The Collapse of RBS: a 10 minute read


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There is nothing so terrifying as the sound of crashing paper.

At the time of writing they were bid at approximately Gilts plus 68bp, 30bp through reoffer. The PWLB, an agency of the UK Treasury, had historically been the lender of last resort for TfL but by returning to capital markets, TfL proved that it could diversify its debt portfolio and access better levels of funding than its peers in the UK local authority sector. TfL is an executive body of the Greater London Authority. In retrospect, the success TfL has had in establishing a sterling curve in just a matter of months, and its future access to cheap alternative sources of funding, hinged on the success of its year market re-entry deal.

Ally Financial sought bankruptcy protection for its sub-prime mortgage unit Residential Capital on May 14 after months of carefully choreographed negotiations. Among the most important steps was locking up financing that would keep ResCap from triggering defaults on its mortgage servicing contracts — defaults which would have allowed trustees to snatch lucrative servicing pacts, setting off an all-out war among creditors. Indeed, the UK bank had to navigate a labyrinth of potential conflicts and pitfalls in order to make the DIP work. The biggest drain on liquidity was meeting obligations to make advances to cover certain shortfalls to investors in mortgage pools.

As Barclays stepped in those advances became the key to a new financing package. ResCap chief financial officer Jim Whitlinger said the company met with multiple advisers and the financing approach proposed by Barclays was the most beneficial to the estate by far. Both tranches flexed tighter. In addition to the private label servicing advance rights, the DIP is backed by a portfolio of whole loans.

Barclays decided to structure the loan as a leveraged loan and not a securitisation one because of where the natural buyer is for this type of product. It was able to bring in both leveraged loan investors that were getting access to investment-grade collateral, which they do not normally have, and some high-grade investors that typically never buy DIP paper but crossed over for this deal — more than in all.

The highly structured DIP has 40 different events of default. Part of the package of protection Barclays offered investors in the DIP was to guarantee that a sales process would take place and a buyer would be in place before the first draw. That made it effectively a bridge loan that gave ResCap breathing room to. Such deals fell out of favour because a large chunk of their audience is hedge funds, whose strategy is to immediately place the delta when faced with a mandatory.

Yet, as the US market for similarly structured mandatories is dramatically different with an outright buyer base and no need for a delta placement, the combination of advice from banks and adviser Rothschild was deceptively simple: launch a a transaction into the US to soak up the outright demand. The logic was clear, but the unknown was whether US investors would buy. VW is a global name with production sites in every region of the globe, but the company has no US listing.

US demand was crucial as the more hedge fund involvement, the larger the delta placement and the lower the chance of success. The planned use of proceeds was also vague.

VW priced somewhere between the two and then traded tighter. Six banks had pitched ideas to VW and each was also asked for their placement strategy on the bonds and the delta. It was the adviser that pushed for the Monday night launch, fearing markets could trade off following the US presidential election the next day. It was a judicious move — and one banks holding risk were unlikely to make unprompted — as markets did just that as the fiscal cliff moved into focus.

Pricing came at the best terms for investors with a coupon of 5. Just Auditors are not familiar with the structure and Bayer, which was previously the benchmark transaction in Europe, found its mandatory treated as debt by its auditors. It is the treatment of benchmark transactions that tend to determine subsequent auditor behaviour, so the deal not only has redefined the distribution and pricing of mandatories, but as importantly, whether it is worth companies issuing them.

In particular, the Nikkei index hit a low for the year just before the KDDI deal was launched and investor sentiment in the credit market was weak because of the European situation. The electricity utility was reeling from the liabilities resulting from the multiple meltdowns at the Fukushima Dai-ichi nuclear power station that followed the March 11 earthquake and tsunami and needed to monetise assets rapidly. News of the deal surprised the market. Additional proceeds took the total buyback to , shares.

Bonds were offered at against a At final pricing Daiwa gave an implied volatility of Outrights saw a low premium in a large company — a rare investment-grade issuer in Japan — with a growth story. Hedge funds saw a sensible price and the ready availability of cheap asset swap to hedge the credit.

Competitors had only compliments for the trade as it was not pre-sounded and traded flat at in the aftermarket — all the more impressive as the lack of issuance meant earlier deals had struggled to find the sweet spot on pricing. Mizuho, Morgan Stanley and Nomura were co-managers. JP Morgan drew on its all-round strengths and pan-regional reach in to find opportunities even in a subdued year for primary equity-linked issuance.

It completed deals for issuers from six countries and was active in a couple of successful restructurings, which was a major theme. Make believeHopes of Sony bringing a deal had initially looked slim, as the firm teetered on the brink of a downgrade to junk status, and its stock price had halved in the previous eight months. The asset swap boosted the bond floor significantly, to 90 from around 79 without. The sukuk issue exchanges into shares of Chinese department store operator Parkson Retail Group and was issued by vehicle Pulai Capital.

The note priced with a coupon and yield of 0. Management participation boosted investor confidence. The fina. It proved to be a groundbreaking year for the Islamic bond market. Sure, there had been some groundbreaking transactions in the past, such as when Saxony-Anhalt or GE Capital issued sukuk or when the likes of Indonesia printed blockbuster deals, but was the year the asset class came of age.

