RBC: Nothing out there to shut deal market, although event-linked volatility to continue

By Paul Deckelman

New York, May 13 - Last week's wild financial market gyrations - which saw a sharp fall-off in high-yield primary issuance and the abrupt postponement of several deals, as well as a heaviness in both the junk and the bank debt markets, as equities plummeted around the world - were likely a one-off event that probably won't be repeated, and so the capital markets look to remain open to borrowers, in the opinion of executives at RBC Capital Markets Corp.

The continued vigor of high-yield primary issuance and syndicated loan issuance is, in turn, good news for RBC, as Royal Bank of Canada's investment banking arm seeks to aggressively expand its share of the underwriting pie in both markets, bolstered by a string of major new hires from other financial companies.

The massive sell-off in the stock market, which spilled over into the debt markets, "was an aberration," declared James S. Wolfe, a managing director and the head of U.S. leveraged finance for RBC, in an interview with Prospect News.

Meanwhile, the worsening debt situation of European nations in general and Greece in particular, which fed investor angst and which overhang both the equity and debt markets, "is not a new issue - it's one that's been ongoing."

Markets to keep lending

He called the nearly $1 trillion rescue package cobbled together by the European Union and the International Monetary Fund "the European version of TARP," referring to the Troubled Asset Relief Program which the U.S. government put in place in late 2008 to steady the then-eroding financial markets.

Wolfe added that the European package "clearly" had "provided some stability," as evidenced by the financial market recovery seen since Monday.

While cautioning that macroeconomic concerns would certainly continue to produce volatility, "our view is that there's nothing out there that we think is going to close the market."

While several high-yield deals in the market were heard to have been postponed last week due to unsettled conditions - offerings from Essar Steel Holdings Ltd., Americold Warehouse Investment Portfolio LLC, Penske Automotive Group, Inc. and Jones Apparel Group Inc., the latter deal shelved within just hours after having been announced - Wolfe opined that it wasn't so much that the companies couldn't have gotten those deals done, but "rather, some of those were opportunistic and in the face of the volatility, chose not to price a deal and chose to wait it out."

Once the storm blew past, he said, "the market opened and quickly recovered over the weekend events...people are back launching deals, and deals are pricing, and so I do think that was a sort of isolated week in terms of the volatility."

Little loan volume impact

In the leveraged loan market, Wolfe's colleague, Miguel Roman, a managing director and the head of U.S. loan capital markets global syndicated and leveraged finance for RBC, saw no major impact on loan volume, noting that most of the carnage in equities and junk had taken place May 6 and to lesser extent, Friday, "and you rarely launch bank deals on a Friday, so by and large, the week was set before this volatility set in."

Roman pointed out that last week, RBC was launching the financing for Triumph Group Inc.'s $1.5 billion acquisition of Vought Aircraft Industries Inc. - it is the lead bank on the financing deal, which is expected to include a term loan portion and a junk bond offering - "so we were mindful of what was going on."

Even so, "we ourselves did not perceive any need to delay our launch of our deal, and I doubt anybody else did" for their own respective transactions, he said.

On the buyside, he continued, "accounts have continued to commit to deals. We're hearing from accounts. They're open for business, they're committing capital. Some of them are viewing [market gyrations] as a buying opportunity, very vocally they have said that to us."

At the same time, he said that some accounts, made nervous by the volatility, "have indicated that they want a higher return on certain transactions." But this week, "again, those accounts we've talked to seem to feel pretty good about the way things are going."

Opportunity knocks for RBC

Meanwhile, Wolfe, Roman and their colleagues are feeling pretty good about the progress which RBC - already the dominant financial institution in Canada - has been making over the last few years in extending its reach southward into the United States and into the rest of the world, particularly Europe, as well.

Fortuitously, when the credit markets crashed in mid-2007, RBC, Wolfe said, "had very little, if any, LBO exposure, and we were never in the mortgage business, so as a result of that, we had a very clean balance sheet."

With most of its potential rivals suddenly running into trouble from these areas, RBC was "able to utilize our balance sheet to aggressively take market share in a market where there's very few, if any, people still providing true capital commitments."

That, he said, enabled RBC to get a foot in the door with "both corporate clients and sponsors. Quite frankly, in a more robust market, with the likes of the other major bulge bracket firms, if they were in the marketplace, it would be more difficult, obviously to get a shot at leading a deal for these firms."

By providing or lead-arranging the financing for big acquisitions, such as TPG Capital's purchase of Axcan Pharma Inc., Apax Partners' acquisition of Qualitest and Vintage Pharmaceuticals, both in 2007, and Apax's 2008 purchase of TriZetto Group Inc., "we were really able to cement very strong relationships with, obviously, top-tier firms," he said.

