Brazilian investment banks are dealing with plummeting fees and extremely bearish prospects for 2009 by chopping staff and bonuses. Meanwhile, the US shops that appeared with such fanfare over the last 18 months are under significant strain some went under, others were sold at distressed levels and their commitment will be seriously tested.
That fees will get slammed, no-one doubts. One senior investment banker predicts fees would drop by 70%-80% from the high point of 2007, which is when many of the expanding US shops were staffing up to seize.
Jean-Marc Etlin, executive VP, at Banco Itaú BBA, whose parent bank is planning to merge with Unibanco, is slightly less pessimistic. He expects fees to fall 40%-50% between 2007 and 2009. This year will see fees fall some 20% against last year with a further downturn of 30%-40% in 2009, he believes. You have to remember that deals this year were big. Vale and OGX fees were equivalent to as many as 25 small IPOs, which were more prevalent in 2007, he notes.
Itaú is likely to escape as one of the least scarred, thanks to its historic Brazil focus, balance sheet and established relationships. And the announced tie-up with Unibanco will give it a further leg up say rivals. They add, however, that the Unibanco team may be vulnerable to cuts from overlaps. Etlin, who knows the Unibanco team well, says it was too early to comment on the possible composition of any merged team, as of mid-November.
Elsewhere, fattened up teams are rapidly being slimmed down, with large groups at UBS and Credit Suisse already trimmed and Merrill Lynch looking vulnerable. After the global collapse of standalone investment banking, Goldman Sachs and Morgan Stanley also appear highly challenged.
Compensation which went up in a straight line and for some areas surpassed New York will deflate in line with a global investment banking correction. Junior staff are likely to be particularly affected, according to São Paulo-based Ademar Couto, director of financial services at headhunter Ray & Berndston Brasil. He anticipates bonus cuts of some 30% for senior staff
Those lower down benefited from staff shortages in 2006-2007 and received hefty bonuses last year, with associates making packages of $500,000-$600,000. These could be slashed by 50% or more, Couto notes, adding that the pattern will vary from house to house and that there are still firms seeking selected talent.
The collapse in equity capital market volume in the second half follows rapid changes in the rankings of the top investment banks. That means some will hurt more than others.
UBS Pactual, the top ECM performer in 2007, according to Dealogic data, has been mauled in rankings this year and placed seventh, versus top last year. To be fair, its absence on the blow-out deal by Vale in July which raised $12.2 billion hurt rankings, but the firm has been involved in only one of the top 10 deals this year, that of OGX.
The bank has already seen three significant team walk-outs this year, culminating in the loss of Pactuals André Esteves, former head of UBS LatAm investment banking, confirming simmering tensions between the UBS and Pactual teams. He extracted a unit of 12 to create his own shop, BGT, which debuted by flipping part of the Lehman carcass to Standard Chartered in November.
But after the huge drop in market share and global instability, prospects may actually be looking up for UBS, say rival bankers. A policy of lock-ins for Pactual staff that last as long as 2011 should prevent further losses, and walk-outs have helped to right size the investment bank in Brazil, says an ex-team member. Furthermore, the most acute phase of troubles at the parent appear to be ending.
Elsewhere, Credit Suisse has held up better than its Swiss rival both in terms of ranking and staff walk-outs. The firm placed second in ECM for 2008 until the end of October, the same as for the whole of 2007, according to Dealogic, losing out only to Itaú BBA and had more control over departures, although it too saw senior staff leave for Merrill earlier in the year.
The problem is that part of the reason for retention is Credit Suisse has been paying 30%-40% above market levels, according to Couto. It is now having to shed senior staff that could damage its franchise, say rivals.
Losses include Roberto Attuch, a senior analyst was who ranked number two in banking for Brazil, and Rafael Pagano, head of Brazil ECM. These are key people and will certainly raise eyebrows with clients, says the banker.
Credit Suisse is already drawing criticism for the rotten performance of its IPO spree, and has also been struggling with the large number of foreign exchange derivatives contracts that it sold to clients. It was one of the banks that sold such contracts to Aracruz which has paid $2.13 billion to unwind them. Credit Suisse declined to be interviewed by LatinFinance for this story.
