The stormy derivatives and trading market has rattled the shutters at Bankers Trust New York Corp., drawing attention away from its solid foundation.
Or so says Duncan P. Hennes.
As managing director of treasury and funding, it is Mr. Hennes' job to remind investors of the bank's strengths. And he has been responsible for some of the few visible successes the bank has scored in recent months.
A mere two weeks after the bank declared a $125 million first-quarter loss, the 38-year-old Mr. Hennes brought to market $150 million in the bank's seven-year bonds. "A lot of people questioned why we would enter the market then," said the intense but soft-spoken Mr. Hennes.
But the issue was a success. And less than a month later, investors snapped up a set of 10-year bonds at approximately the same price, indicating a genuine appetite for the company's paper.
"I think the deals have demonstrated that they can issue paper," said Ethan M. Heisler, a fixed-income analyst at Salomon Brothers Inc. "And the market, at some price, will be receptive to them."
But now Mr. Hennes really has his work cut out for him. Already beset with widely publicized problems in the risk management and trading operations - the two business lines that accounted for 53% of earnings in 1993 - the bank has had to contend a spate of downgrades by rating agencies.
On Friday, IBCA Inc. became the latest rating agency to lower debt ratings on Bankers Trust, a little over a week after Moody's Investors Service took similar action. Downgrades raise the cost of funding at the bank, because investors demand higher returns for lower rated companies.
Thus it appears Mr. Hennes and his team of approximately 50 in the bank's treasury and funding department will have to work that much harder if they hope to continue issuing long-term debt at the pace of the last year. Since April 1994 the bank has issued $3.436 billion of new long-term debt.
In an interview last week, Mr. Hennes said the effects of the downgrades so far will have only marginal effect on the bank's cost of funds. What's more, Mr. Hennes argued that the rating actions were unwarranted and did not reflect the financial foundations and discipline of the bank.
"We come across as being aggressive when in fact we're conservative," said Mr. Hennes. The former Arthur Andersen accountant said Bankers Trust exercises conservative practices in accounting, capital liquidity, credit risk, and the mobility of risk.
As an example, Mr. Hennes pointed to the stability of Bankers Trust's securities valuation allowances as compared to those of its peers.
Mr. Hennes said the rating agencies are too focused on the bad publicity. The rating agencies appear to be fixated on how many phone calls they are going to get the next time Bankers Trust is in the news, and are wondering how they are going to be second-guessed, Mr. Hennes said.
"The ratings focused on the results over a very short period of time, and didn't take into account enough of the traditional financial measures," said Mr. Hennes.
The rating agencies acknowledge focusing on the myriad negative headlines about Bankers Trust - but argue it is appropriate to do so.
"We are trying to look through what the headlines are saying," said Tanya S. Azarchs, a director of financial institutions at Standard & Poor's Ratings Group.
"It's not so much the headlines, however, as it is what effect they might have on their business that's important," said Ms. Azarchs. "Whatever the truth of those allegations, the impact could be very real."
In fact, while analysts generally agree that the longer-term volatility of the risk management and trading operations gives the downgrades merit, some point out that downgrades in and of themselves can affect the cost of business for the company.
"When rating agencies lower their ratings, it puts pressure on the bank," said Mark Gross, a senior vice president at IBCA.
Adding to the current uncertainty about the bank are the recently announced retirement of two of the bank's top executives, chairman and chief executive officer Charles S. Sanford and chief financial officer Timothy T. Yates.
And with the identity of their successors unknown, the bond market continues to value the company as a hybrid of traditional banking and investment bank.
The bank's long-term bonds are trading at a spread over comparable treasury rates that is greater than the average spread for commercial bank debt, but at a narrower spread than is typical for an investment bank. The wider the spread, the more expensive the bond is for the issuer.
Investment banks tend to carry lower debt ratings and provide larger spreads for investors because of the greater volatility of their businesses.
Mr. Hennes argues that Bankers Trust combines the best of both businesses and should be rewarded with a tighter spread, a feat it had achieved in the early '90s, when commercial banks were beset with real estate problems.
While analysts lauded Bankers Trust's conservative funding principles and discipline, they expressed concerns about the bank's ability to generate the same kind of earnings the higher margin derivatives business had brought to the bank.
The bank expects to focus more on the annuity-type businesses, such as investment management and transaction processing. While Mr. Hennes said the derivatives business won't shrink, it will become a smaller part of the overall business mix as other businesses grow.
In the meantime, Mr. Hennes and his treasury team will have to continue to come up with innovative funding solutions, and show the market the bank's financial strength.
Fortunately for Mr. Hennes, the bank has quite a few things in its favor that give him several options in finding purchase funds.
Because of its credible international reputation, the money center bank has been able to access the Eurobond market three times for a total of $750 million this year, and has issued $250 million in its commercial paper program. Since April of 1994, the bank has issued a total of $1.458 billion in the European market.
"The Eurobond market represents a nice diversification of selling paper to other markets," said Mr. Hennes.
In general, Mr. Hennes hints there may be some innovations in store, but he is playing his cards close to the vest. "Just watch," he said with a smile.
