Wednesday, 19 September 2018

The Record Crack'd

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It’s all very well leaving something on the table – but US$2.66bn? Anthony Peters renews hostilities with syndicate desks

Anthony Peters

Anthony Peters, SwissInvest Strategist

FOR SOME REASON I appear to have a reputation of always being at war with syndicate desks. I think I might have an inkling as to why that is: I am.

Two deals recent deals, that on the face of it didn’t have much in common, should help to explain why. One was the eight-tranche US$49bn record-breaking Verizon Communications deal; the other the mere bagatelle of a €750m seven-year transaction for Conti Gummi, the German tyre-maker.

The connection? Each in their own way were disasters.

The debatable nature of the Conti deal – it priced on September 2 at 99.228 and was being slapped around a point lower before you could say “check the pressure, please” – is pretty evident to most observers. But the story is much the same with the Verizon transaction – it opened in the grey market at something like 35bp tighter than it had been priced.

Before I go any further, I must take my hat off to the bankers at the 11 houses that were involved with Verizon’s syndication for having the guts to even think that they could get away such a staggering mountain of debt in a single transaction.

But one man’s meat is another man’s poison. Verizon shareholders bright enough to “do the math” will be aware that US$49bn issued 35bp too cheaply and for a weighted average life of the entire borrowing (which is 15-1/2 years) will cost them, on a quick and dirty calculation, around US$2.66bn in interest that that they need not necessarily have paid.

YES, I KNOW that this is an extraordinary transaction and one that will quite likely have replaced the Apple bond complex in pole position to be voted Bond of the Year but in its success it again demonstrates an issue that I have been wrestling with for years – namely that syndicate desks, once the machine room of the bond business, have become havens for simple allocators.

There will have been ample high-fiving across the Street, especially with respect to the fees earned (which will be swelling bonus pools), but isn’t it really a story of banks’ collective brains being unable to pitch the correct price on the deal?

Just last week, there was a lovely, plain vanilla US$1bn 10-year issue from South Korea. It was first talked at Treasuries plus 135bp, then at plus 115bp–120bp and was finally priced at plus 115bp. How can it be that a caucus of million-dollar earners can’t get the pricing on an OECD sovereign issuer to within 15% of the correct spread?

IN HIS ARTICLE on former Kidder Peabody and CSFB bond guru (and now Barclays president) Hans-Joerg Rudloff in the special supplement celebrating 2000 editions of IFR, Keith Mullin reminds us of Rudloff’s greatest contribution to the Eurobond market, namely the “bought deal”. Yes, the bought deal. Individual houses bid a fixed price in competition in order to underwrite an entire transaction. Of course, in those days US$150m was a decent deal, US$250m was large and US$500m was a jumbo but, nevertheless, syndicate managers had proper balls and laid them on the line every day. They were playing for money and not for matchsticks.

Syndicate was the machine room of the trading floor where the big risks were taken and where knowing one’s market intimately – that means the detailed thinking of both issuers and investors – was not only essential but the prime purpose of syndicate’s very existence. Bid too high for a mandate and you missed the underwriting, bid too low and you won a loss-making deal.

The madness is that a market is supposed to be where buyers and sellers meet but current rules forbid the two from freely communicating as syndicate desks are caged behind so called Chinese Walls and defined as being “private”. It’s all a bit as though the law permitted you to only speak to your doctor over the phone.

Perhaps we are not too far away from bond markets copying the model of crowd-funding

IN MY VIEW, had the Verizon deal been correctly priced, it would have traded a half a point or maybe even a point better in the aftermarket but to see the 30-year tranche break six big figures up was a public embarrassment. I very much doubt they will be but if I were one of the issuer’s senior executives, I’d have the lead managers’ heads of syndicate in and would be carpeting – rather than congratulating – them.

It might, of course, be that the banks defend themselves by stating that they don’t price transactions, the investment community does. What then, for heaven’s sake, do they get their fees for, if they no longer price deals, as they certainly don’t make proper liquidity-enhancing markets in the bond issues they have led? Perhaps we are not too far away from bond markets copying the model of crowd-funding – put the deal on screen and let the folks underwrite directly themselves.

Remember the old joke about the stuffee? You get the stuff and I keep the fee …. It was funny in the 1980s but has no place in the second decade of the 21st century. Perhaps introspection, rather than hubris, is now called for.

(This story was corrected to reflect the correct maturity and launch of the Conti Gummi bond deal.)

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