The day Mattle gave the grey market a bear hug

By Nigel Adam

“Armin Mattle doesn't have anything against me personally," said Stanley Ross, gazing thoughtfully into the November darkness outside his office window. "He just thinks that we (Ross and Partners) have diminished the market rather than added to it. I stuck my neck out in the EIB issue. That was my own fault.”

Two months after the event, the flamboyant chairman of grey market traders Ross and Partners (Securities) still chafed over the European Investment Bank affair. That was the issue that showed the grey market's vulnerability to aggressive lead manager tactics.

It began when Union Bank of Switzerland (Securities) managing director Armin Mattle brought a $100 million, 12⅜% seven year issue for the EIB to market at the end of August. The choice of UBS as lead manager surprised some in view of its reluctance to participate in the new issue boom earlier that year (Euromoney, August 1980). But this was an unusual offering. It was a conversion issue, designed to persuade investors to switch out of a maturing EIB issue into the new paper. Because UBS already controlled a substantial part of the existing issue within its own network, it had a major advantage in its bid for the mandate.

Potential co-managers, however, showed a marked reluctance to join Mattle in the deal. Some viewed the yield as unattractive when compared with similar outstanding EIB paper. Others considered the effort of digging out existing holders of the issue wasn't worth their trouble. One bank was prepared to take a $5 million co-management position: Kredietbank Luxembourgeoise. But after lengthy discussions between Mattle and Kredietbank's André Coussement, UBS decided to go it alone.

"It would have made Coussement look pretty small with a $5 million position dwarfed by UBS's $95 million,” commented one source involved in the deal.

To his later chagrin, Ross had no idea that Mattle now had full control of the issue's distribution. Unable to reach either the UBS chief or his deputy Leigh Wilson by phone, Ross went ahead and quoted a grey market price on his Reuter Monitor screen. The EIB bonds were (issue price) less 2½ less 2.

Then Mattle struck. He bought 200 bonds at less 2. He bought another 200 at less 1⅝%. He bought a further 200 at less 1¼. That was enough for Ross. Now visibly shaken, he struggled to cover his short position.

By the time he'd found the bonds the price had moved well against him. The result: a loss of at least $8,000. A pinprick perhaps, but a pinprick in a most sensitive nerve. One dealer contacted by Ross in his frantic search for the EIB paper lost count of the number of expletives directed against Mattle. "Armin and I have written our last tickets,” Ross is reported to have said.

“I led with my chin,” admitted Ross later in a more sanguine mood. “I was totally unaware of the extent to which Mattle controlled the issue." But the incident still rankles deeply. Just over two months later both men were guest speakers at the annual AIBD seminar in Montreux. Neither had anything to say to each other. "Fritz Rieder (the board member organizing the seminar) was careful to seat them well apart at dinner on the night Stanley arrived,” said one guest later.

To outsiders, Mattle's punitive raid against Ross seemed quite deliberate. “He knew Stanley couldn't cover right away because UBS controlled all the bonds,” observed one dealer. Not all were sympathetic to Ross's complaints at the time. “If you live by the sword you must expect to die by it,” commented another trader drily.

Did Mattle deliberately set out to take his old adversary for a ride? "Ross thought I should have informed him that UBS was the sole lead manager," retorted Mattle. "He thought I had acted unethically. Well, he should have got his facts straight before he put his price on the screen."

Even in the tight-knit world of the bond dealing community few can pinpoint the origins of the feud between Ross and Mattle. “The chemistry between them has never been right," remarked one senior dealer who knows them both. Ross himself commented: “Mattle suffers from a certain folie de grandeur. We've always been fencing."

One former AIBD board member recalled that the hostilities began when Ross and Mattle worked together as founder members of the association. "Even at that stage they were both keen to establish themselves as prima donnas and a strong rivalry was already apparent," he remembered.

