Investment Banking in a global pandemic

In the throes of the ongoing COVID-19 pandemic, with a strong focus on economic recovery and promoting sustainable development, more nations and policymakers have begun reopening the conversation on investment banking and how it can help pave the way toward much needed post-pandemic growth. But how?

Let’s take a step back and explore investment banking. Investment banking (IB) spans a range of financial transactions to corporations, governments and financial institutions worldwide. Investment banks provide a host of advisory and arranger led services, including evaluations of initial public offerings (IPOs) and secondary market offerings, underwriting new debt and equity securities, syndicating loans, facilitating the sale of securities, research, trading and principal instruments and helping to facilitate mergers and acquisitions, broker trades, and reorganisations for both institutions and private investors.

At the core, Investments banks are primarily tasked with raising capital for clients including, corporations and governments. This is important to note because investment bankers therefore need to understand key economic indicators and monetary and fiscal policies so that the corporations and governments in turn can benefit from the optimal financial structuring advice.

Regionally, as the pandemic rages on, and more pieces continue to fall into place, we can expect a considerable increase in the need for short-term and long-term financing from the Central Government and corporations. So far, severe economic fallout is projected due to drastic interruptions in global activity, the temporary closure of borders and grounding of flights, disruptions in supply chains and a near complete standstill of the tourism industry, inclusive of cruise ship activity. The ensuing implications for a country like Trinidad and Tobago, and the Caribbean region, are staggering. Islands such as Barbados, Jamaica, Dominica, Grenada and St. Lucia have turned to IMF funding to stem the economic fallout from the COVID-19 pandemic. Other islands, such as the Eastern Caribbean Currency Union/Organization of Eastern Caribbean States (ECCU/OECS) countries are already projecting severe contractions in GDP.

Consequently, the tourism industry, on which Caribbean islands are heavily reliant, is at a standstill, causing widespread unemployment and substantial reductions in government revenues and foreign exchange earnings.

Locally, investment bankers can raise equity publicly for clients on the Trinidad and Tobago Stock Exchange or privately through private placement deals. Meanwhile, for debt, bankers raise debt publicly via the local bond market or privately through private placement bonds or syndicated loans. For Trinidad and Tobago, the syndicated loan market is by far the largest source of capital given the investors in that market are some of the largest corporate banks in the country. Some of the most noteworthy loans made in recent history have been provided to the Water and Sewerage Authority (WASA) and the Trinidad and Tobago Electricity Commission (TTEC), two large scale national industries.

At the end of July 2020, Trinidad and Tobago’s outstanding net public sector debt increased to $120.5 billion (71.7 per cent of GDP) from $103.2 billion (62.2 per cent of GDP) in September 2019. The Central Bank added that the country’s deficit is projected to increase to $16 billion largely due to COVID-19.

According to the 2020 Review of the Economy by the Government of the Republic of Trinidad and Tobago, and the most recent Central Statistical Office (CSO) figures, the domestic stock market posted a decline over an 11-month period (October 2019 to August 2020), with the Composite Price Index (CPI) falling by 5.4 percent. Aggregate market capitalisation of the TTSE declined to $129.5 billion (a drop of 4.9 percent) at the end of August 2020.

We also saw for the period October 2019 to June 2020, 21 primary bond issues, worth TT $15.27 billion were raised on the Primary Bond Market as compared to 12 issues worth TT $7.3 billion for the same period ending June 2019. The Government of Trinidad and Tobago remains the most active issuer in the local bond market.

Thus, it is clear how much IB is factoring into Trinidad and Tobago’s road to recovery. However, what it also means is that going forward there are even more opportunities for investment bankers to play a more central role in sectoral and economic survival and revitalization. The scenario ahead is a complex one.

For starters, the sector must be fully prepared for the pandemic’s unprecedented public health, economic, and societal impacts that will intensify challenges like falling equity prices, liquidity stress, evolving financial regulations, market democratisation, pricing pressure, increased client sophistication, shifts to remote working arrangements, and the push for rapid financial technology (tech) advances. Investment banks best able to adapt (and who have already adapted) to this “living with Covid-19” will undoubtedly have a head start on the competition. However, this is more than simply having a competitive edge. This is about investment banks fulfilling that basic obligation to provide efficient sources of capital to governments and corporations in a time of a global crisis and adding meaningful, lasting value.

Investment banks must embrace a more relationship-based approach to transactions to ensure the sustainability of issuers and borrowers in different types of economic cycles, deploying technology to enable effective origination and diligence transactions with restricted travel. Virtual roadshows were already widely used prior to global pandemic as a means of reducing transaction cost. Going forward, local and regional bankers will need to evaluate other functions for a transaction can be facilitated remotely.

One thing is certain: Investment banks will continue to play a critical role in the financial system and by extension the local and regional economies, acting as brokers and intermediaries to source capital. Ultimately, however, we will need to collectively challenge the status quo and ensure that the IB model in the Caribbean evolves over time to consistently deliver innovative and flexible capital sourcing and structuring solutions for small to large businesses and governments to ensure sustainability.

Most of all, all players must continue to work in tandem with the larger interests and the public good at heart.

We are in this together.