09 December 2006

TD Securities is Now Number 3 Securities Firm

The Globe and Mail, Sinclair Stewart, Boyd Erman, Andrew Willis, 9 December 2006

The thing about Frank McKenna stories is that they inevitably veer toward the same punchline. Like the time, in the mid-1990s, that a secretary entered her boss's office with a stack of letters. The executive had decided to consolidate his company's call centres in a single location, eliciting a predictable flood of entreaties from the provinces. Yet only nine expressions of interest had arrived in the mail.

"Who's the tenth who didn't send one?" he asked.

"Frank McKenna," the secretary replied. "He's waiting outside."

Fast forward a dozen years and the man formerly known as the Energizer Premier is as indefatigable as ever, hopping on planes when others are writing letters, knocking on boardroom doors, and spinning his relentless salesman's pitch.

This time, he's playing rainmaker on behalf of Toronto-Dominion Bank rather than the people of New Brunswick -- but the results look equally promising.

Since resigning as Canada's ambassador to the United States last April and embarking on a Bay Street career, Mr. McKenna, 59, has become a consul of sorts for the revamped TD Securities, a glad-handing door-opener in a firm that has suffered from a lack of historical relationships with blue-chip CEOs.

"There's no doubt that the way in which I'm being used is for air cover at the highest levels," Mr. McKenna explained in an interview. "I find that we've got the talent to compete, but the big issue is the long-standing relationships that the [other] bank-owned dealers have. We have to replace that. I find that once that initial introduction is made, our people on the ground do a very, very good job of landing the business."

They certainly have. TD Securities, the firm once viewed as the weakest of the Big Five bank-owned securities firms in terms of mergers and equity underwriting, has improbably vaulted to the No. 3 spot in those key businesses this year, confounding plenty of skeptics. The firm has grabbed coveted advisory roles on Xstrata's recent $18-billion takeover of Falconbridge Inc. and, most recently, Air Canada's combined initial public offering and secondary stock issue, which raised $525-million. This year, TD Securities accounted for about one-fifth of the bank's overall profit, which was about 25 per cent better than it had forecast.

Part of this success, doubtless, can be chalked up to Mr. McKenna's Rolodex. Behind the scenes, however, a much larger effort has been under way for the past few years. The culture has become much more aggressive, evidenced by the way TD elbowed its way in to advise Xstrata.

Perhaps more importantly, it has become cohesive: Once regarded as a firm of disparate businesses and deal makers, often with contradictory objectives, TD Securities is now preaching teamwork, with traders and investment bankers working hand in glove to grab a single piece of business.

Ed Clark, TD's chief executive officer, seems happy, but he's not the sort to settle for being No. 3. He acknowledges the bank needs to add about 150 investment advisers before it can compete more effectively on the big IPOs and pose a real threat to industry behemoths CIBC World Markets Inc. and RBC Dominion Securities Inc.

"We haven't played up the TD Securities story -- it has sort of been our stealth bomber," Mr. Clark said. "We want to solidify our position so that everyone recognizes us now as the No. 3 dealer, and position ourselves so that in the next two or three years we give CIBC a run for their money."

The problem is, investment banking is a notoriously unpredictable business, ruled as much by serendipity as it is by the irregularity of deal flows. The question on Bay Street isn't so much when TD can catch CIBC. It's whether they can hang onto their No. 3 spot and prove that 2006 was no fluke.

A year ago last March, after an otherwise uneventful annual meeting in Ottawa, Ed Clark made his own news. Standing before a group of reporters, he said he wanted to transform TD Securities into one of Canada's top three underwriters by 2010.

The initial reaction, in the banking community at least, was puzzlement. TD Securities had just finished seventh among Canadian dealers in the last underwriting league tables, which measure the value of IPOs and other equity deals a bank brings to the market each year.

Mr. Clark, as it turns out, was making a calculated effort to galvanize his investment bankers. He took over as CEO at the end of 2002, just after TD had reported its first ever annual loss because of billions of dollars worth of bad loans. As Mr. Clark began cleaning up the balance sheet and paring down the investment bank's lending exposure, there was a sense that TD Securities was a firm in retreat -- a sense rivals were only too happy to reinforce with clients when they competed with TD for underwriting assignments.

