO CAPITAL MARKETS
+
LOWER YOUR BORROWING COSTS
Investors
Bank/ Dealers
Issuers
Investors
Different types of
investors, have different
needs and motivations…
Pension Funds
Mutual Funds
Hedge Funds
Government Funds
Bank Treasuries
Insurance Companies
Central Banks
DIFFERENT MANDATES
-WILL AIM TO
BEAT AN ‘INDEX’
AT A MINIMUM
Corporate Treasuries
Ethical Funds
Investors
Different types of
investors, have different
needs and motivations…
Pension Funds
View on interest rates
Mutual Funds
View on monetary policy
Hedge Funds
Relative Value against other
paper
Government Funds
Bank Treasuries
Insurance Companies
Central Banks
DIFFERENT MANDATES
-WILL AIM TO
BEAT AN ‘INDEX’
AT A MINIMUM
What’s behind the fixed
income investment decision?
Corporate Treasuries
Ethical Funds
Coupon or dividend cash to
deploy
View on a specific credit
View on a currency
Asset reallocation
Positive carry
Geopolitical risks
Investors
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DIFFERENT MANDATES
-WILL AIM TO
BEAT AN ‘INDEX’
AT A MINIMUM
DERIVATIVES
ETC.....
Investors
ASSET CLASSES
EQUITIES
CURRENCIES
COMMODITIES
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DIFFERENT MANDATES
-WILL AIM TO
BEAT AN ‘INDEX’
AT A MINIMUM
DERIVATIVES
ETC.....
Investors
ASSET CLASSES
CAPITAL STRUCTURE
EQUITIES
HIGH YIELD/ JUNK
PRIVATE EQUITY
Y
I
E
L
D
MUNICIPALITIES
FIXED INCOME
%
PROVINCIAL BONDS
CURRENCIES
COMMODITIES
DIFFERENT MANDATES
-WILL AIM TO
BEAT AN ‘INDEX’
AT A MINIMUM
CORPORATES
ABS/ MBS
MONEY MARKET
SSAS
DERIVATIVES
CMB
ETC.....
CANADA BONDS
Investors
ASSET CLASSES
CAPITAL STRUCTURE
EQUITIES
HIGH YIELD/ JUNK
PRIVATE EQUITY
Y
I
E
L
D
FIXED INCOME
%
CURRENCIES
COMMODITIES
DIFFERENT MANDATES
-WILL AIM TO
BEAT AN ‘INDEX’
AT A MINIMUM
CORPORATES
ABS/ MBS
MUNICIPALITIES
MONEY MARKET
PROVINCIAL BONDS
DERIVATIVES
CMB
ETC.....
CANADA BONDS
CAPITAL STRUCTURE
ASSET CLASSES
EQUITIES
CURRENCIES
Y
I
E
L
D
COMMODITIES
HIGH YIELD/ JUNK
FIXED
FLOATING
CORPORATES
CAD
ABS/ MBS
MUNICIPALITIES
%
PRIVATE EQUITY
FIXED INCOME
MONEY MARKET
DERIVATIVES
PROVINCIAL BONDS
CMB
CANADA BONDS
PRODUCTS
Investors
USD
5YR
10YR
30YR
ULTRALONG
3MOS RESETS
AMORTIZING
RESIDS
COUPONS
CALLABLE
PUTABLE
EQUITY 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
Bank/ Dealers
Issuers
Trading floors - these days are LONG gone !!!
Flow of MFABC debt
(PRIMARY)
Issuers
Government Finance
Banks/ Dealers
Bond Sales Desk
*PRIMARY
MARKET*
Investors
Flow of MFABC debt
(SECONDARY)
Bond Trading
1. Agency
2. Inventory
Banks/ Dealers
Bond Sales Desk
*SECONDARY
MARKET*
Investors
Flow of MFABC debt
(PRIMARY + SECONDARY)
Issuers
Government Finance
Bond Trading
1. Agency
2. Inventory
Banks/ Dealers
Bond Sales Desk
*PRIMARY
MARKET*
Investors
*SECONDARY
MARKET*
CDN Government Credit = CMB
+ Prov
+ Muni
+ Other
Banks/ Dealers
CDN Government Credit
CDN Government Credit
(C$ Primary Issuance)
(C$ Secondary Trading *PER DAY*)
140
?
120
C$ Billions
100
80
60
40
20
0
2005
2010
2011
2012
2013
Source: Bloomberg League Tables
2014
How many $millions of
government credit paper do
CDN dealers trade PER DAY?
