1 Interfacing With Global Debt Markets Role of the Underwriting Syndicate Mark A. Hadden Managing...

1

Interfacing With Global Debt MarketsRole of the Underwriting Syndicate

Mark A. HaddenManaging Director, Head of Government Finance

March 26, 2015

UNDERWRITING SYNDICATE

ROLES...


ROLES...

MARKET ADVICE


ROLES...

MARKET ADVICE

NEW ISSUE DEAL EXECUTION


ROLES...

MARKET ADVICE


NEW ISSUEPLACEMENT


ROLES...

MARKET ADVICE


NEW ISSUEPLACEMENT

SECONDARY MARKET LIQUIDITY


ROLES...

MARKET ADVICE


NEW ISSUEPLACEMENT


INVESTOR RELATIONS


ROLES...

MARKET ADVICE


NEW ISSUEPLACEMENT


INVESTOR RELATIONS

ANALYTICS


ROLES...

MARKET ADVICE


NEW ISSUEPLACEMENT


INVESTOR RELATIONS

ANALYTICS

RESEARCH


ROLES...

MARKET ADVICE


NEW ISSUEPLACEMENT


INVESTOR RELATIONS

ANALYTICS

RESEARCH

CONDUIT FOR BANK

WHY IS THIS IMPORTANT?

1. MFABC IS CURRENT ON MARKET EVENTS

HELP SHAPE THE DEBT MANAGEMENT STRATEGY

KEEP TREASURY STAFF AWARE OF MARKET COMPLEXITIES

GREATER BREADTH AND DEPTH TO THE MFABC BRAND

2.

3.

4.

STRONG ACCESS TO CAPITAL MARKETS+

LOWER YOUR BORROWING COSTS

Investors Bank/ Dealers Issuers

Investors

DIFFERENT MANDATES -WILL AIM TO BEAT AN ‘INDEX’ AT A MINIMUM

Different types of investors, have different needs and motivations…

Pension Funds

Mutual Funds

Hedge Funds

Government Funds

Bank Treasuries

Insurance Companies

Central Banks

Corporate Treasuries

Ethical Funds

Investors


Different types of investors, have different needs and motivations…

Pension Funds

Mutual Funds

Hedge Funds

Government Funds

Bank Treasuries

Insurance Companies

Central Banks

Corporate Treasuries

Ethical Funds

What’s behind the fixed income investment decision?

View on interest rates

View on monetary policy

Relative Value against other paper

Coupon or dividend cash to deploy

View on a specific credit

View on a currency

Asset reallocation

Positive carry

Geopolitical risks


ASSET CLASSES

EQUITIES

CURRENCIES

COMMODITIES

PRIVATE EQUITY

FIXED INCOME

MONEY MARKET

DERIVATIVES

ETC.....

Investors

Investors


ASSET CLASSES

EQUITIES

CURRENCIES

COMMODITIES

PRIVATE EQUITY

FIXED INCOME

MONEY MARKET

DERIVATIVES

ETC.....

ASSET CLASSES

EQUITIES

CURRENCIES

COMMODITIES

PRIVATE EQUITY

FIXED INCOME

MONEY MARKET

DERIVATIVES

ETC.....

YIELD

%

Investors CAPITAL STRUCTURE

HIGH YIELD/ JUNK

CORPORATES

ABS/ MBS

MUNICIPALITIES

PROVINCIAL BONDS

SSAS

CMB

CANADA BONDS


CAPITAL STRUCTURE

HIGH YIELD/ JUNK

CORPORATES

ABS/ MBS

MUNICIPALITIES

PROVINCIAL BONDS

CMB

CANADA BONDS

YIELD

%

Investors


ASSET CLASSES

EQUITIES

CURRENCIES

COMMODITIES

PRIVATE EQUITY

FIXED INCOME

MONEY MARKET

DERIVATIVES

ETC.....