"We were getting marketed against, it's fair to say, by our competitors, who said 'TD's getting out of the business,' " said TD Securities CEO Robert Dorrance, the man Mr. Clark tapped to lead the dealer, and one of the principal architects of its revival.

"[Our] message was 'We want a domestic franchise that is top three, that will do what it takes to get there, that will be active in credit, that will invest in its people.' But we had such a hard time getting that message out there that I think he used the annual meeting as a platform."

TD Securities has always been a unique case among the Canadian dealers. It is viewed as more Toronto-centric than the rest. It has the reputation of being a specialist in media and communications, and not particularly deep in other fields. It has a smaller network of brokers to help sell stock to investors.

Most importantly, it never bought an independent investment bank, leaving it without the deep pool of deal makers enjoyed by its rivals (although it did buy Newcrest Capital in 2000, grabbing the country's top institutional sales and trading team). As a result, the bank would lend money to important clients, only to see them go elsewhere when it came time for them to buy a competitor or do an equity financing.

"We weren't leading enough deals, and we didn't have enough confidence in bidding on deals," Robbie Pryde, who oversees sales and trading at the firm, explained during an interview in the Diefenbaker Room, one of a series of meeting areas that the bank has named after Canadian prime ministers.

Mr. Clark calls TD's decision to build from scratch "one of the most impactful" the bank has made in its history, and he's been desperately trying to play catch-up.

"I think we had the core content people, but we just weren't out there asking for the business," he said. "I think . . . we had a constructed dealer where the engine wasn't on drive all the time. Like a lot of things in life it just needed some leadership."

After mending TD's balance sheet, Mr. Clark and Mr. Dorrance huddled with other senior investment bankers and executives to develop a strategy for gaining market share. The bank would use its balance sheet aggressively, stepping to the plate with loans to deepen ties with clients. It would jettison its global derivatives business, a move that would result in almost $200-million in charges and losses. It would expand its focus domestically, though, targeting weaknesses like mining and energy and moving into orphaned areas, like early stage companies in the oil sands.

The key, though, was using its real strength -- trading -- to build a reputation with companies and garner information that could be used in pitches by investment bankers. The traders provide a key link to the big institutional investors who gobble up stock sales and approve merger transactions, and TD realized it could sell that expertise.

And all of a sudden, TD started banging on CEOs' doors, asking for business.

"They are pitching us now all the time to get out on the Street with them -- as much as anybody -- and in fact probably even more so," said Keith Carrigan, CEO of BFI Canada Income Fund.

The strategy coalesced on a recent pitch for Air Canada's IPO.

Before the carrier emerged from bankruptcy protection in 2004, the alternative investment group at TD Securities was already preparing a huge file.

The firm had one of the first analysts on the stock, and was a massive trader of the shares. Like other hopefuls, it offered to lend money to the airline, even though the banks had been burned by credit when it tumbled into receivership.

And of course, it didn't hurt that Mr. McKenna was a former director on the board, who could help arrange a meeting with Robert Milton, the head of Air Canada's parent company.

It took two years of groundwork and shoe leather, but it paid off last month when the bank was awarded a co-lead spot on the airline's IPO. Mind you, these weren't unmitigated bragging rights: The Air Canada issue has been a bit of a dud, sinking more than 20 per cent from its offering price this week, and some observers believe it was overpriced.

For TD, getting a piece of Air Canada was a case of slowly laying a foundation. But there have been other instances in which TD has nabbed business simply by being more aggressive.

When Coors was running into trouble with its purchase of Molson in late 2004, TD bankers simply jumped on a plane, Frank McKenna-style, to explain their view that the brewer wasn't reading the Canadian investors right. The message: TD knows the market because of its trading operation and could help fix the problem.

"We just flew down to Colorado and said 'You guys are messing this up. Let us explain what we'd be doing,' " Mr. Clark recalled. "And it was so obvious that we understood the marketplace."

Coors was already getting advice from Deutsche Bank AG, but hired TD anyway in October, 2004. Three months later, Coors sweetened the deal by about $640-million. That cemented the support of Molson's biggest shareholder -- Toronto-based AIM Funds Management Inc. -- and paved the way for the transaction to go through.