CDN Government Credit = CMB
+ Prov
+ Muni
+ Other
Banks/ Dealers
CDN Government Credit
CDN Government Credit
(C$ Primary Issuance)
(C$ Secondary Trading *PER DAY*)
140
12
120
10
8
C$ Billions
C$ Billions
100
80
60
6
4
40
2
20
0
2005
2010
2011
2012
2013
2014
Source: Bloomberg League Tables
CDN Government Credit = CMB + Prov + Muni + Other
0
2010
2011
2012
2013
2014
Source: IIROC trading statistics
CDN Government Credit = CMB + Prov + Muni + Other
CDN Government Credit = CMB
+ Prov
+ Muni
+ Other
Banks/ Dealers
CDN Government Credit
What The Street Holds
(C$ Secondary Trading *PER DAY*)
Primary Dealer Positions By Asset Class (US$ Bln)
12
10
C$ Billions
8
6
4
2
0
2010
2011
2012
2013
2014
Source: IIROC trading statistics
CDN Government Credit = CMB + Prov + Muni + Other
Source: NY Fed, Haver Analytics
Banks/ Dealers
What this means….
CDN Government Credit = CMB
+ Prov
+ Muni
+ Other
What The Street Holds
Primary Dealer Positions By Asset Class (US$ Bln)
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.
Source: NY Fed, Haver Analytics
Banks/ Dealers
Secondary Trading
Characteristics
CDN Government Credit
Ontario is the most traded (~C$3.5Bln
traded per day).
(C$ Secondary Trading *PER DAY*)
12
Ontario is the bell-weather, with most
CDN government credits referenced
against it (yield versus yield)
10
C$ Billions
8
6
Ratings are bucketed by capital structure,
pricing (by yield) follows.
4
2
0
2010
2011
2012
2013
2014
Source: IIROC trading statistics
CDN Government Credit = CMB + Prov + Muni + Other
MFABC’s ratings, brand exposure,
investor depth, and size helps position
itself as a hybrid between provincial and
municipal paper.
Bonds trade on a price basis BUT for
simplicity they’re generally evaluated
on the spectrum on a yield basis
Banks/ Dealers
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
MFABC Spread Relationships (10yr term; basis points)
MFABC 10yr Bond Yields
4.50%
BASIS POINTS
4.00%
3.50%
3.00%
2.50%
2.00%
45
40
35
30
25
20
15
10
5
0
1Q
1.50%
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
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
NBMFC-NB
MFABC-ONTARIO
MFABC-BC
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.
CAPITAL STRUCTURE
HIGH YIELD/ JUNK
ABS/ MBS
MUNICIPALITIES
PROVINCIAL BONDS
SSAS
CMB
CANADA BONDS
ISSUERS
CORPORATES
FIXED
FLOATING
USD
5YR
10YR
30YR
ULTRALONG
3MOS RESETS
AMORTIZING
RESIDS
COUPONS
CALLABLE
PUTABLE
EQUITY LINKED
ISSUERS
PRODUCTS
CAD
Purpose
INFORM investors about the issuer’s story
GOAL is to entice buyers and lower borrowing costs
INVESTORS CONCERNS that need to be addressed
BROADEN the base of global investors is a core program objective
THANK THEM for their time and support of the borrowing program
Value of ONE 10yr
basis point on $1B
program
Give
UPDATE on the issuer’s story
FORWARD OUTLOOK on finances of the issuer
BORROWING strategy education
ROI
~$900,000
~$3,000
IR Trip Cost
Receive
FEEDBACK on the issuer’s story and outlook
COMMENTS AND IDEAS to help with the borrowing strategy
APPRECIATION for your time discussing the issuer’s program in a closed setting.
In Person Meetings
Often the best way to make a solid impression for the credit
Investors appreciate the initiative to attend meetings face-to-face
Dialogue tends to be quite open. This contributes to the building of
credibility between the investor and issuer
It takes added logistical efforts to book several meetings
Phone One-on-Ones
Cost effective way for meeting investors and answering any questions
Can cover a variety of clients in a short period of time
Generally convenient for investors as any cancellations don’t have a
large impact on either one’s day
Conferences
Reach a broad range of investors, and it’s cost effective
Useful for developing contacts
Formal Q&A often limited to a short time frame
Raises the public profile of the issuer
Should be followed by numerous one-on-one discussions
Website
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
Issuers
 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.
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.