SBU Corporate Finance
Corporate Finance plays an important role in our client focus. Clients are serviced by client coverage teams with specific industry or sector expertise. These teams take care of the corporate finance and banking needs of our clients by offering all products and services of NIBC. Corporate Finance is also an entry point for new clients. Business typically starts with a strategic dialogue which may lead to transactions that are structured and executed by Corporate Finance or other SBUs. The division thus plays a pivotal distribution and client interface role for the bank as a whole. The SBU is managed as a matrix structure, comprised of client coverage teams and product teams which work together to offer integrated solutions. These solutions often comprise more than one element of advisory, risk management, fi nancing and capital markets products. The client coverage teams are divided into seven sectors: Financial Sponsors; Food, Agriculture and Retail; General Industries; Infrastructure; Real Estate; Transport and Energy, and Financial Institutions. Working alongside the client coverage teams are product specialists who are divided into six groups: leveraged finance; advisory; project and asset finance; corporate lending; distressed asset management and debt restructuring; syndications and secondary loan training. As with the rest of NIBC, the geographic focus is Northwest Europe and globally for Transport & Energy. Our foreign offices are an integral part of the SBU.
STRATEGY AND MARKETS
The strategy of Corporate Finance is to:
- be a best-in-class, client-oriented provider of financial services to selected industry
- offer a full range of solutions, combining sector expertise and product excellence;
- achieve growth through value added products, strong client relationships and replication of cross SBU multi-disciplinary solutions.
In 2005 we acted as lead adviser on a number of restructuring and merger & acquisition transactions as well as complex public-to-private transactions. We thus proved our value to our clients, particularly in transactions involving high levels of complexity.
Within the BU Capital Markets, our larger average transaction volume refl ects the growth in non-interest-related income, such as underwriting fees, while the increase in the number of transactions is a mark of our growing success in replicating solutions across the BUs through close teamwork. Our matrix structure fosters greater communication and enhances our business generation ability along the various products. In 2005 we therefore expanded further the range and volume of products and services provided to each client. We succeeded in raising the non-interest component of operating income through more fee-related business.
NIBC attained the following positions in selected sectors and/or products:
Geographically, 2005 marked an important step in our positioning in Northwest Europe with the opening of our office in Frankfurt. Our initial focus in Germany will be in Leveraged Finance, Public Finance Initiatives, and Real Estate transactions.
We pursue international equity capital market transactions through our strategic alliance with Bear Stearns.
Operating income fell by 11% mainly due to lower net interest income (from € 138 million in 2004 to € 116 million in 2005). This was partly offset by higher income from fees and corporate derivative transactions (from € 21 million in 2004 to € 34 million in 2005). Operating expenses rose, mainly due to additional direct cost allocations of shared services and were offset by an additional € 9 million release in credit impairment compared to 2004 and lower allocation of indirect expenses for shared services. The above factors resulted in a reduced operating profit before tax by 9%, in line with the decline in operating income.
We are confident of our ability to continue to increase market share and deal quality thanks to our targeted approach and focus on larger and mid-sized companies and/or transactions. Geographically, we have laid the foundation for a growing presence in Germany. In addition, there will be increased focus on the client sector Financial Institutions, Risk Management products, and debt restructuring opportunities.
SBU Financial Markets
Financial Markets is the trading hub, treasury center and distribution outlet of NIBC. It handles all financial market activities, acting on behalf of clients as well as for the Bank itself. It is responsible for the Bank’s funding, market making activities, securities and derivative trading, global distribution and various arbitrage activities. Financial Markets also acts as NIBC’s provider of seed capital to (credit) fi xed income investment funds, that are managed by boThexternal as well as internal managers(NIBC Credit Management). In addition its performs or coordinates (in situations where certain services are outsourced) the back office operations for all the afore mentioned activities.
The three commercial BUs are organised as follows:Client Marketing and Trading (CMT) is responsible for the global distribution (asset raising and sales of financial markets products), interest rate derivative and credit trading activities.