ASSET CLASSES

EQUITIES

CURRENCIES

COMMODITIES

PRIVATE EQUITY

FIXED INCOME

MONEY MARKET

DERIVATIVES

CAPITAL STRUCTURE

HIGH YIELD/ JUNK

CORPORATES

ABS/ MBS

MUNICIPALITIES

PROVINCIAL BONDS

CMB

CANADA BONDS

YIELD

%

P R

O D

U C

T S

FIXEDFLOATING

CADUSD5YR10YR30YR

ULTRALONG3MOS RESETSAMORTIZING

RESIDSCOUPONSCALLABLEPUTABLEEQUITY LINKED

Investors

Variety of different ‘investor’ classes to choose from

Lots of asset classes to navigate

There’s an entire capital structure to explore

Large spectrum of products to investigate

OUR GOALS(1) Make sure MFABC has a high degree of visibility amongst investors(2) Broaden the ‘buyer’ base(3) Educate investors on the municipal sector and where MFABC fits within that.

Investors

Trading floors - these days are LONG gone !!!

Government Finance

Bond Sales Desk

Investors

Issuers

Banks/ Dealers

*PRIMARY MARKET*

Flow of MFABC debt (PRIMARY)

Bond Trading1. Agency 2. Inventory

Investors

Banks/ Dealers

*SECONDARY MARKET*

Flow of MFABC debt (SECONDARY)

Bond Sales Desk

Government Finance Bond Trading1. Agency 2. Inventory

Investors

Issuers

Banks/ Dealers

*PRIMARY MARKET*

*SECONDARY MARKET*

Flow of MFABC debt (PRIMARY + SECONDARY)

Bond Sales Desk

Banks/ Dealers

CDN Government Credit (C$ Primary Issuance)

0

20

40

60

80

100

120

140

2005 2010 2011 2012 2013 2014

C$

Billio

ns

CDN Government Credit (C$ Secondary Trading *PER DAY*)

Source: Bloomberg League Tables

CDN Government Credit = CMB + Prov + Muni + Other

?How many $millions of government credit paper do CDN dealers trade PER DAY?

Banks/ Dealers

CDN Government Credit (C$ Primary Issuance)

0

20

40

60

80

100

120

140

2005 2010 2011 2012 2013 2014

C$

Billio

ns

0

2

4

6

8

10

12

2010 2011 2012 2013 2014

C$

Billio

ns


Source: Bloomberg League Tables Source: IIROC trading statisticsCDN Government Credit = CMB + Prov + Muni + Other CDN Government Credit = CMB + Prov + Muni + Other


Banks/ Dealers

0

2

4

6

8

10

12

2010 2011 2012 2013 2014

C$

Billio

ns


Source: IIROC trading statisticsCDN Government Credit = CMB + Prov + Muni + Other

What The Street Holds Primary Dealer Positions By Asset Class (US$ Bln)


Source: NY Fed, Haver Analytics

Banks/ Dealers

What this means….

Trading levels remain elevated

…but dealer balance sheet limitations and inventory costs are becoming more difficult

Regulatory/ Compliance related issues are negatively impacting inventories too

Growth of issuance versus dealer limitations – will be an important test for liquidity.

What The Street Holds Primary Dealer Positions By Asset Class (US$ Bln)

Source: NY Fed, Haver Analytics


Banks/ Dealers

0

2

4

6

8

10

12

2010 2011 2012 2013 2014

C$

Billio

ns


Source: IIROC trading statisticsCDN Government Credit = CMB + Prov + Muni + Other

Secondary Trading Characteristics

Ontario is the most traded (~C$3.5Bln traded per day).

Ontario is the bell-weather, with most CDN government credits referenced against it (yield versus yield)

Ratings are bucketed by capital structure, pricing (by yield) follows.

MFABC’s ratings, brand exposure, investor depth, and size helps position itself as a hybrid between provincial and municipal paper.

Banks/ DealersBonds trade on a price basis BUT for simplicity they’re generally evaluated on the spectrum on a yield basis

05

1015202530354045

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015

BASI

S PO

INTS

MFABC Spread Relationships (10yr term; basis points)

NBMFC-NB MFABC-ONTARIO MFABC-BC

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2010 2011 2012 2013 2014 2015

MFABC 10yr Bond Yields

MFABC Secondary Trading-Borrowing costs continue to drive lower, alongside global interest rate markets-MFABC bonds trade at the strongest end of the municipal spectrum, also trading stronger than some provinces.-MFABC debt continues to trade with reasonable liquidity

Banks/ Dealers

Fluent primary and secondary markets remain important for MFABC performance.

