Years ago, on the occasion of a visit to Canada by John Bond, the retiring chairman of HSBC Holdings plc, a local columnist chided Canada's so-called Big Five banks, led by Royal Bank of Canada, for being too cautious and domestic. They'd missed the boat, observed Globe and Mail columnist Eric Reguly in 2005, "perhaps forever."
The global financial crisis has since proved him wrong. RBC, which emerged relatively unscathed from the post-Lehman liquidity crunch, is now the fourth-largest North American bank, with a $65 billion market capitalization, after Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup Inc. Toronto-Dominion came fifth, with $64 billion.
In leveraged finance particularly, RBC has been showing the flag. Its corporate and investment banking arm, RBC Capital Markets, has clawed its way up Reuters Loan Pricing Corp.'s top 10 bookrunners for leveraged buyout loan syndications in 2009 and 2010. This year it pushed ahead of Goldman, Sachs & Co., Morgan Stanley, Citi and UBS.
It may still take some time before becoming the lender of choice among buyout chieftains, but RBC Capital Markets now bills itself as a large player with a boutiquelike approach. Though the bank's assets are still only a third of J.P. Morgan's, it does help to have a less constrained balance sheet in notoriously fickle leveraged finance markets.
The industry has been under "intense" pressures, says Jim Wolfe, head of RBC's U.S. leveraged finance unit. Between European sovereign debt worries and uncertain global economic prospects, not to mention recent ratings downgrades, many large institutions have curtailed risk taking. With an Aa1 rating from Moody's Investors Service and AA- from Standard & Poor's, adds Wolfe, RBC has taken "an opportunity to leverage our own business."
Wolfe, a Bear Stearns Cos. veteran of 15 years until the disaster of 2008 brought him to RBC, doesn't put much stock on rankings himself. "I'd like to think our success is being driven by our balance sheet and industry expertise that we bring to clients rather than taking market share from competitors," he argues. "It's hard to delineate the two. Given the fees paid to the Street, there'd be enough competitors that are active players at any given time."
As he sees it, RBC's ascendance on the bookrunner charts is as much a function of being at the right place at the right time as the concerted effort to beef up its leveraged finance business, part of a global buildout of the bank's investment banking operations as a whole. When Wolfe joined in June 2008, his unit was about 15 strong; today it has close to 50 people across the high-yield, loan and capital markets.
Two years ago, RBC promoted Blair Fleming, the bank's global head of syndications and leveraged finance operations, to lead investment banking in the U.S. Fleming has since presided over a wholesale hiring binge in the U.S., recruiting more than 200 professionals across industries over the past two years. More than 30 are managing directors, many of them seasoned refugees from the Wall Street shakeout.
"We're obviously in a unique period in Wall Street where we saw an availability of talented people from institutions that no longer existed," says Wolfe.
RBC has also moved up the food chain to investment-grade debt. It was bookrunner for a recently completed $4.6 billion bond offering from Verizon Communications Inc. and an offering from Cablevision Systems Corp.
To be sure, the bottom line has been adversely affected by lower client volumes and tighter credit spreads. Net income for the capital markets group dipped 7% in fiscal 2010, ended Oct. 31, 2010, to C$1.65 billion ($1.62 billion). But syndicated finance gross revenue almost doubled from last fiscal year, and the unit "made significant progress" in 2011, generated by investment banking and loan book revenue, a spokeswoman says.
Financial sponsors are taking note. Private equity clients are "very focused on consistency" and "want to make sure their financial partners deliver in good markets and bad," says John Sorice, a financial sponsors banker who did 22 years with J.P. Morgan before moving to RBC in '09.
Among its clients, Apax Partners LLP has been the most active this year, with at least seven transactions with RBC. The relationship was cemented in 2008 when RBC was sole underwriter for Apax's $1.4 billion take-private of healthcare software company TriZetto Group Inc. and a recent add-on for TriZetto, Gateway EDI of St. Louis. It was also part of the syndicate for Apax's $6.3 billion acquisition of San Antonio medical-device company Kinetic Concepts Inc., the largest leveraged buyout of the year.
RBC's David Daniels, co-head of U.S. financial sponsors who came from Wachovia Securities LLC, says that certain technology sectors that have not been large issuers in credit markets have been among the most active recently. He points to Internet domain host Go Daddy Group Inc., bought by Kohlberg Kravis Roberts & Co. LP and Silver Lake in July, as one example.
By July, however, credit markets had turned jittery, and financing for Go Daddy's acquisition wouldn't clear the markets until September.
"That was an incredibly tough time in the market, but they came through with a commitment at a time when a lot of banks were telling us they were closed for business," says one sponsor. "These guys are constructive, fast and knowledgeable."
RBC was left-lead arranger on Sterling Group's acquisition of Stackpole International, an Ancaster, Ontario, maker of pumps and metal components for car equipment manufacturers. Financial details were not released, but Moody's says it involved $117 million of equity from a Sterling-led investor group for a total value of about $302 million. Syndication of a $140 million term loan for the transaction cleared the market in early August at terms slightly higher than initially expected, LIBOR plus 600, with a 1.5% LIBOR floor and a 98 issue price.
"We price our capital at what we're comfortable with, what works for us and fits our clients' needs," says Wolfe. "We need to find a balance."
Sterling partner Kent Wallace says the bank proved to be "a great partner," successfully leading the Stackpole financing "at attractive terms despite the complexities and the backdrop of a difficult economic environment."
Also in August, RBC committed up to $270 million of financing to back Permira's purchase of educational software company Renaissance Learning Inc. for $440 million. The group also supported the London firm's recent $1.5 billion purchase of call center software company Genesys Telecommunications Laboratories Inc. from Alcatel-Lucent SA.
As banks grew even more recalcitrant through September, RBC committed early on to GTCR LLC's bid, unveiled that month, for Fundtech Ltd., a transaction banking software company. GTCR's $388 million trumped an offer from S1 Corp. A $225 million loan financing is pending completion as of mid-November.
But where RBC really showed it can play an aggressive hand for an attractive target was in the take-private of discounter 99 Cents Only Stores Inc. RBC backed a $1.6 billion offer from Los Angeles-based Ares Management LLC, with which RBC has had a strong relationship, and the Canadian Public Pension Investment Board.
RBC had prior experience in the sector. In 2004, RBC and Citigroup ponied up a $200 million loan for Bain Capital LLC's purchase of Canadian discount retailer Dollarama Inc., an investment that was immensely profitable for investors following the Great Recession. For 99 Cents, RBC partnered with fellow Canadian traveler BMO Capital Markets Corp. on a debt package that helped tip Ares' offer above that of crosstown rival Leonard Green & Partners LP.
Unlike other leveraged finance groups, RBC Capital Markets is growing. It has shed its middle-market image, and picked up some sharp elbows in the process. On Wall Street, that could go a long way to making it to the top.