Doubtless, there is a swagger in TD's step, one that borders on cockiness. TD bankers took a similar flight to London this spring to meet with Anglo-Swiss miner Xstrata PLC in hopes of advising it on its attempted takeover of Falconbridge. The stakes were huge, but TD was no less assertive than it had been with Coors.

"They were not afraid to be contrarian and state a different view, sometimes to the other advisers and sometimes to ourselves," said Marc Gonsalves, head of investor relations at Xstrata. "What we liked about that first meeting in London is that they were really straight up and up-front with us."

It didn't hurt also that most of the competition was already conflicted, working for other players in the huge mining dust-up, and leaving TD as one of the last major Canadian investment banks free to play a role for Xstrata.

When Xstrata finally snagged Falconbridge, TD didn't stop. Instead, the bank tried to horn in on the other major nickel deal -- the fight over Inco Ltd.

TD's traders hatched a plan to finance Teck Cominco Ltd.'s last-ditch attempt at buying Inco with Canada's biggest ever stock sale, an overnight issue that would have raised $5.7-billion. The fact that Teck already had advisers -- BMO Nesbitt Burns and Merrill Lynch -- didn't bother TD a whit.

Would the old TD Securities have pitched such an audacious idea five years ago?

"It would have been tough to do," said Pat Meneley, the firm's head of investment banking. "I just don't think that we were in the position to deliver that kind of solution."

As it turns out, TD wasn't able to deliver for Teck. The failure of the deal inevitably led to questions in the market -- many from competitors, to be sure -- about whether TD's vaunted market intelligence was as good as the firm believed.

Overcoming those concerns -- as well as bulking up its undersized network of investment advisers and finding more relationship bankers to augment Mr. McKenna's work -- is crucial if TD hopes to remain in the third chair of the Canadian investment banking world. That spot has been pretty much a rotation of the banks that aren't named RBC or CIBC.

Mr. Dorrance, perhaps better than anybody, knows its premature to be running victory laps. When he left the newly merged Nesbitt Burns, it had just been crowned the top equity house in the country. Soon after, it had been knocked off.

"We're not sitting here saying 'Oh wow, we're planting the flag, lets go home.' We continue to need to knock on doors," Mr. Dorrance said. "Sometimes these numbers can move around because of fortunate and unfortunate transactions. We really are focused on what does it take to stay in the top three."
RBC Dominion Securities Inc.

2006 2005
Profit $1.4-billion $760-million*
Revenue $4.7-billion $4.1-billion
% profit 30% 23%

RBC, the powerhouse of Canadian investment dealers, rebounded from its Enron charges to produce $1.4-billion in profit -- almost as much as the entire bank made only 10 years ago. The results were driven by exceptionally strong trading results and near record M&A fees, highlighted by its role advising Inco Ltd.

*Includes $591-million charge for Enron litigation. Without that charge, profit would have increased 17%
Scotia Capital Inc.

2006 2005
Profit $1.1-billion $921-million
Revenue $2.4-billion $2.2-billion
% profit 30% 29%

Scotia Capital may not be at the top of the league tables, but the dealer nevertheless had a strong year, raking in more than $1-billion. Stronger lending and derivatives trading, helped by the bank's international footprint, drove the results, as did its purchase of Calgary's Waterous & Co., which gave a sorely needed boost to M&A fees. The performance was hindered somewhat by lower equity activity.
BMO Nesbitt Burns Inc.

2006 2005
Profit $860-million $853-million
Revenue $2.8-billion $2.7-billion
% profit 33% 36%

BMO's investment banking results have barely budged in three years, and are up just 4 per cent since 2004. Part of the reason is that the bank wasn't as badly burned as its rivals by the credit meltdown of a few years ago, and as a result, had less upside for recoveries when the lending climate radically improved. The dealer suffered from a weak fourth quarter, when trading revenues were markedly down.
CIBC World Markets Inc.

2006 2005
Profit/Loss $646-million ($1.7-billion)*
Revenue $2.7-billion $3.4-billion
% profit 26% N/A

CIBC had another strong showing on the M&A and equities front, finishing atop the pack with RBC. Although revenue dipped substantially because of lucrative merchant banking gains last year, the unit continued to benefit from strong underwriting and advisory fees, including its role as an adviser to Falconbridge Ltd.