Treasury and Investment Portfolios (TIP) mainly concerns the Bank’s corporate treasury function and is responsible for funding and liquidity management, money markets trading, management of the bank’s interest rate and currency risks, management of NIBC’s core investment and collateral portfolios and management of(seed) capital invested in (credit) fixed income investment funds.
Structured Finance (SF) is responsible for the management and origination for NIBC’s structured finance transactions. These transactions are performed predominantly in a joint-venture with TIP given the nature of the underlying instruments (repo’s, bonds, derivatives, funding etc.). Transactions, however, are also performed in cooperation with and on behalf of the SBU Corporate Finance.
Financial Market’s strategy is to support NIBC’s businesses in the most optimal fashion by providing it with:
- Low funding costs, sufficient liquidity and prudent balance sheet management;
- Excellent global distribution capabilities, through our own and partner networks;
- Excellent financial risk management, trading and hedging capabilities;
- State-of-the-art structured fi nance capabilities.
Compared to 2004 the operating profit before tax declined 33% as a result of lower income that was slightly compensated by lower expenses. The lower income mainly stems from lower revenues in credit and interest activities, reflecting the low credit spread and interest rate environment in 2005. The decrease of operating expenses by 6% is a result of cost control as well as the transfer of staff to the SBU Investment Management. The latter is in line with the 42% increase of the credit-related assets under management by Investment Management. Return on economic capital before tax remained stable at 24% with lower operating profit being compensated by lower capital usage. In 2005 a number of large transactions was distributed to investor clients on behalf of other SBUs. The largest transactions concern the residential mortgage securitisations and the structured credit securitisation Belle Haven II.
We foresee no easing of the spread tightness in credit markets. Such aggressive market conditions will make it difficult to achieve trading gains on our long biased investment and trading portfolios. We therefore expect that this part of our business will contribute less to this year’s revenue than in 2005. The interest rate derivatives business, however offers slightly greater potential. To support NIBC’s growing securitisation eff orts (five active issuing platforms) and fund platform (both debt and equity funds), we will expand our distribution capabilities significantly. Hiring eff orts will take place across most of our offi ces.
SBU Real Estate Markets
Securities and investments based on real estate loans are an important growth area for NIBC, and one in which NIBC has a strong track record and state-of-the-art expertise. To strengthen development in this area, real estate and ABS related knowhow and products are grouped into a new SBU: Real Estate Markets.
Real Estate Markets is organised in five commercial and two non-commercial BUs, created around the key activities Commercial Real Estate Finance, Residential Mortgages and other Securitisation and Fund Development initiatives.
Commercial Real Estate Finance is active in origination and execution of commercial real estate finance and is responsible for the CMBS warehouse and exits through the capital market.
Residential Mortgages focuses on originating and securitising Residential Mortgages. These mortgage loans are originated via selected business partners and subsequently securitised in the well established Dutch MBS program.
Securitisation and Fund Development is offering securitisation and fund solutions for pools of (non-real estate) loans and other assets for third parties and internal bank clients. Furthermore Securitisation and Fund Development incubates principal finance programs for new asset classes.
STRATEGY & MARKETS
The strategy of the new SBU is to originate or buy assets – ranging from Commercial Real Estate loans to Residential Mortgages – structure portfolios and sell them off to investors. The guiding principle is to originate with the sole purpose of selling the asset on, thus creating balance sheet velocity. Commercial Real Estate focuses on investors and follows them increasingly outside the Netherlands. Currently many of them are looking at the Northwest European market, in particularly Germany. Over time NIBC targets to attract and service an additional client base in Northwest Europe.
Residential Mortgages further expands the position in the competitive Dutch residential mortgage market by increasing product offering as well as the number of distribution parties. Besides, opportunities in Northwest Europe are explored in order to introduce the Residential Mortgage Principal Finance concept.