That view is reinforced by an article which Mattle wrote in the April 1979 issue of the AIBD gazette commemorating its tenth anniversary. "At the November 1969 general meeting," he recalled, "I proposed that the AIBD should publish the names of market makers against each outstanding international bond issue. For this purpose, a definition of the responsibilities of a market-maker were advanced and listing, as well as delisting, criteria were proposed. The assembly adopted the proposal in principle – the standard practices committee under Ross declared it 'not feasible'. The market makers were delighted," concluded Mattle with heavy irony.

“I first met Ross well before the days of the AIBD," said the UBS managing director last month. “It goes back as far as 1956 when I joined Dominion Securities in London and he was at Strauss Turnbull. When Ross joined Kidder in 1968 he came to talk to me at Bondtrade and asked my advice. At that time our personal relationships were reasonably good and our families used to visit each other."

So what went wrong? One former member of Ross's dealing team at Kidder may have the answer. "By the early 1970s Stan was at his peak in the Eurobond market and Mattle was in full swing running Bondtrade from Brussels. They were always sparring. Stan's attitude was 'who needs Bondtrade?' We hardly ever dealt with them."

Another remembered Mattle's legendary telephone call to Ross in the early 'seventies which began: "This is the house of distinction calling the house of extinction." That was prompted by the arrival at Kidder of Tony Dyson, who had often crossed swords with Mattle while at Samuel Montagu.

When Ross left Kidder in September 1978 after a blazing row with the firm's president, Ralph DeNunzio, and set up his own operation, the rift between himself and Mattle became complete. No longer did the two men attend each other's parties. "There was a time when Armin always invited Stan down to his country house in Sussex," said one trader who still gets such invitations. "That wouldn't happen now.” When Ross celebrated his fiftieth birthday on November 20 last year he sent an open invitation to drinks that evening via the Reuter Monitor. It even included “the mighty sun god", a clear reference to his old adversary. Mattle didn't attend.

"I disapproved of Ross's new operation just as he would have disapproved of it himself while he was still at Kidder," said the UBS chief bluntly. “And I'm not a person who can maintain a social relationship with someone if I don't like the way he operates."

The controversy over the grey market, or pre-market as Ross prefers to call it, began in earnest with the formation of Ross and Partners in late 1978. Whatever the term, it refers to the practice of dealing in a new issue during the selling period: that is to say, after the indicated terms are known but before the subscription agreement is signed. The practice isn't new. But the open display of grey market prices has infuriated a large number of issuing houses. An attempt by the AIBD board to impose a rule against the practice at the 1979 general meeting was assumed to have been sponsored by the big houses. That attempt failed after one of the noisiest wrangles in the association's history.

Mattie's opposition to the grey market is unbending. At a Euromoney conference in December 1979 he claimed that the grey operators aggravated primary market difficulties by discouraging retail demand. Worse, co-managers of an issue made more direct use of the grey market than the ordinary underwriter.

“I recognize that the grey market is nothing new," he told Euromoney recently. "But it's now been magnified out of all proportion and given a lot of unnecessary publicity. And that's largely due to Ross."

Attacks by lead managers on the grey traders have occurred before. In May 1979 Credit Suisse First Boston sharply cut allotments of a $100 million Crédit Suisse (Bahamas) convertible issue. At the same time it was actively buying in the market wherever it could in a deliberate squeeze on the fringe traders. The result: a rush to cover short positions and, for some, substantial losses. “Whatever Ross lost on the EIB deal with Mattle is pocket money compared with the Crédit Suisse operation," remarked one issue manager. Ross, however, claims that he spotted the ruse in time and sidestepped the squeeze.

Ross's ability to court publicity is legendary. In a statement included in the annual accounts of Ross and Partners (Securities) for the year to June 1979, he boasted: "The name of Ross and Partners has been mentioned no less than 35 times in 12 different publications since we began."

But the publicity can backfire. “When he first started his operation, he went around predicting he'd be a millionaire in three years," recalled one former associate. “Now that doesn't look like happening, he's the perfect target for those who dislike him. And there are enough lead managers in that category to make life very difficult for him.”