*Includes $2.5-billion charge CIBC incurred to settle Enron-related lawsuits
TD Securities Inc.

2006 2005
Profit $629-million $422-million
Revenue $2.3-billion $2.0-billion
% profit 14%* 19%

Climbing the league tables helped boost this unit's profitability, as it collected more from underwriting equity business and advising on mergers, including Xstrata PLC. This year also marked the end of a reorganization that saw TD Securities exit some foreign structured-products businesses, which resulted in $129-million in writedowns and losses in 2005.

*On a normalized basis. excluding $1.7-billion gain on deal with Ameritrade Holding, this number would be 20%
National Bank Financial Inc.

2006 2005
Profit $283-million $244-million
Revenue $1.1-billion $980-million
% profit 33% 29%

Strong trading -- a hallmark of National Bank Financial -- combined with securities gains to improve results over last year. However, the smallest of the Big Six brokerages said record M&A activity wasn't enough to offset the impact of fewer equity IPOs, prompted in large part by a slowdown in the income trust sector.

Text & Research: The Globe and Mail, Sinclair Stewart, Boyd Erman, Andrew Willis
Equity Underwriting

Equity league (2006 year-to-Nov. 24)

Rank Underwriter Credit ($million) Market share Number of deals
1 CIBC World Markets $4,502 17.9% 45
2 RBC Dominion Securities 4,052 16.1 39
3 TD Securities 2,976 11.8 40
4 GMP Securities 2,261 9.0 35
5 BMO Nesbitt Burns 2,000 7.9 34
6 Canaccord Capital 1,277 5.1 26
7 Scotia Capital 929 3.7 14
8 Merrill Lynch 864 3.4 6
9 National Bank Financial 767 3.0 14
10 Sprott Securities 613 2.4 22
11 Raymond James 599 2.4 10
12 Blackmont Capital 434 1.7 13
13 Orion Securities 401 1.6 11
14 First Energy Capital 355 1.4 8
15 MGI Securities 283 1.1 3
16 Other 2,877 11.4

Sources: TD Securities & Thomson Financial
Mergers & Acquisitions

M&A league (2006 year-to-Dec. 8)

Rank Financial advisor Value ($million U.S.) Market share Number of deals
1 CIBC World Markets $67,181 25.3% 57
2 UBS Securities 65,210 24.6 27
3 JP Morgan 57,571 21.7 23
4 Morgan Stanley 53,314 20.1 11
5 Deutsche Bank AG 47,895 18.1 11
6 Citigroup 47,829 18.0 15
7 RBC Dominion Securities 45,400 17.1 43
8 Goldman Sachs 43,985 16.6 17
9 Rothschild 37,565 14.2 14
10 TD Securities 33,866 12.8 23
11 HSBC Securities 32,114 12.1 6
12 Scotia Capital 30,134 11.4 35
13 Credit Suisse 29,606 11.2 16
14 Merrill Lynch 28,489 10.7 14
15 Macquarie Bank 28,217 10.6 6

Source: Bloomberg Financial Services
Announced Toronto-Dominion Advisory Deals

2006 year-to-Nov. 24

Announced date Target Acquiror Size ($million U.S.)
May 15, 2006 Falconbridge Ltd. Xstrata PLC $19,040
April 16, 2006 Petrofund Energy Trust Penn West Energy Trust 2,943
March 7, 2006 Aliant Inc. Bell Canada-Wireline operation 1,487
July 12, 2006 CHUM Ltd. Bell Globemedia Inc. 1,449
Sept. 14, 2006 Cambior Inc. Iamgold Corp. 1,233

Sources: TD Securities & Thomson Financial
Toronto-Dominion Book-Run Equity Deals

2006 year-to-Nov. 24

Date Issuer Transaction Size ($million)
Nov. 23 North American Oil Sands Marketed Private $52
Nov. 16 Air Canada IPO 525
Nov. 15 Dundee REIT Bought 150
Nov. 9 Harvest Energy Trust Overnight Combo 638
Nov. 9 Sound Energy Trust Overnight 40

Sources: TD Securities & Thomson Financial