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Saturday, 21 October 2017

Please, sir, can I have some too?

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Anthony Peters, SwissInvest Strategist

WITH THE MOMENTOUS events of a deepening eurozone crisis taking place across the Channel, this columns seems a perfect opportunity to … point out what a miserable bunch syndicate managers are. For once, the complaints about that deservedly maligned sub-species do not come from the point of view of the smaller institutional community (though that still feels like it is being treated like the last leper when it comes to allocations of new issues) but, instead, from the sales desk.

I was in the good old Eurobond market when it was, by definition, a US dollar-denominated beast. London trading desks dealt in dollars and it was this business that brought the likes of Goldman Sachs, Salomon Brothers, Dillon Read and Dean Witter to London. Then there was the Japanese warrant and ex-warrant business, the convertible stuff and, if necessary, one dipped into the arcane world of Deutsche mark or French franc bonds.

The US domestic corporate and mortgage bond markets were strange creatures with tax issues and ones that were dabbled in by very few European investors. Bid/ask spreads were wide, sizes quite small and the living was by and large fairly easy.

Since the late 1980s – Big Bang was 25 years ago – the world has changed beyond recognition. In those days, any deal above US$500m in volume was a “jumbo” and the 10-year US$1bn Canada 9% 2/1996 was a benchmark bond that traded, in London hours at least, with a higher level of liquidity than even the 10-year US Treasury note and was therefore the traders’ preferred hedging tool until New York opened.

New issues were underwritten by one house, some of the bonds were passed on to co-leads, co-managers, managers and so on in ever smaller retention pieces, who then locked-in their fees by flipping their bonds straight back into the first bid in the broker market.

The introduction of the “pot deal” changed all that and with the slackening of the Glass-Steagall Act, dollar-denominated corporate bond underwriting returned to American soil.

Not being entirely stupid, salespeople wonder why they are being sent out to help to fill an underwriting book in which they and their clients will not be considered

THIS IS WHERE the salespeople’s grumble begins. Syndicates make grand announcements of new issues; then salespeople go to work. Messages go out, orders come in; price whispers follow, then price talk and price guidance; the deal is launched, allocations are passed around … and European investors get no bonds.

“New York syndicate decided to ‘favour’ US and Asian investors” is one of the old chestnuts that is wheeled out for the benefit of the poor salespeople who have spent an afternoon soliciting orders for deals in which their clients get either derisory or no allocations at all.

Not being entirely stupid, despite what the syndicate desk might think, salespeople wonder why they are being sent out to help to fill an underwriting book in which they and their clients will not be considered.

As a salesman myself, I once had the privilege of covering Europe’s largest US dollar corporate bond buyer and I can confirm that there were occasions when its new issue order was the only one to be considered when nobody, but nobody, else in Europe had paper allocated to them.

Globalising bond distribution is fine and dandy but why then put the sales desk through the pain of first booking orders and then frustrating the demand? For a while it was common for the London syndicate desk to be given a fixed amount of paper by New York and it would be left to the locals to decide who was to be considered and who not. After all, for the transatlantic cousins it’s darned difficult to distinguish between Swiss Re, Swiss Life and the Swiss Guard.

MY LITTLE SHOP now represents the interests of many smaller investors who are far too insignificant to warrant coverage from the institutional sales desks in the investment banks – salespeople who wasted their time on that kind of business would not survive for long – and who want more love than they will be given by so-called retail desks. They actually have, in many cases, no more of a desire for a relationship with the big firms than the big firms want to have with them.

But does being small necessarily have to mean that one is shut out of the new issue business in general and the dollar business in particular?

I know that there are some who hanker after a more structured world of new issue distribution, not least those working for institutions that keep being told not to puff up their orders and only to register their “real demand” but are never properly considered at allocation time.

However, seeing as the only thing more worrying than a lousy allocation is a full one, the eternal game of puffing and scaling back rumbles on to nobody’s satisfaction.

Obviously, the syndicate desk only has a fixed amount of paper to hand out and with demand pouring out of all orifices – unless the borrower is EFSF – the job is hard. But would it not be a fair proposal that some form of indication be given in advance as to what percentage of a transaction is to be targeted at which geographical region, at which class of investor and that it be left to local syndicate desks to manage their “retention”?

Given what sticklers for regulatory protocol our syndicate friends have become, doesn’t it seem strange that they are still so protective of their opaque and seemingly random allocation free-for-all? How about a spot of that much vaunted transparency there too?

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