An illustration of that was provided by the $40 million issue for Trailer Train Finance which Manufacturers Hanover brought to the market in October. Ross was quoting the bonds at around less 2½ less 2 in the grey market, a price which clearly irked Tony Dyson, assistant managing director at Manufacturers and a former member of the Kidder trading desk.

It's well known in the London bond market that Ross and Dyson never worked easily together. "They never got on with each other and that's still true today," remarked a former colleague of them both. "Tony never had much regard for Stanley's management capabilities. He always thought Stanley's attitude to his team was one of divide and rule."

Ross's quote on Trailer Train wasn't unreasonable. In the early days after allotment of the bonds a substantial number came on offer and the price slipped dramatically. One co-manager reportedly dumped his entire allotment almost at once. Recalled Dyson: “I came in at 8.30 one morning and immediately a broker was on the line offering me stock. I took it and he offered more. This went on for several hours and the price dropped to around 91/92. At that level I said to my dealers: 'Right, go out and buy the paper wherever you can get it.’”

As with the Crédit Suisse deal, Dyson's squeeze on the short sellers caught several on the hop. One of those he caught was Stanley Ross. In market jargon an operation of this kind is known as a take-out. If it's successful, as it was in the case of Trailer Train, it can make a trader a lot of enemies. "A lead manager will sometimes ask a small trader to go round and take out loose bonds from the market if he wants to support the issue. But only from institutions," explained one dealer. “If the trader takes out his fellow professionals as well he's asking for trouble. And that's what Dyson did with Trailer Train.”

That might explain why Dyson, by his own admission, isn't liked by many fellow traders. "Such are my relations with the Eurobond market that I'm free for lunch every day next week," he's reported to have told one caller recently. Some market operators refer to him disparagingly as "Dinky" Dyson, a nickname which has its origins in his days at Kidder.

“I'm not liked in the market because I don't talk to the market," said Dyson bluntly. "Quite frankly I haven't got the time. I believe in talking to my clients. But there are one or two professional market makers who are very happy with the business I give them."

Dyson may not be the most popular figure in the Eurobond market, but he doesn't have to endure the kind of stress forced on a grey market operator such as Stanley Ross. That stress is beginning to make its mark. Ross has been looking for a partner to inject new capital into his firm, a partner who would also allow him to withdraw gracefully, at least from day-to-day trading. "I can't trade as I used to,” he sighed during a gruelling session early last year (Euromoney, May 1980). So far, though, his search has apparently been in vain.

Ross's expectations of achieving millionaire status have certainly been disappointed. In the company's first reporting period ended June 1979, Ross and Partners (Securities) made a loss, including debenture interest, of around £184,000. Profits on bond trading were more than offset by losses on equities and options. Accounts for the year to June 1980 haven't yet been filed. But according to one source close to his firm, that year wasn't profitable either.

Pressure from issuing houses certainly contributed to that disappointment. But so, too, has the arrival of another grey market operator, Canadian American GIE. Based in Paris, the operation is a subsidiary of Canadian American Bank, Luxembourg which is in turn owned by Northwestern National Bank of Minneapolis. It began a year ago under the managing directorship of Alessandro Carboni, formerly with E. F. Hutton.

Canadian American makes a grey market in straight dollar bonds and in some Deutschemark and guilder paper. It doesn't trade convertibles, unlike Ross, although that may soon change, according to Carboni. “I estimate Canadian American has taken at least half of Ross's business in straight dollar bonds," said the head of a major London trading house. "The reason is simple: people now have a choice between two grey operators. It's easy to play one off against the other." Carboni himself commented: “We certainly provide an alternative – another screen to look at, if you like."

Ross appeared unperturbed by the new challenge. "Canadian American started off very aggressively but they've now dropped away. Our screen is interrogated more than any other in the Eurobond business, sometimes up to 3,000 times a day," he noted with his usual breezy confidence.

