IFR DCM Roundtable 2018: Roundtable participants

Keith Mullin, KM Capital Markets: Welcome to the 2018 Thomson Reuters IFR Debt Capital Markets roundtable. Bond markets have been buffeted by a number of themes so far in 2018. Fed tightening and US curve-flattening, ECB taper-talk, equity market volatility, credit spread widening, high Libor-OIS spreads, and broader concerns around jobs, growth and inflation are just some of the elements playing into the market right now. How should we interpret all of this in terms of how it impacts deal-making in the primary market, from the perspective of the size of deals that can be done, pricing, deal execution and managing the aftermarket?   Mark Lewellen, Barclays: Thinking about the US specifically, Fed monetary policy has been very well flagged. There are mixed views in terms of how many hikes we will see this year but that’s also been well signalled and I think the Fed has done a pretty good job. We recently did a survey of institutional investors. Views on the number of rate hikes are relatively well balanced. What’s interesting, though, has been the impact on the yield curve, particularly 10-year Treasuries. They seem to be anchored around the 2.8%-2.9% area and there’s been a lot of discussion about whether we would sustainably break through 3%. But in spite of all of that, US credit markets have remained remarkably robust. Supply is down quite considerably but I think that’s more due to issuer reasons, particularly around things like tax reform, capital repatriation and the discussion around the tax deductibility of interest, which are having an impact on the need by US corporates to fund. But institutional investor demand for credit remains very good. You mentioned, Keith, the size of transaction that can be done. CVS was in the market in March with a US$40bn trade that went very well with an order book that was multiple times oversubscribed. General sentiment towards investment-grade credit remains very strong. The picture is a little different for high-yield, which is a bit more susceptible to absolute interest rates and there are retail ETF holdings in high-yield so you tend to see more volatility in terms of inflows and outflows. But generally speaking the US market is undoubtedly more stable and new-issue premiums have remained relatively stable compared to Europe.   Keith Mullin, KM Capital Markets: But we have seen some credit spread volatility in the US.   Henrik Johnsson, Deutsche Bank: 2018 is not 2017. Throughout this year, we’re going to see much more volatility in every asset class. Considering volatility was at an all-time low last year, maybe that’s an obvious statement. What we’ve seen in the primary and secondary markets in the first quarter on both sides of the Atlantic has been very instructive of what’s going to happen. Issuance is way down, as Mark mentioned, but that is based on issuer reasons rather than investor demand and it’s been keeping markets relatively stable. Even though we’ve experienced some equity volatility, the combination of low primary debt issuance and central bank buying – particularly in Europe, but also in Asia – has kept credit spreads surprisingly robust. We were very surprised in January that the market was as good as it was because we thought the disruption we were expecting in 2018 would happen sooner than it has. The reason you’re all of a sudden seeing more widening in credit spreads is because supply has caught up. In the couple of weeks leading up to Easter, you suddenly started seeing more deals, even a few weekly supply records being set so investors’ reduced cash balances became more of a factor, together with the fact that there isn’t much dealer inventory to support the secondary market. As we go forward into 2018, what you’re going to see is days when everything seems fine and issuance flies out the door, and days when navigating the markets will be more challenging. It’s not necessarily US macro; it’s going to be issuance trends, it’s going to be political stuff.   Kei

Keith Mullin, KM Capital Markets: But avoiding those pitfalls is not a trivial point if you lack full visibility going into a trade around how it might be received. In terms of how you assess what you need to do as intermediaries and how to position a deal to make sure it goes well, what are the additional factors that you need to take into account in this MiFID II world that we live in? Mark Lewellen, Barclays: The point has already been made. Notwithstanding the tighter constraints we face due to regulation, we’ve just gone back to the normal way of doing transactions. The 2016, 2017 way of putting waves of transactions into the market, particularly last year, and essentially knowing they were going to go well, has changed. There is a lot more focus on investor marketing, a lot more thought goes into roadshows and on credit positioning. Syndicate desks are having to work for their money and they’re having to think hard about timing and advise issuers in the right way. But that’s really healthy. Everything we’re talking about is really just moving back to normalisation. Keith Mullin, KM Capital Markets: But it’s a more complicated world. Beyond the market changes we’re discussing, it’s a new world out there in as far as there’s much more scrutiny around the allocation process than there used to be. There’s far more scrutiny over the information dissemination process and what constitutes material non-public information, and the credit research world has potentially been turned upside down. Mark Lewellen, Barclays: If I think about the internal processes around issuing a bond compared to how it was five years ago, yes it is more complicated. There is a lot more thought that needs to go into it. There’s a lot more thinking around information dissemination etc and we’re working under the constraints of MiFID II. But again, I think that it is very positive. There was possibly some not great behaviour taking place. That has been stripped out. There is a lot of thought around allocation. There had been a lot of complaints from certain classes of investors who didn’t feel that they were being fairly treated in the allocation process. Now we have transparency around that. It is very helpful. But in terms of the general way that we do transactions in terms of roadshows, marketing, timing around execution, that hasn’t really changed. What’s changed is the internal processes we need to follow to get things done in the right way. Henrik Johnsson, Deutsche Bank: I think the market has actually gotten simpler rather than more complicated. The syndicate black art used to be trying to find investors you knew were long-term holders and maybe giving them preferential access. As activity on the secondary trading side has reduced, what’s happened is that more of these asset classes, maybe with EM and high-yield as outliers, are turning into market-beta asset classes where investors are taking the market risk. We used to be able to intermediate much more collectively as banks because we had more inventory and could smooth out market volatility. We could selectively allocate people we felt were more long term. All those things are more difficult to do as a result of regulation. Investors are basically taking that risk more than we are at the moment. But that makes sense because they have the capital. As we see more political volatility or spreads widening, the real test is going to be whether there are going to be effects. If there is a shock, what happens on the buyside? Do they suddenly get massive withdrawals because ETFs have daily liquidity? That’s more the risk than anything the banks are doing right now. Frederic Zorzi, BNP Paribas: MiFID II is a non-subject for new issues. As Mark said, maybe we have to do more recording but that’s on the bank side; that’s internal organisation. On the external side, for investors, it’s business as usual. Has any issuer been impacted in terms of spread, in terms of volume, because of MiFID? No. P