The other big cloud hovers over Merrill Lynch, which has made little impact in either ECM, failing to feature in the top 10, or M&A, despite hiring aggressively in Brazil.
I dont believe in the Merrill structure the way that it is now, says Couto. He says that aggressive and expensive hiring with guarantees positions the shop poorly in a shrinking market. Furthermore, expansion was carried out by combining senior team members from different firms, which makes the team-building process more delicate and prone to failure.
The Brazilian business also has a relatively limited palette of products to offer corporates at a time when the latter are having to be creative to close deals and need balance sheet support, adds a rival banker. Lastly, the Bank of America take-over of Merrill sparks negative speculation about the future of the investment banking arm in LatAm.
Alexandre Bettamio, head of investment banking for Brazil at Merrill Lynch in São Paulo, says that the firm is in Brazil for the long term and has full support from top management. Indeed, CEO John Thain recently cited Brazil as a key market for development, though he also notes the risks of emerging markets generally. And Merrill is heard to be discussing adding a wider loan platform to support its investment banking business in LatAm.
However, other than the blatant culture clash, Bank of Americas use of balance sheet in the region has dwindled to next to nothing over the last five years, along with its apparent interest in Latin America. And there have been persistent rumors of a sale of the Merrill unit, which competitors see as expensive and underworked.
Other investment banks have less far to fall, principally as they were unable or reluctant to build during the go-go years. JPMorgan, which has a team of some 20 in investment banking, has come third in ECM to the end of October according to Dealogic. It will only need to dismiss staff in a protracted downturn, says an insider.
Markets Firmly Closed
Bankers agree the first half of next year will extend the recent ECM and DCM drought. They expect a slight recuperation only in the second half, kicked off by follow-ons and very large, liquid IPOs.
The largest, safest companies will lead a market re-opening with smaller companies probably locked out for the next 12-18 months, predicts Etlin. Markets will slowly re-open for large companies with good and proven cashflow, agrees Nicolas Aguzin, head of LatAm investment banking at JPMorgan. Brazil will see fewer than 10 equity deals next year, concentrated in the second half, raising $3-$4 billion in total, he predicts.
Next year primary equity volume will retreat from levels of 2007 and fall between those of 2005-2006, says Bettamio. He is more optimistic about the speed of the recovery, although even he concedes that most of the activity will come in the second half.
Sectors will be unevenly affected. Those that were hottest in 2006-2007 and flooded the market will not return any time soon. Is 25 a reasonable number of listed real estate companies? 2007 was off the charts, says Etlin. It is not only smaller companies, particularly in areas that were hot, that will be hard hit. Mining and commodities will see much less activity as expansion plans are slashed with the downward adjustment in prices.
M&A has been one of the bright spots, and some bankers note a decent pipeline of deals to close over the next quarter. The proposed merger of Itaú and Unibanco shows how large deals can still get done, says Bettamio. He believes companies are still acquisitive as they are looking to achieve synergies as well as scale and diversification at a time where cost control is key.
Fuelling the trend is the number of small and flimsy firms that went public but now need to consolidate. And the ability of Brazilian firms to buy cross-border will return once global markets stabilize, say bankers.
Still, Itaú and Unibanco used no investment advice at all, at least in the initial phases of their discussions. And Aguzin cautions that the exuberant start in M&A to the last quarter is not reflective of the real environment. Asset prices are depressed and there is little financing, he notes. Some deals will be done through share transactions as companies hoard cash while the credit crunch persists.
M&A boutiques, who have long been hobbled thanks to their inability to offer financing, and can offer lower fees, may benefit. This is a good moment for us and we have seen demand increase, says Plinio Chapchap, a professor of finance at the Profins Business School and M&A partner at Queluz Gestão de Ativos, a boutique asset manager and corporate advisor.
The next year looks like being the mirror image of the last two years of exuberant run-up in markets, team sizes and staff pay in the Brazilian investment banking industry. Those most likely to suffer are those that most benefitted before: junior staff in the most aggressively growing foreign shops, whose commitment is being strained to the limit.