Carboni disputed the often heard complaint that Canadian American didn't make a price in as many issues as his London rival. "We trade virtually all dollar straights. The big difference between ourselves and Ross is that we don't trade convertibles at present. On the other hand we've done Deutschemark and guilder bonds which he hasn't. We're having a lot of fun and making a lot of money. Our grey market operations are profitable, although we did have a bad month in August."

Carboni may be having fun but, like Ross, he's had to contend with a lot of opposition from the issuing houses. "Some lead managers can't stand us," he admitted. “I've had strong arguments with several who, in their own words, have tried to call our bluff. On one occasion we sold the lead manager of an issue more than he really wanted to buy.”

Canadian American's first application to join the AIBD last year was rejected without official explanation, according to Carboni. That's a rare occurrence, particularly as an application is usually just deferred if the problem is a procedural one. Approval of a new applicant needs the majority support of all board members and not just those present at a particular meeting. The major issuing houses are well represented at most board meetings and their hostility to the grey market is no secret.

"The semi-official reason for our rejection was that the AIBD didn't have enough information about us,” explained Carboni. "So we took John Morrison (chairman of Northwestern National Bank of Minneapolis) to see some of the major banks while he was in Europe. We then applied for membership a second time and were accepted in November."

Some issuing houses, though, work closely with the grey market – even if neither side is prepared to admit it. That simply heightens the anger of those primary houses who enforce a rigid boycott of the grey operators. “I'm convinced that some issue managers are weak enough to let themselves be blackmailed," remarked one senior trader sharply. “If they know Stanley Ross is about to quote less 2½ less 2, and he usually rings to tell them, they'll be tempted to drive a bargain. In return for a more favourable quote they'll give him some bonds to place."

In a thinly disguised attack on Ross his former colleague at Kidder, Ian Kerr, recently made the argument public. In his weekly investment letter he referred to the grey market as a puppet of the principal lead management house. "The truth is that the grey market, particularly in the case of convertible issues, mirrors the ambitions of the lead manager," he wrote.

"How else does the grey market Reuter screen show new convertible issues before underwriters and selling group members have received the offering telexes? If the grey market is quoting a price for a new issue before the offering telexes have been sent, that price can only be based on the amount of bonds which the lead manager says have been pre-placed."

Ross couldn't contain his expletives when Euromoney asked him to comment on Kerr's remarks. He then went on: “Kerr's an academic. He doesn't understand how prices are made. It's partly intuition, partly analysis – and almost always full of risk. Would an issuing house really tell us how much he has pre-placed? It’s absolutely laughable.”

Outsiders were amused to see the two ex-Kidder men hitting it out in public even if some of the arguments were well worn. "Why does Stanley take everything so personally?" wondered a senior executive at a US bank. "If he's going to conduct a personal crusade he ought at least to find some better chevaliers."

Clearly, though, it's to Ross's advantage if he can work with the lead manager. “He always comes on to us to ask what the underwriting arrangements are," said one. 'If he can't find out, for whatever reason, he's out in the cold. That's exactly what happened with the EIB conversion issue. Now he's going around saying he can work with most lead managers but not UBS. Well, I shouldn't think that worries Armin Mattle. Mattle has never needed brokers in this market, and Ross is basically a broker."

If Mattle's attack on Ross was deliberate, another episode demonstrated that planned aggression by the lead manager isn't always necessary to cause damage. Being left in the cold can cause equal harm. Ross admitted that with the $25 million convertible deal for Thomas Nationwide Transport, led by Hambros, he got it wrong. Others, less kindly, construed that to mean he lost money.

The TNT issue in November hit rough waters when the company's share price went ex-rights on the same day as the convertible started trading. The share price fell by more than was technically justified following the rights adjustment. Some underwriters sold out their allotments of the convertible, and its price began to slide. “Hambros were reportedly quoting 96½/98 to certain underwriters," recalled Ross. "But in the real market the bonds were 96 offered." The TNT bonds dropped rapidly to 91/92 on the second day of trading. "People would have been better off if the lead manager had supported the price,” remarked Ross ruefully.