Tenors were pushed out, a more diverse issuer base sought sukuk funding, and pricing dynamics for much of the year was more favourable than in the conventional market. Bank capital has been a big theme in the emerging markets over the past year and new structures had already been evident in Brazil and Russia.

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It was the first Sharia-compliant Tier 1 instrument. Despite the terminology, the structure was deliberately designed to be kept as simple as possible. The instrument was compared with preferred shares hybrid Tier 1 deals done by US banks. As preferred shares are accounted for as equity rather than as liabilities, they do not have to include loss-absorption provisions at the point of non-viability.

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Basel III only requires this type of loss absorption feature either conversion into equity or principal write-down if the instruments are accounted for as liabilities, which is the case in Europe. But given the uniqueness of the transaction, there was always going to be an element of price discovery about the process. The structure was also perfectly attuned with Sharia principles, given that the flexibility to cancel coupons and the perpetual maturity provided equity-like features to the instrument.


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The bonds, which priced at par, were trading at In a market where players all-too quickly come and go, Societe Generale has proved to be the rare exception, resolutely placing the equity derivatives business at the heart of its investment banking operations come rain or shine. The strategy is one that some rivals questioned given the tough market backdrop of the last four years, but the French bank has proved it can deliver impressive results, innovative client solutions, and unparalleled liquidity provision even under the harshest conditions.

And was a year as tough as any. Against that backdrop, the divide between those houses with long-term commitment and those that had just come along for the ride in hope of better times ahead became more pronounced than ever. We saw a lot of banks retrenching, but because of our ability to generate profits, we can expand our business.

What makes us different is that stability. A full suite of engineering capabilities for both secured and unsecured notes were made available across the full range of payoffs and underlyings, with Bank of New York Mellon brought in as collateral monitoring agent and liquidation management agent to add an additional layer of comfort.

More from IFR Review of the Year magazine

In just a few weeks of launch, the bank ranked as a top three provider with hedge fund Marshall Wace. Winning bigThe liquidity advantage.

RBS shares up over 10% - banking sector in focus

Helen Bartholomew. There was not much room for profit in the commodities business in High regulatory and capital costs looming via Basel III and Dodd-Frank, as well as increasing difficulties in gleaning trading profits in a slow-moving and directionless market, scared off several firms from the space. But top-tier banks remained successful by using the entire portfolio and expertise across the firm to provide unique hedging opportunities in illiquid markets.

But even without the general consistent bullish or bearish trends of previous years, Deutsche was able to offer innovative solutions and investment opportunities to its clients. For example, the bank solved a major hedging issue for gas distribution companies in Central and Eastern Europe. Those companies were buying gas based on oil indices, and therefore needed to hedge both the possibility that oil and gas prices would diverge, as well as the foreign exchange risk associated with buying gas denominated in euros and selling to clients in US dollars.

In conjunction with the foreign exchange derivatives desk, the firm began offering forward contracts on oil indices denominated in both euros and US dollars, the first bank to do so. The strategy paid off for clients early in the year when Iran threatened to close the Strait of Hormuz and oil prices spiked while gas prices stayed level, necessitating an oil versus gas price hedge that could be denominated in both currencies.

The bank has since created an offering for forward transactions denominated in Eastern European currencies too. The North American gas business did not lag far behind. Deutsche executed 2. Going longThe bank also excelled in providing long-dated hedges in electricity markets, a sector where banks shy away from entering purchase agreements maturing in more than five years due to a lack of liquidity.

That attracted the attention of small to mid-size consumers and producers that began outsourcing some of their off-hour trading responsibilities to the German dealer. Even as the eurozone crisis reverberated throughout the rates world, the largest reforms in the history of the swaps market loomed. Banks were forced to adapt business models in view of Basel III, which lumps aspects of the interest rate swaps business — particularly long-dated, uncollateralised trades — with hefty funding and capital charges.

Of more immediate concern was the US Dodd-Frank Act taking effect in — swiftly followed by similar legislation in Europe — requiring all standardised swaps to be centrally cleared and electronically executed, forcing banks to bolster infrastructure and prep customers.

They rank for sure in the very first [tier]. We feel our size, balance sheet and strong capital position have helped our client business boom from an already strong position. The good news is we have managed to maintain our top spot in revenues in a very good year. This aligned risk management systems, with the rates business moving on to Athena, a pricing and risk management platform introduced in the FX business two years previously.

RBS Chief Executive Ross McEwan Answers Listeners' Questions - LBC

Athena provides traders and salespeople with a one-stop shop to price and manage the risk on m. Christopher Whittall. After a stuttering start, the year ended strongly with the European equity-linked market running at a level of activity not seen in years. Volumes eventually overtook those of both the previous two IFR award years.

Yet it was not plain sailing, with an active first quarter followed by a very quiet second.

The Collapse of RBS: a 10 minute read The Collapse of RBS: a 10 minute read
The Collapse of RBS: a 10 minute read The Collapse of RBS: a 10 minute read
The Collapse of RBS: a 10 minute read The Collapse of RBS: a 10 minute read
The Collapse of RBS: a 10 minute read The Collapse of RBS: a 10 minute read
The Collapse of RBS: a 10 minute read The Collapse of RBS: a 10 minute read

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