Two years ago, as Micki Hidayatallah scouted potential acquisitions, he knew he needed more cash. But when the CEO of Houston-based Allis-Chalmers Energy Inc. met with RBC Capital Markets, its head of energy banking identified what he really needed: to disencumber the company from a line of credit personally guaranteed by Hidayatallah and his wife.
After a second meeting, RBC CM, a U.S. unit of Royal Bank of Canada, extended Allis-Chalmers a $50 million syndicated line with a lower rate and lighter covenants, replacing the oil-and-gas equipment company's credit line from its existing bank. Since then, RBC CM has financed $700 million in public debt and equity for Allis-Chalmers that has propelled it through six acquisitions. RBC even stuck by Allis-Chalmers during one deal by bridging public debt and equity on its own balance sheet. Hidayatallah couldn't be happier. "They're the best relationship bank," he declares.
How did a Canadian bank swipe a client from a well-known U.S. one? Not through its international presence or knowledge of overseas markets. RBC was simply more geared to small- and mid-cap businesses "than any U.S. bank I've met," Hidayatallah says.
Constrained by their relatively small, high-cost, and crowded home markets, banks from outside the United States are tweaking their strategies to exploit greenfield opportunities here.
Admittedly, it has been a slog. While the U.S. offices of foreign banks have doubled their assets to $2.5 trillion in 10 years and increased business lending by 19 percent, to $337.8 billion, their share of total banking assets is up only 2 percent and their share of business loans has declined compared with 1997, according to the Federal Reserve.
But those statistics miss some of the investment-banking businesses of international banks, such as RBC. Indeed, internationally based banks have taken full advantage of the Gramm-Leach-Bliley Act of 1999, which removed the separation between commercial and investment banking. Many have also snatched up consumer retail branches to complement their corporate banking arms.
And, as the three banks highlighted here — Rabobank International, a unit of Utrecht, the Netherlands-based Rabobank Group; Paris-based BNP Paribas; and Royal Bank of Canada's capital-markets business — illustrate, some banks have made inroads by offering something different in products, vertical industry expertise, and the banking relationship itself.
In fact, were U.S. money-center banks' compulsion to grow overseas to distract them from their commercial businesses here, foreign banks would be poised to fill the breach. Johnny Cameron, Royal Bank of Scotland's corporate banking chief, has stated that, "there are not enough serious corporate banks in America for a country the size of America."
Rabobank: Tilling U.S. Soil
Netherlands-based Rabobank is serious about expanding its stake in the United States. The bank made headlines recently by yanking Tour de France leader Michael Rasmussen from its cycling team for missing drug tests. But to U.S. customers, the banking cooperative is better known for being one of the largest institutions financing food and agricultural businesses, with a portfolio of $15 billion in North America.
Driving growth in the States is the bank's knowledge of agriculture and its familiarity with supply-and-demand swings of the industry, which makes its client relationships sticky. Case in point: Jackson, Mississippi-based Cal-Maine Foods Inc.
Rabobank first won the business of the $598 million producer of shell eggs in 1984, in part by cutting 200 basis points off the company's line of credit, says former Cal-Maine CFO Bobby Raines. But more than 20 years later, Rabobank is still the agent bank in the firm's $40 million revolver. "They stay with you in a loss year; they understand when we have a two-year period when we're not making money," says current CFO Timothy A. Dawson.
Rabobank's agricultural focus has also enabled it to build a mergers-and-acquisitions business in cross-border deals, says Robert S. Bucklin, chief corporate banking officer in North America. M&A is the product that gets the attention of the C-suite, Bucklin says. And although Rabobank's team in the United States is small — just under 20 people — it has advised on some major deals, including Tata Group's $677 million purchase of a 30 percent stake in vitamin-water brand Glaceau.
Going forward, the triple-A-rated bank is forging into credits initially judged too risky — chain restaurants and ethanol production. The moves are meant to counter some slowing in the agriculture and food-processing areas. But don't expect Rabobank's changing portfolio to generate any controversy. "They take small positions [in terms of] their average loan size. They're very careful," says Lynn Exton, a senior vice president at Moody's Investors Service.
BNP Paribas: Financial Engineers
Careful is not a word typically used to describe derivatives trading, but the S&P 500's daily price swings the past few months may make utilizing derivatives prudent.
In fact, Todd Steinberg, head of equities and derivatives for BNP Paribas in the United States, believes that market volatility will drive more companies to use equity derivatives — the options market — to protect against securities-market turbulence. Indeed, equity-derivatives volumes on the CME Group (the options exchange) were up 99 percent month-over-month last August. And Steinberg is poised to capitalize: the global equities and derivatives group is contributing one-fourth of the French bank's revenue.
