Sunday, 22 July 2018

On spivs, scumbags and syndication

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Anthony Peters has issues with new issues.

Anthony Peters

Anthony Peters, SwissInvest strategist

While the UK was busily obsessing with Ed Miliboy’s madcap energy pricing policy and stocks in the power sector were being knocked about, the German market had its own big loser in the shape of Deutsche Bank on the back of CEO Anshu Jain’s hint that Q3 earnings in the fixed income space were going to be significantly lower than they had been during the same period last year. Well, I’ll be blowed!

I don’t think it needed a rocket scientist to work out that the significant decline in market activity since the end of Q1 would have to lead to lower profits and since both Jefferies and Citicorp have already ‘fessed up, I’d now expect to see a flood of other houses popping up and warning that all is not good in the garden.

I too must admit that I am spending more time refining my skills at Angry Birds than I am printing business but next to that I am also taking time to chat to old chums on the Street who seem to have time on their hands than they’d like to. One in particular was moaning that all the activity has now concentrated in primary markets and that he is reminded of 2006-2007 when pretty much all activity was being swamped by new issue distribution.

Can it be right that a UK citizen and taxpayer should be denied the right to buy UK government debt at the issue price?

He carried on – and I promise that this is not me beating up on syndicate desks for a change – that it again felt as though smaller accounts were being forgotten again in the syndicate process. He spoke about the depth of the crisis in 2008 when issuers were more than happy to have the risk appetite of lesser punters at their disposal. The little guys were there for them, got decently allocated and largely made a nice living out of being there. Now, he feels, they are being treated as though, in his own words, they were something unpleasant on the sole of a shoe.

I suppose there is an element of truth in this. We too find ourselves involved in the new issue business on behalf of our clients – some fall into the “spivs and scumbags” category of new issue punters, some are decent but small real money investors who are hoping to find that a small corner of that much vaunted “level playing field” might be reserved for them. Such a moment occurred on Tuesday when we filed an order in for the new 2064 index linked Gilt which the UK Debt Management Office had handed out for syndication.

We only asked for £1.5m of a £5bn issue which was as far as I know roughly twice covered. We were allocated no paper; not a penny’s worth.

Allocation angst

Can it be right that a UK citizen and taxpayer should be denied the right to buy UK government debt at the issue price? When I queried the allocation – I must admit to having been more than just mildly miffed – I was told that a) the issue had been oversubscribed and lots of people had not receive bonds and b) when I asked for an explanation from syndicate why I had been zeroed that it was too busy with six other deals to be able to concern itself with my displeasure.

Either the salesman who told me that is innocently wrong – which is quite possible – or I would have to assume that the syndication process for UK government debt it being handled by the people who a concurrently doing a 3 year Renault deal or a 30 year Pru sub? As cynical as I am, I doubt the latter.

I have no problems with government bonds being syndicated – I thought the pure US-style auction process had gone too far. Still, I do believe that there is a need for guidelines to assure that the “level playing field”, which has been created to guarantee that all comers are privy to the same information, includes being able to obtain an allocation, no matter how small, in the paper that they have chosen to subscribe to, and take on risk after receiving and digesting it. Am I truly asking for too much?

Meanwhile, my chum pointed out the BHP Billiton bonds complex which came to market yesterday. Once again, the initial pricing suggested to him was miles away from the formal guidance which was again away from where it priced. The 3 year FRN was initially being rumoured at Libor+50 but finally came at Libor+20, the 5 year fixed was being mooted at T5+95 but came at T5+70, the 10s were suggested at T10+135 and priced at 125 and finally the 30s at T30+150 but came at T30+130.

Loose talk costs lives. The initial numbers upset the entire secondary market in the commodity space as spreads initially got trashed across the sector, only to then snap back in again as the new issue looked to be coming tighter and tighter. To hear a 3 year FRN rumoured at +50 only for it then to be priced at +20?

Sometimes I really do feel like giving up.

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