Securitisation and Fund Development will focus on executing securitisation transactions and will co-develop funds for either corporate clients or NIBC’s asset base. Goal is to maintain fees within the bank and pro-actively provide the client base with new ideas based on international market trends.
Compared to 2004 the operating profit before tax increased with 19%. Operating income increased with 25% whilst operating expenses increased with 17%.
The higher operating income reflects increases in interest income and trading income. Although mortgage rates are highly competitive, interest income has increased due to an above average portfolio size. Trading income benefited from the high level of refinancing, the satisfactory level of new origination and the over € 5 billion of securitisations.
The growing number of staff, further investments in operations and costs related to set off the downgrade related consequences for NIBC’s securitisation business, caused the 17% increase in Operating Expenses.
The Commercial Real Estate market is mainly financed with traditional banking loans. Introducing financing based on capital market exit might prove to be an attractive alternative. New asset financing opportunities, such as housing cooperationsand healthcare, may come to the market driven by draw back of the government. The fragmented market however requires intense research and a selective approach.Both competition using the principal finance model and the number of CMBS issuers are increasing. Notwithstanding this competition, 2006 credit spreads are expected to remain on the 2005 level caused by a strong demand for quality assets and diversification. Investors focus mainly on retail, residential and prime offi ce locations.
The Dutch residential mortgage market is maturing and has over the past couple ofyears been driven by refi nancing. The market is under pressure by a combination ofincreased (foreign) supply and the urge to maintain volume by Dutch competitors. An additional trend is the shifting of distribution power from banks to packagers, large broker organisations and centrally managed high street mortgage shops. Finally on the regulatory field the new Financial Services Act will improve transparency, professionalism and quality of advice; the political pressure to further restrict or abolish tax deductibility will thereby continue. Due to these market dynamics, profitable growth initiatives will come from target group products.
The European market for structured products is quickly developing. However, the market is not yet fully mature and a lot of opportunities to launch new products or take on new roles in this market. Securitisation and Fund Development will accelerate asset and investment management activities, by leveraging expertise beyond balance sheet capacity with a diversity of funds, ranging from securitisations, leveraged credit funds to equity funds.
SBU Principal Investments
Principal Investments provides mezzanine and private equity financing to companies based in Northwest Europe (particularly the Benelux, Germany and the UK). We have developed a compelling track record in this market. Principal Investments invests in companies with a sustainable competitive advantage and predictable free cash flows, in partnership with management. We consider ourselves very fl exible in structuring investments and are able to use mezzanine and equity securities alike. Principal Investments had a good year in 2005: we reported an all time high operating profit before tax of € 55 million and a comprehensive result before tax of € 93 million. Both mezzanine and equity investments performed especially well. The portfolio of non-core investments was reduced by an amount exceeding budget and the fi nancial performance of the remaining investments far exceeded 2004.
The European private equity and mezzanine markets have become increasingly competitive during the past two years, particularly the very crowded leveraged buy-out market. This has led to substantially higher acquisition multiples and highly levered capital structures. In this environment, our demonstrated ability to fi nd investment opportunities on a largely proprietary or negotiated basis proves extremely valuable.
The relationship with other NIBC SBUs continued to be very close and fruitful in 2005, resulting in several attractive investment opportunities. Based on this relationship and Principal Investments’ own network, investments with an aggregate amount of approximately € 160 million were consummated. Given Principal Investments’ objectives and expanding activities the staff was further increased with 7 professionals, from 18 to 25 FTEs.
STRATEGY & MARKETS
- Deliver tailor-made mezzanine and equity fi nancing solutions;
- Establish and raise funds attracting sophisticated institutional investors;
- Build a highly professional team that identifies, evaluates, structures and consummates investments with attractive risk-adjusted return expectations;
- Transform the portfolio of non-core investments into a well managed investment portfolio.
