The first - Ford Motors telling their investment banks that in return for lucrative mandates for bond and equity issues they will be expected to provide credit facilities as well. The clear message - no loans, no bonds or equity deals.
The second - four banks (ABNAmro, Deutsche Bank, Goldman Sachs and UBS Warburg), bidding for a $10 billion bond mandate having already provided $7 billion floating rate bank debt for Unilever with almost no front end fees. The financing was to partially refinance the $22 billion term loan used to finance Unilever's acquisition of Best Foods.
On the surface it is a victory for the one-stop shops offering a plethora of banking products. Stand-alone investment banks can no longer cream off the profitable capital market products without putting the low margin loans on their balance sheet. The financial supermarkets can do it all for you.
Bond subsidy
But wait a second and think about it. Is it really a win-win situation for them? I think not. What it means is that these institutions will be giving up the fees which they would normally charge for arranging such large loans to get the bond mandate. In effect the loan guys will be subsidizing the bond product. How long do you think this can go on before they ask for a share of the bond fees?
To carry the trend further, the customer says "do the bond deal for me because I will give you the equity deal where you will earn a much higher underwriting fee". Both products become less profitable, and the clear winner is the borrower who has effectively lowered his overall financing costs.
This is unfortunately a trend that will accelerate in the future. As the old economy companies come under pressure to improve performance, they are looking around to see what they can do to reduce costs. They can only fire so many people without effecting productivity. The various B2B product exchanges are enabling them to be much more efficient in terms of their purchase of manufacturing input. They are all now zeroing in on their banking costs and saying to themselves why should that be immune? How do I reduce my overall banking costs?
The internet is already helping them to reduce their trade finance costs and manage their cash more efficiently, as it enables them to track their funds flow and reduce the floats which the banks used to get. The various exchanges that are being set up will enable them to get the best foreign exchange or interest rates without calling up a dozen banks.
Ground shifting
For investors the ground rules are also changing. Instead of calling various banks to get quotes on bonds or other investment products all they have to do is go to the various exchanges set up as joint ventures by the banks themselves and get the best price.
Next will be the fund raising. The trend started by Ford and Unilever is just the beginning. Other companies will follow them. The internet will enable them to do comparison shopping for all of their financial products, including fund raising. This means that if loans can be distributed cheaper and more efficiently over the internet then the company can unbundle its financial product needs and shop at the most efficient provider - "if you offer me cheap loans, I will give you the bond mandate, even though you might not be the best deal in town".
By unbundling they will get the cheapest loans and also the cheapest bonds or equity. For high-grade borrowers it makes no sense to pay banks to arrange syndications for them. Effectively they bring in their relationship banks. They could do it much cheaper over the 'net and achieve wider distribution.
Best of all worlds
This might of course seem to be a simplistic view of what is likely to happen. But just think: if a Japanese bank is willing to offer you loans at Libor or sub-Libor, as they did recently for NTT DoCoMo, you take that and then take the cheapest offer on the bonds. You get the best of all worlds.
Of course banks will argue there is a relationship involved, and borrowers will go through the motion of saying they care about long term relationships, but when your stock is not moving and you are under pressure, guess how long that relationship is going to last? As anyone who has been in this business will know, what the relationship will do is get you a chance to match the lowest offer, not get you the deal because you offered them a cheap loan. You are not the cheapest on the bond and your competitor's capability is just as good as yours.
What is this going to do to the world of investment banking over the next five to 10 years? The next few years are going to be interesting. Keep watching this space!
Mr Syn is a highly respected banker with years of experince in the Asian syndicated loan market.