"A lot of our competitors are pitching equity origination or M&A as their main product," Steinberg says. But U.S. investment banks don't spend resources on developing "the technical aspects of the business."
BNP is doing the opposite. The bank now has 170 front-office people in equity derivatives in the Americas, up from 84 in 2003. In the past two years, BNP's product set has gotten "much more clever" in addressing each situation that calls for equity derivatives, he adds. For example, the bank created an innovative stock-buyback structure for Hewlett-Packard last year that evened out the tech giant's share repurchases to protect against dilution from employees exercising options.
Specialized finance contributes another large portion of BNP's corporate-banking sales. Earlier this year, Capstar Partners LCC, a subsidiary of BNP Paribas's Energy, Commodities, Export Project unit, helped Ormat Technologies monetize its renewable-energy production tax credits and other tax benefits. The transaction was "a complicated deal accounting-wise," says Joseph Tenne, CFO of $269 million Ormat, which builds and operates geothermal-energy power plants. The BNP unit structured the transaction, determined the accounting treatment, and helped Ormat to explain the transaction to its auditors. "They brought in the right investors and we got a very attractive yield," says Tenne.
The financial engineering and complex financing feats by BNP Paribas will come in handy if U.S. companies crank up their use of such services. "You can't just decide one day that you're going to be strong in derivatives," Steinberg says. "The risk-management systems take a long time to build."
RBC Capital Markets: Middle March
Buying, not building, has characterized Royal Bank of Canada's march into the United States. But while the bank's RBC Centura consumer retail arm proclaims "Let's do something giant," RBC Capital Markets is trying to quietly stake a presence among U.S. midsize companies.
"There are close to 12 investment banks trying to focus on the Fortune 500; we felt there was a vacuum in the middle," says Peter de Vos, RBC Capital Markets's head of investment banking.
To fill that vacuum, RBC has performed seven rollups in the past 15 months, including buying Daniels & Associates, a top adviser to cable and telecom. In midmarket M&A, "the difficulty is that you have to have full product capability — you have to be able to loan money," says de Vos. That's where the bank's syndicated and leveraged finance department, which is expanding distribution staff and hiring coverage bankers in the States, comes in.
The improvements have panned out nicely. In 2006, RBC Capital Markets advised on 28 M&A transactions in the United States worth $4.4 billion, boosting it to 19th place in the league tables from 31st the year before. Underwriting for non-investment-grade companies is RBC's fastest-growing business.
For one client, Denver-based MarkWest Energy Partners LP, a $786 million (in revenue) master limited partnership in the energy industry, RBC managed the company's $200 million high-yield debt offering in 2006 and led the credit facility to finance a 2005 acquisition with $500 million in loans. "I communicate with them frequently," says Nancy Buese, senior vice president and CFO. "We have frequent conversations about modeling, credit enhancements, and financing for deals."
RBC stands out from other banks because of its internal coordination and communication internally, especially between the debt and equity teams, Buese says. "If I tell the high-yield guy something, he communicates it to everyone else," she says.
Not surprisingly, the credit crunch could dampen RBC's leveraged-loan and high-yield dealmaking. And RBC is going to encounter some much larger players in midmarket M&A, including Deutsche Bank, Lazard Ltd., and Banc of America Securities (see "No Big Deal"). Nonetheless, RBC's own takeover machine is still humming. In mid-August, says de Vos, RBC was actively looking at investments in three boutique M&A firms.
While corporate customers like Buese make little distinction between U.S.-based and foreign-based banks, U.S. regulators do.
Despite talk of the decline of Wall Street as the epicenter of global financial services, "there are still a number of regulatory and tax issues that retard expansion [of international banks] in the U.S.," says Larry Uhlick, CEO of the Institute of International Bankers.
Among them are a Securities and Exchange Commission rule that lets broker-dealer operations of some U.S.-headquartered investment banks hold less capital in reserve than the U.S. broker-dealer operations of internationally based banks; a proposed IRS law that would prevent international banks from combining the profit and loss of their branches with those of their nonblank affiliates, for tax purposes; and a "safe harbor" rule on the fair-market valuing of securities and derivatives that is unavailable to banks not preparing financials in accordance with GAAP.
For the most part, however, these regulatory issues are surmountable. With their well-designed strategies and customer focus opening more doors than ever, foreign banks are likely to take such minor hurdles in stride.
Vincent Ryan is a senior editor at CFO.