2007

The View from Below

When a deal gets done most of the press and kudos go the arrangers, bookrunners and syndicate leaders. Forgotten by everyone, including us, are the participants, often referred to in the pejorative as “stuffees”, without whom the system would fail, as no single financial institution can provide all the capital needed or take on the amount of risk involved. We sat down with market participants to understand how and why the system works. So the discussion could be more frank, we spoke on background.

The primary motivations to be a participant are manpower, overhead and risk. To be an arranger or bookrunner requires an organization with sourcing, syndication and agency capabilities. There is a minimum critical mass required. To go with scale it must also be willing to put its balance sheet at risk. Ultimately, if the small guy wants to enjoy the economics of underwriting he has to be aggressive on price thus further spoiling pricing and losing access to future business from the major players. It is therefore easier for many to partner up with the main banks that do the bulk of the business anyway.

Participants do not operate in a vacuum. In addition to relationships with a core banking group which may include: DnB, Nordea, Fortis and BTMUCC in the U.S., DVB, ING, HSBC and RBS in London, SocGen, Paribas and Calyon in Paris as well as the biggest fish of them all, HSH, the participant must have a direct relationship with his customer. “Know your customer” is an important edict and not only because of OFAC, which like the Patriot Act, is on every US bankers mind. Not only is the banker obligated, through these edicts, to know what is customer is doing and whom he is dealing with, it is through direct contact he learns what is going on in the company in particular. Moreover, he is selling the bank’s capabilities to the customer who has final say as to who is to be included in the syndicate.

This is only an excerpt of Market Commentary – 07/12/2007

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