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Monday, 23 October 2017

Vivendi and its unhappy ending

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SwissInvest strategist Anthony Peters says 15 bookrunners on one deal is just plain madness

Anthony Peters, SwissInvest Strategist

I HATE THE thought of being branded as a creature who is at war with fixed income syndicate desks (aren’t we all, just a wee bit?) but whenever I settle down to review the week, another missile that went rogue springs to mind. This week saw a two-tranche euro-denominated deal for Vivendi at five and seven years, which, following the recent fiasco experienced over the sale of EFSF at five years, demonstrated how syndicate managers can struggle when it comes to handling deals that don’t blow out.

At risk of boring you, the list of joint bookrunners reads like a Who’s Who of the European corporate bond market: Santander, BofA Merrill, BoT, Barclays, BNP, Citigroup, Agricole, Credit Mutuel, Deutsche, HSBC, Lloyds, Mizuho, Natixis, RBS and SocGen.

Have I ever seen anything like this before? Of course not – because it’s complete rubbish. Apart from anything else, how many Big Macs and Cokes can you buy out of the fees when they are split fifteen ways?

I don’t know how this came about but it seems as though it started with “just” five – not a small number for a two-tranche corporate deal at the best of times. Patently, the deal was struggling, as we found out that the final sizing was only €500m on each tranche, which is the minimum required to meet the promised “benchmark” status.

However, what was more scary was that a further 10 joint leads were added when the grey market was already calling the bonds offered-only and it all rather had that feeling of as many dealers as possible being brought into the boat in order to prevent them from being able to trade in the grey themselves.

I never let it be forgotten that the syndicate desk used to be where the big underwriting risk was taken and where pitching a price to an issuer and then standing up to it was de rigeure. In those days, there were 20 or 30 days until payment date on new issues. As a result, most firms had new issue dealers who were part of the syndicate desk, who made the market until the bonds were taken over by the secondary trading desk.

THAT LINK BARELY exists anymore and secondary traders frequently show no loyalty to the deals that their syndicators have just put into the market. So, if you need to stop a house from shorting your deal, ask it into the syndicate, ship out some retention bonds and you might be looking a bit better.

That the Vivendi deal didn’t work too well isn’t a disaster in itself – not all deals do – but there was a sense that those involved weren’t sure what to do. The collective memory of an age before new corporate issues were ripped out of your hands simply because they were there is now pretty thin.

Good bonds are ones that place well and where the leads know where paper is to be found in order to maintain future liquidity

I recall a deal I was once involved in for Deutsche Telekom – it was a broken maturity and priced off a quirk in the credit curve. At the borrower’s request we invited another bank in as a joint-lead, although it had nothing fundamental to do with the transaction. It was a slightly madcap deal that had been my idea and for which I had decent interest.

However, DT wanted a benchmark transaction and so we launched a bond that was too large and that few understood or cared how and why it was priced the way it was. However, the other bank was “in the know” and, so I was later told, its secondary desk started shorting the deal the moment it broke syndicate.

I never found out how much blasted thing had cost us – I’d guess it was as much as the budget of a small African nation – but our uncommitted so-called joint-lead left us sitting high and dry. Charming, although I still take my hat off to my head of syndicate at the time who had the cahoonas to do the trade.

I’M AFRAID THAT the Vivendi transaction looks to me like something of an example of everything that can go wrong going wrong and nobody being prepared to stand up and to admit it. That deal now has a bad aura and, irrespective of how cheap it gets, I’d never touch it.

Good bonds are ones that place well and where the leads know where paper is to be found in order to maintain future liquidity. Fifteen joint leads make for a senseless free-for-all in which nobody has earned enough in fees to justify maintaining liquidity. That bond is dead; it is deceased, it has gone to meet its maker; it is, at best, nailed to the perch.

I can’t imagine that it was the borrower’s treasurer who decided to involve 15 banks, so whoever advised him should be lined up, given one last cigarette and shot.

Trading books are already going flat ahead of year-end and whatever unplaced paper there is left out there sloshing around from the mishap will get cheaper and cheaper. It will be lodged in all kind of places and the leads – all 15 of them – will have no idea where it is. Although this is in many respects the opposite of my own personal DT disaster, I know a bond to steer clear of when I see one; in this case there are actually two.

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