Amid a national conversation about racial justice in the United States, companies are seeking out more diverse investment banking and broker-dealer firms to serve as active bookrunners on their high-grade bond deals.
The active bookrunner status nets participating firms a larger portion of fees and it is rare to find instances where smaller Black, Hispanic, veteran, and women-owned firms are promoted above the largest banks in the world.
In fact, since 2012 just 14 deals from six companies were actively led by multiple diversity & inclusion firms, according to Citigroup, which served as a stabilising lead on 13 of those trades.
Five of those deals have come in the past four months as companies attempt to reckon with the current social climate in a way that promotes more diversity in the often closed-off capital markets space.
"Conversations regarding D&I syndicate structures, particularly in conjunction with ESG and social justice initiatives, are happening with borrowing clients with an incredibly high degree of frequency," said Peter Aherne, Citigroup's head of North America capital markets.
"Helping these firms bolster their credentials in this respect will allow them to participate in more transactions."
The movement is perhaps epitomised by PepsiCo's US$750m three-year bond issue from October 5 that included eight diverse investment firms.
The bookrunners included three Black-owned firms – CastleOak Securities, Loop Capital and Siebert Williams Shank – the latter of which is also women-owned.
Among the other co-managers were women-owned broker-dealer R Seelaus, Hispanic institution Ramirez and three service-disabled veteran firms Academy Securities,Drexel Hamilton and Mischler Financial Group.
"This period of societal unrest over the summer has created an historic moment where everyone across the board is trying to find ways to address inequality and under-represented groups and have a bigger impact," said Jim Brucia, co-head of origination and syndicate at R Seelaus.
Inclusion as an active bookrunner nets these D&I firms anywhere from 15%–20% of the underwriting fees as opposed to a paltry 1% when they are included as co-managers.
It also shows Wall Street D&I firms are capable of executing deals for Fortune 500 companies.
Duke Energy, General Electric, Toyota Motor Credit and Verizon Communications all started using D&I firms actively on their trades in 2012 and 2013, and new companies are starting to take interest.
On Friday, Citigroup, which typically serves as sole lead bookrunner on all of its own deals, invited CastleOak, Loop Capital, Ramirez and another Black-owned firm Blaylock Van to serve as active bookrunners on its four-year non-call three social bond issue that will fund affordable housing projects.
Brucia said R Seelaus was receiving far more unsolicited enquiries this year to do business in the bond market.
It is a similar picture at Siebert Williams Shank, according to Matt Fijko, a managing director at the firm. "We're beginning to see some corporations we haven’t banked before and it's improved our marketing effort," he said.
Not only are these deals promoting a more inclusive market, but also the companies receive tangible execution benefits.
PepsiCo priced the US$750m of three-year bonds at a negative new-issue concession and built a US$3.2bn order book, which was larger than the US$1.9bn order book for its US$750m 10-year offering the same day that was led by Citigroup, JP Morgan and Morgan Stanley.
Borrowers are particularly interested in the small high-quality investors D&I firms can attract, said Ronald Quigley, head of fixed income syndicate at Mischler Financial.
Those strong relationships are in part the result of large banks downsizing sales teams in the decade following the financial crisis, multiple people said.
"There is a lot of real estate that the larger banks are ceding to the smaller broker-dealers, who cover those accounts," Brucia said.
Additionally, the largest investor groups are getting behind D&I bonds and anchoring the deals with large order sizes.
For example, BlackRock committed to increasing its partnerships with Black and Latinx broker-dealers in a press release over the summer.
"We believe that diversifying the companies we partner with to serve our clients helps us to deliver better outcomes," the release stated.
Despite the success of these D&I firms the trades they lead still require at least one bulge bracket investment bank to stabilise the trade, nearly all parties agreed.
In PepsiCo's case that was Citigroup and JP Morgan, which provided resources for allocating books, deep relationships with top-tier investors and, in some instances, capital to underwrite the bonds.
D&I firms have greatly increased their capital over the last decade to better underwrite bonds, and in 2016 they proved they could do a 30-year deal for Duke Energy.
Still, bulge-bracket banks provide a capital backstop when D&I firms are unable to meet the requirements of larger deals.
"These sorts of deals can't be done exclusively with just D&I firms; that's never been done before," one banker said.
Few expect a D&I firm will ever ascend into the top 10 league table rankings, but inclusion on deals from major companies is real progress.
"I don't think it's going to slow down," Fijko said. "There is a real push from corporate America to give our firms the increased experience and increased economics on these transactions and it's very welcome across all our partners."