Investment Management has been identified as a core element of NIBC’s strategy and Principal Investments will play a leading role in organising investment funds. We believe to have reached the stage at which we are able to attract third party investors to participate in our mezzanine and equity investments based on our track record. For that reason, during 2005 preparations started for a mezzanine/equity fund to be established in 2006.
Compared to 2004 operating income increased by 23% to € 49 million. This is mainly a result of the large number of realisations during 2005. Operating expenses were higher due to a larger number of FTEs and higher variable compensation. The net release in credit impairments with respect to the non-core portfolio of € 8 million reflects the improvement in its quality in 2005. As a result, the operating profi t before tax increased in line with operating income (22%). The comprehensive result before tax nearly doubled compared to 2004 due to the performance of the equity portfolio. The comprehensive result before tax consists of operating profit before tax plus the fair market value changes included in shareholders’ equity. In addition, we further reduced the non-core portfolio from € 212 million at year-end 2004 to € 72 million at year-end 2005.
In an environment that is expected to remain very competitive, we will continue to focus on our niche of providing creative financing solutions to mid-market companies. The clients and relationships of NIBC will continue to be an important source of investment opportunities. Germany will increasingly have our attention as NIBC expands into that market across all her businesses. We will invite institutional investors to participate in the investment funds that we intend to establish and/or sponsor, with a view to significantly expand our investment activities.
SBU Investment Management
Investment Management is responsible for all asset management activities within NIBC. Its performance reflects the Bank’s performance in this area overall, and groups together investment management activities originated by Corporate Finance, Financial Markets, Principal Investments and Real Estate Markets. The SBU was established in 2003 to create a division between the Bank’s asset management activities and the origination business. This created a truly arm’s length portfolio management business that assesses the risks and financial potential of each investment independently of the Bank’s other commercial SBUs. The SBU manages the NIBC funds through the BUs NIBC Credit Management and Fund Services and includes also NIBC Wealth Management, the 60%-owned independently run private asset management arm. Fund Services acts as agent on behalf of all the NIBC funds. Substantial growth of our investment management activities is one of the key objectives of NIBC.
NIBC Credit Management (NCM) has offi ces in The Hague, London and Greenwich, USA and is responsible for NIBC’s credit fixed income asset management activities. The focus is on four distinct sub-segments of the global credit fixed income markets:
- Global corporate credits (both high yield as well as investment grade investments);
- European loans (with an emphasis on leveraged loans);
- European structured credits (ABS, MBS and CDOs);
- US structured credits.
NCM’s expertise is offered to investors via three separate business lines:
- Managed Accounts;
- Collateral Management (“North Westerly” and “Belle Haven” programs);
- Fund Management.
The strategy of Investment Management is to offer new and innovative funds to institutional investors and (high net worth) retail investors through both its securitisation as well as its and fund platform. Currently NIBC manages fi ve active securitisation platforms and – before the end of 2006 – will be involved in the management of approximately five to six funds.
NIBC continued to invest considerable effort and resources in 2005 in laying the groundwork for a major expansion of our investment fund activities. We are targeting this area for growth based on our expectations that the strong investor demand we have witnessed in the past few years for fund products will continue.
The markets are awash with liquidity looking for decent returns, while assets are scarce. These conditions create a natural environment for securitisation, the bedrock of our investment fund expansion plans.
Securitisation became even more popular in 2005, as investors widened their asset-class base, pushed by demand for secure yet solid returns. With money market interest rates at record lows, the shrinkage in government debt paper pushing yields to historic lows, and a relaxation of institutional investment rules, securitisation has established itself as an asset class vital to any diversified portfolio. The beauty of these deals is the fact there is something for every investor, depending on risk appetite and investment statutes. NIBC makes it business to know what the market wants and is able to structure securitised transactions of increasing size and complexity, and to place them effi ciently and profi tably.