In fact, Hambros gave substantial support to the bonds, according to the bank's syndication and dealing manager Leonard Gayler. But Ross obviously wasn't able to take advantage of it. "We opened the first day's trading at around 97¾ even 98 bid," recalled Gayler. "Then the selling emerged and we took quite a few bonds before we had to stop. You can't stand up and buy £1 notes at £1.10 for very long.”

Gayler wouldn't comment on the extent to which, if any, he normally dealt with the grey market. One thing is certain: he wasn't broadcasting his TNT price beyond a limited circle of underwriters. The grey traders suffered accordingly.

The grey market has one line of defence against hostile lead managers. Like any other bond trader, a grey operator can always find a pretext for not dealing at the price quoted on the Reuter screen.

"I've often tried to deal with the grey market at its screen prices, only to be met with some excuse," complained Oswald Gruebel, chief executive at White Weld Securities. "They say 'your order is too large' or something like that. The prices quoted frequently don't reflect reality when it comes to dealing." Gruebel, a tough professional widely respected in the market, didn't hide his contempt. "The grey market as it exists is too narrow, too easy to manipulate. The whole Eurobond community has only two grey market screens to look at. Why shouldn’t more firms do pre-market trading? We at White Weld would consider starting such an operation if we got the support of other leading market makers."

Publicly at least, Ross denied that he would ever refuse to trade. "We might be ⅛ or ¼ point out compared with our price on the screen but we'll always trade. I update whenever I can, and in any case far more regularly than other operators in the market. Why should the grey market be singled out for criticism when other houses are sometimes as much as three or four points away from their screen price?"

Ross may have achieved a highly visible position in the secondary market but he hasn't achieved peace of mind. Last year was one of the most volatile and most frustrating in the market's history.

On top of that Ross has had to cope with personal clashes, and not just with Mattle. Late last year Willy Breitschmid, the convertible trader at Ross and Partners, resigned. Those who know Ross say the parting was far from amicable. "Breitschmid was taking positions in convertibles which made Stanley's hair stand on end," commented one. "It just couldn't last." Breitschmid's departure left Ross himself handling convertibles, an exacting task by any standards.

How long can Stanley carry on? That's the question his friends and enemies alike were asking themselves as the year came to a close. Ross wasn't keen to talk about the joint venture he's been seeking and which so far has eluded him. But it's recognized that he needs more capital in addition to the £1 million put up by his controlling shareholder, Marlon House Holdings.

“We do have a capital problem. We could do so much more in the market if that problem were solved," said Ross. "But we still haven't found a partner which meets our requirements.” One of those requirements is that Ross and his team want to continue under their own flag. And that may prove a sticking point. “Anybody who bought a stake in Ross and Partners would want their own name on the letterhead," observed one senior banker.

The most recent rumour centred on Drexel Burnham Lambert as a possible candidate for the joint venture. Drexel already has a small bond dealing team in London, but senior executive Roger Jospé quickly dismissed the speculation. “We haven't been talking," he told Euromoney. "I don't really know Ross's operation apart from what I see on the screen."

In the past, Blyth Eastman Dillon has also been mentioned as a potential buyer. That rumour started when it became known that INA, the American insurance corporation, held talks with Ross and his shareholders early in 1979. But according to one source who was closely involved, there was never any question of INA merging its investment banking arm with Ross and Partners.

"That was never on the cards. Blyth was never drawn into the talks, they simply revolved around INA making an investment in Stanley's operation,” explained the source.

Those talks never reached a satisfactory conclusion. "INA suddenly dropped the negotiations," recalled David Hagan, chairman of Marlon House. "They didn't give any reason. We were very reluctant to talk at all, but they were proposing a massive injection of capital, as much as £10 million or even £20 million. INA would have bought out Marlon House, leaving us with a profit in excess of our original £1 million investment."

