The role of a programme arranger is vital. But if an issuer makes its selection based on an existing relationship, such as lending ties it has with a bank, then an MTN facility is little more than an exercise in good public relations. Pieter van Dyck, global MTN product manager at ABN Amro, says: "The lending relationship is an important one and it is part of the whole relationship, but issuers which go purely on this and don't look at arranger capabilities miss the point. There is more to being a good arranger than just playing postbox for documentation." It is debatable which borrowers do this most. John Delaney, executive director at Goldman Sachs, says: "It is part of a general, broader trend. Lending banks are creating leverage off this type of relationship to win mandates. This is particularly being felt in the US." However, Scott Church, managing director, debt capital markets services at Merrill Lynch, believes it is more prevalent in the European market. Church believes borrowers should look for effective project management from arrangers. He explains that this is achieved by banks with expertise and broad experience of the market. If the knowledge base is there an arranger can assess different situations and take a programme forward in the best direction. Ten years ago Merrill Lynch dominated arrangerships in MTN programmes. Since 1989 it has arranged 170 facilities, almost double that of its nearest competitor, Morgan Stanley Dean Witter, according to MTNWare. However, competition from banks traditionally strong in lending business has been growing in the last few years and ABN Amro and Deutsche Bank have both arranged more facilities than Merrill Lynch so far this year. Church, at Merrill Lynch, emphasises the difference in funding sources between commercial and investment banks which, he believes, leads to an unfair advantage when competing for mandates. He says: "Commercial banks take in retail deposits and have access to interbank markets and central banks. This allows for much cheaper funding. Merrill Lynch, as an investment bank relies solely on wholesale capital markets funding." He continues: "Our mix of business is different from these banks. We simply cannot commit our balance sheet in these situations where our interest margin would be negative." Commercial banks can sometimes set up programmes at a loss, if it means winning a prestigious mandate. Robert Mohamed, director and head of transaction management at Deutsche Bank, one of the largest lending banks in the market, is defensive. Regarding instances where an issuer may choose an arranger based solely on its lending relationship, he says: "Only in a very small number of cases does that happen." He argues that there is no correlation between being a successful arranger and being a lending bank. Deutsche Bank has arranged 45 programmes since 1997. This is significant because between 1985 and 1996 they only arranged 25, according to MTNWare. Mohamed at Deutsche Bank says: "In the last three years the focus of the organisation has been devoted to this particular product, where before it wasn't. It has been created from a thin platform, but we have gone out and performed across the board, and now have a track record to demonstrate this." Joe Azzam, vice-president and director, origination and syndication at TD Securities, the trading name of Toronto Dominion Bank, believes lending banks have to perform in order to stay in the running. He says: "Issuers want quick, efficient execution of their deals. As a bank we have strong lending relationships but despite this we are chosen as dealers because of our performance." The idea that issuers reward lending banks with arrangerships can be extended to their appointment of dealers. Many lending banks admit that it does happen, but suggest there is more involved in the decision than strengthening business ties. Myles McBride, Euro-MTN product management at Salomon Smith Barney (SSB), says: "Dealership awards may have a relationship focus and bank lending can be a significant part of this relationship. But a balance should be struck between core relationship houses and non-relationship banks, which may also be proven Euro-MTN performers, to achieve the best mix. Luckily SSB, as part of Citigroup, is one of the few houses which covers both senarios." Some issuers would admit that their choice of programme arranger is often largely lender relationship-driven. But the reasons behind this are valid. Some borrowers may only have swap-lines through lending banks. Also, in a post-Emu environment, borrowers are increasingly having to compete with each other for dealer attention. In this situation a borrower may rely on lending relationship strengths to pressure dealers to work hard for it. A possibility for the future is that an issuer may use its own lawyers to set up documentation, and in doing so by-pass the need for an arranger. Church at Merrill Lynch considers this would be a mistake since arrangership is about more than mere legal framework. It is important that arrangers can offer strategic advice. Lawyers cannot do this as they do not know the market well. He says: "We need to show issuers that arranging an effective MTN programme is about good project management at all stages."
October 13, 2000