Given the strong dynamics in this market, we decided in 2005 to expand on our fund management activities, creating separate tradable investment funds designed to appeal to smaller institutions and private investors. Up until now, securitised deals have been largely restricted to institutional investors. The new NIBC funds will give private investors direct access to assets that would otherwise be unobtainable, and share in the relatively more robust rewards. The underlying assets for these funds will range from mortgages to US or European credits, and private equity holdings owned by NIBC Principal Investments and third parties. We are planning at least two debt-based funds and at least three equity-based funds.
Operating income rose sharply by 83% as a result of a 42% increase in assets under management to € 6.9 billion, which generated strong fee income growth at Harcourt and NIBC Credit Management. The higher operating income was fully off -set by higher operating expenses. Operating expenses more than doubled due to expenses growth at Harcourt and the transfer of staff from Financial Markets to support the expanded investment management activities.
In 2005 one new credit fund (Distinct: a cross-over European long biased credit fund) and one follow-up transaction (Belle Haven II: a securitisation of US structured credits) were launched.
We plan to focus on significantly strengthening our distribution capability in 2006, expanding in Frankfurt, London, Singapore and Greenwich, USA. We expect the additional costs to be more than outweighed by new income streams generated by the creation of the new funds.
SBU Corporate Center
The SBU Corporate Center supports all activities of NIBC. This support consists of shared services relating to human resources, group finance, investor relations & corporate communications, information data management, legal, corporate tax, internal audit, compliance and facilities & services. The Working Capital Management Sector (WCMS) also forms part of the Corporate Center. The WCMS manages the Bank’s shareholders’ equity and the other assets and liabilities not allocated to the individual SBUs. The key performance criteria for Corporate Center are quality of services, business alignment and cost control.
The main focal points of activity during the year included gearing up for the conversion to IFRS and the change of ownership of NIBC, which required considerable efforts. In addition we began implementing an operational excellence program.
The operating income from Corporate Center concerns interest on economic capital and non-attributable income. In 2005 the SBU made an operating profit before tax of € 18 million, compared to a loss of € 39 million in 2004.
The sharp rise in the Corporate Center’s operating income relative to 2004 was due in particular to a non-recurring provision not allocated to the business lines and the write-down of a strategic investment, both in 2004. In addition, the IFRS eff ects that were not allocated to the business lines in 2004 were negative on balance, whereas these effects were positive in 2005. This refers in particular to the volatility relating to the application of macro hedge accounting under IFRS. The decline in expenses for corporate functions & shared services reflects an increase in the direct allocation of these expenses to the business as from 2005. Adjusted for these direct allocations expenses were 4% below 2004 levels. Non-attributable expenses in 2005 included € 30 million in costs related to the change of ownership of NIBC. These expenses were incurred in the fourth quarter of 2005.
Allocations to other SBUs declined from - € 3 million to - € 5 million. Th is mainly reflects the balance of lower allocation of interest on economic capital and lower allocation of indirect expenses. The lower allocation of interest on economic capital concerns both a decrease of capital usage by other SBUs as well as a lower interest rate. The lower allocation of indirect expenses mainly reflects the transfer of indirect to direct expenses at the beginning of 2005. The allocation to the other SBUs of tax gross-up remained relatively stable. The tax gross-up concerns benefits allocated to commercial SBUs on revenues that have a low or zero tax rate.
One of the priorities for 2006 is to strengthen the Group Finance and Information Data Management functions for the more onerous tasks required by the new Basel II and IRFS rules and regulations. The responsibilities of the strengthened BUs will include implementing a Target Operating Model, thus improving our internal reporting mechanisms that in turn will facilitate risk management, accounting and auditing. In addition to that, the projected growth in our Medium Term Action Plan requires further investments in Human Capital and strengthening of our Human Resources function. The focus will be on building a high-performance culture with additional investments and improvements in such areas as leadership and management skills, talent development and succession planning, and performance management and reward.
The Corporate Center will play an important role in the next year in supporting NIBC in its goal to achieve operational excellence in our internal processes.