To Hagan's obvious disappointment, no other potential suitor for Ross and Partners has proved as generous as INA. "I've had all kinds of propositions, and on two occasions I've actually met the interested parties. But people have approached me on the assumption I want to sell. I'm not a forced seller. I wouldn't give up our investment for just a modest premium. If the right offer came along, and Stanley and his team agreed, I might do what we did with Godsell (the money broker which Marlon House sold to Astley and Pearce for around £3 million)."

In the present market climate few buyers will be prepared to pay the kind of premium which INA had in mind. In the meantime, where will Ross and Partners get its capital boost? Apparently not from Marlon House. "It was agreed before we started that, for the firm to be viable in the long term, something would have to change," remarked Hagan. "Either we'd have to put more capital in, or the structure would have to be altered in some other way. But we (Marlon House) don't have capital to invest at present. Just because we got £3 million from the sale of Godsell doesn't mean we have that amount to invest in Ross and Partners."

So Ross will have to continue his search for an outside buyer.

As Euromoney went to press, the latest unsubstantiated rumour was that by January he would have found one.

But if one dinosaur is struggling for survival, what's happening to the other? Mattle may have got the better of his arch rival in the EIB deal, but spectators of that struggle wonder what the future holds for Mattle himself. "He's cut himself off from everybody," remarked a senior executive at a major issuing house. "Armin is a chastened man. He was brought up in the tradition that everybody needs the UBS. Now the reverse is true and Armin doesn't seem to be able to adapt."

Mattle has at least as many enemies among the issuing houses as Ross. “The days are gone when he could crack the whip and expect the market to jump," remarked one London merchant banker drily. The hostility stems from the time, not so long ago, when UBS bid aggressively for new issue business and then forced underwriters to take all the bonds for which they were committed. That prompted some of the London merchant banks to complain to Mattle's head office in Zurich. “If an issue isn't going well, for whatever reason, the lead manager should call the underwriters and ask them to help him out," said the same banker. “Mattle used to say: 'you've got your allotment in full and that's an end to it'." At the same time, his no-nonsense manner brought him a great deal of respect.

Among borrowers, Mattle's reputation still shines. Roland Lees, head of the banking division within the Shell group treasury, commented: "We've been out of the Eurobond market for three years (since Shell International's $500 million, 8¼% issue of December 1977 led by UBS). But we think most highly of UBS and Armin Mattle. He certainly drives a hard bargain with his syndicate but he never goes too far."

To outsiders, at least, UBS now seems to have withdrawn into the shadows. In Euromoney's bond market league table for the first nine months of 1980, UBS dropped to sixteenth place, from seventh in the corresponding period for 1979. That was due mainly to the bank's reluctance to entertain fixed price deals during the new issue boom. On the other hand, UBS scored a coup with a $100 million floating rate issue for the Bank of Montreal in December. That deal was the first FRN for the Canadian bank and the first FRN lead managership for UBS.

The recent move to UBS (Securities) by Nicholas Ryan, formerly vice president and director at Dominion Securities, prompted speculation that Mattle might be paving the way for his successor. Mattle would soon be returning to his native Switzerland, the rumours ran, to take up a job within the UBS hierarchy.

That seems unlikely, at least for the moment. "Nick and Armin work very well together, but Nick isn't senior enough to take over as managing director," said a colleague of Ryan's. More to the point, Mattle now has his roots deep in the UK, having married into an English family. He hasn't worked in Switzerland for nearly 25 years, having moved from Dominion Securities in London to Bondtrade in Brussels and then back to London with UBS.

The tension in the Eurobond market is now so marked that both Ross and Mattle would probably prefer a change of climate. Both men now find themselves on the fringe of an increasingly hostile community, a community in which new issue and trading activity is being concentrated in fewer hands. But the rivalry between them won't diminish. The EIB affair will never be forgotten.