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Saturday, 16 December 2017

Exploding bids meet blind auctions

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Banks explore ‘exploding’ bids to avoid block blow up.

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Of the US$119.2bn of accelerated trades in EMEA in 2013, about US$22bn was derived from a blind auction, where bankers are given a short period of time, often less than an hour, to guarantee a minimum price for an offering of stock.

Some banks argue that competition under these circumstances results in overly tight bids aimed at ”buying” league table credit by banks playing catch-up, rather than designed for successful distribution. With private equity selldowns and government privatisations likely to feature heavily in this year’s pipeline, few expect to see a contraction in auction-based blocks, despite a number of high profile failures last year.

One measure to improve outcomes in 2014 is the submission of ”exploding bids” in auctions: a bank puts a time limit on the validity of its bid. If the deal has not launched in time, the bid expires.

“Most banks, if not all, would include some kind of deadline on risk bids in an auction. Otherwise it is a put with no expiration,” said the head of syndicate at a US bank. “The success or failure of pricing a block at a tight discount can depend on the time of launch and that is out of your control. The difference between launching at 5pm or 7pm can be very meaningful.”

A senior European ECM banker said the “addressable universe of European fund managers begins to erode from 5pm onwards”. Putting a deadline on a bid installs discipline with the vendor to ensure the timing of launch is reasonable.

“When we’re asked to underwrite a placement, we have a strong preference for launching immediately post-closing or very shortly thereafter,” said Craig Coben, head of EMEA ECM at Bank of America Merrill Lynch. “A late launch can prejudice the execution, resulting in worse pricing. If a vendor organises an auction process, we don’t think it’s unreasonable to ask for a timely response to enable us to launch when investors are reachable at their desks.”

Banks are still happy to provide compelling price guarantees if they can avoid an auction and late night launch. “Our approach is to be extremely proactive and try to bid the seller ahead of an auction,” said Luca Erpici, European head of equity syndication at Jefferies. “We believe we can give them a better price based on our knowledge of the stock and potential buyers and reduce risk that way. We believe risk is about distribution.”

Whether putting more controls on timing will reduce risk and instil more discipline in banks that have, to date, looked to others to restrict their excesses, is questionable. Nonetheless if it can take time out of the equation then it should moderate some losses – even if that does also remove a handy excuse for when things do go wrong. 

Robert Venes

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