At the same time, with many of its investment-banking rivals looking to downsize operations in the face of reduced revenues and earnings, or, in some cases, actual red ink, and others such as Bear Stearns and Lehman Brothers going away altogether as independent entities, RBC set about expanding both its banking and research staffs by hiring people let go by those firms or choosing to leave them, allowing it to begin doing deals in sectors in which it had previously not had much of a footprint.

Of the 13 "core" industry groups in which it does investment banking work, "many of these didn't exist for us just two years ago," said Wolfe.

In most cases, the new hires have long-standing banking relationships with major companies RBC has not dealt with before, using these ties to bring new business its way.

"The key to our moving up" in the investment banking ranks, he said, "is the quality of our bankers." Since January 2008, RBC has hired more than two dozen of what it terms "pedigreed" managing directors in various areas from other banking institutions, most recently recruiting Michael Meyer, formerly of Bank of America Merrill Lynch and now an RBC managing director and head of high yield and loan sales and trading. Wolfe termed it "a huge hire."

A bigger piece of the pie

With well-connected new arrivals on board and many of its competitors still retrenching after nearly three years of industry turmoil, and by aggressively seeking business in new areas, RBC is trying to make more of a name for itself as a serious player in corporate finance.

For instance, according to statistics provided by the company as part of its promotional materials, it moved up in the rankings among managing underwriters for North American syndicated loans, from 10th place in 2007 to sixth place last year; on a percentage basis, market share rose to 3.43% in 2009 from 2.40% in 2007. Still its overall underwritten loan volume tumbled by about two-thirds, to $17.1 billion from $50.2 billion in 2007, as industrywide leveraged loan volume swooned by more than 75%, to $498.8 billion from $2.09 trillion previously, due to the lingering effects from the credit crunch.

Underwriting top dog JPMorgan's 2009 loan volume plummeted to $99 billion - less than one quarter of 2007's $442.9 billion.

The anemic 2009 stats are likely to improve this year, given the strong pickup the corporate debt markets have experienced since the latter part of last year.

"Sitting here a year ago," Wolfe declared, "never did we expect that we would be where we are today in terms of aggregate volume and leveraged [debt] levels.

"It's been quite a remarkable year, obviously, in terms of the events that led the market down, and quite frankly, we're amazed in terms of how quickly it snapped back."

'Safer' LBOs make a comeback

While much of last year's activity, and this year's, in the high-yield and leveraged markets has centered around refinancing soon-maturing debt - this is particularly true in Junkbondland - another, growing driver of demand for new paper has been the pickup in both corporate-to-corporate acquisition activity and leveraged buyouts, particularly the latter, which had dried up once the credit crunch hit.

They re-emerged last year - and RBC, which in 2007 had minimal LBO exposure, was in the thick of things, snagging lead roles in five out of the Top 10 2009 global LBO deals. And there promise to be more such transactions this year, with acquisition financing of all sorts expected to account for a bigger share of the proceeds of bond and loan deals than they did last year.

Roman said that RBC has "a good mix" of corporate-to-corporate deals versus LBOs, adding that unlike the bad old days in the pre-credit crunch of the mid-2000s, when many aggressively structured LBO deals had as little as 20% to 25% equity versus the rest in debt - and a few didn't even have that - loading the acquired company up with leverage, "it's a new generation of LBOs," with equity requirements of at least 40% to 50%. "We're far away from the heyday of '06 and '07."

The newer transactions "are safer, from the point of view of the ability of the issuers to repay their obligations.

"We want to make sure transactions we participate in and that we lead are going to be successful in the future. We all have to learn the lessons of the last three years in terms of not overdoing the leverage in transactions."

Deal flow to continue

Wolfe cautioned that "we expect that there will be volatility going forward, no question. By no means is the U.S. economy out of the woods in terms of what's going on here, both in the U.S. and in terms of a global perspective."

However, he said that even if there is continued volatility in the financial markets driven by external events, "I think the market is always going to be open for high-quality deals," although there could be less of a window of opportunity "for the smaller companies, the smaller deals, the more aggressive structures."

For instance, he said that a dividend deal "is clearly much more of a market-timing deal in terms of investor receptivity to buy deals from a use-of-proceeds perspective."

Roman added that "existing issuers, well-known issuers, sector and quality of management will weigh in tremendously in terms of cost of capital and the ability to access markets. If you're a brand-new issuer, whether it's a loan or bond market issuer and your rating is challenged, obviously the story needs to be explained and told [to investors]. It's a little more challenging in a down market or in a volatile market, to access markets."

But overall, Wolfe said, "we feel pretty positive as we look forward in terms of the health of the financing markets," although whether the more aggressive deals can get done "will be dependent on what's going on in the market in that given week, both from an access-to-market perspective as well as a cost-of-capital perspective, in terms of what it's going to take to get investors to buy that particular deal."

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