Liquidity is becoming a greater challenge for banks/ dealers.

Trading volumes remain elevated, however pressure on inventories remains a concern.

Strong commitment by the banks/ dealers to have MFABC bonds trade with a high

level of exposure and profile (domestic and international)

OUR GOALS(1) Provide liquidity and market making for MFABC bonds(2) Continue to educate the market on the MFABC brand(3) Focus on initiatives to reduce borrowing costs for MFABC(4) Help to design approach strategies to funding in the market

Issuers

Background

Majority of government credit deals are underwritten.

Transaction time from start to finish is 10-15 minutes.

Issuers are generally planting ‘buzz’ in the market to better understand investor demand profile (happens 1-3 weeks in advance).

The treatment of ‘large sized’ orders is taking on greater concentration within the issuer community.

Over the last few years, deals are seeing greater international take-up.

The process takes 10 minutes start to finish

CAPITAL STRUCTURE

HIGH YIELD/ JUNK

CORPORATES

ABS/ MBS

MUNICIPALITIES

PROVINCIAL BONDS

SSAS

CMB

CANADA BONDS

I S S

U E

R S

P R

O D

U C

T S

I S S

U E

R S

FIXED

FLOATING

CAD

USD

5YR

10YR

30YR

ULTRALONG

3MOS RESETS

AMORTIZING

RESIDS

COUPONS

CALLABLE

PUTABLE

EQUITY LINKED

Purpose

INFORM investors about the issuer’s storyGOAL is to entice buyers and lower borrowing costsINVESTORS CONCERNS that need to be addressedBROADEN the base of global investors is a core program objectiveTHANK THEM for their time and support of the borrowing program

Give

UPDATE on the issuer’s storyFORWARD OUTLOOK on finances of the issuerBORROWING strategy education

Receive

FEEDBACK on the issuer’s story and outlook COMMENTS AND IDEAS to help with the borrowing strategyAPPRECIATION for your time discussing the issuer’s program in a closed setting.

ROI~$3,000

~$900,000

Value of ONE 10yr basis point on $1B

program

IR Trip Cost

Reach a broad range of investors, and it’s cost effectiveUseful for developing contactsFormal Q&A often limited to a short time frameRaises the public profile of the issuerShould be followed by numerous one-on-one discussions

Often the best way to make a solid impression for the creditInvestors appreciate the initiative to attend meetings face-to-faceDialogue tends to be quite open. This contributes to the building of

credibility between the investor and issuerIt takes added logistical efforts to book several meetings

Having an IR pitch on your website is a great convenience for investors to learn about the credit

An active list of bond debentures in the market is helpful too for those looking up securities

Credit ratings reports readily available are appreciated by investors – at a minimum the ratings themselves.

Any financial statements are an asset to making the lives of investors easier

Cost effective way for meeting investors and answering any questionsCan cover a variety of clients in a short period of timeGenerally convenient for investors as any cancellations don’t have a

large impact on either one’s day

In Person Meetings

Phone One-on-Ones

Conferences

Website

The ‘issuer’ field is highly competitive, both in terms of names and products.

Contact with investors is key towards positioning yourself for sector outperformance.

Investor relations work requires a ‘cyclical’ approach, and a structured strategy.

Investor relations work typically has a significant skew when comparing cost versus potential rewards.

OUR GOALS(1) Help to design an effective investor relations strategy(2) Help to identify opportunities for MFABC to meet new investors(3) Advise the MFABC on how to best educate the market about the product.

Issuers

Conclusions

The underwriting syndicate works with MFABC to enhance profile and lower their cost of funds.

Fully functioning primary and secondary bond markets ensure (1) fluent access to funds, and (2) investors return to the product following a positive experience.

Potential capital markets headwinds comes from thinner liquidity and regulatory pressures on the banking sector

The issuer landscape remains highly competitive. MFABC has been rewarded for their investor relations strategy, distinguishing themselves from the issuing community.

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