It is not unusual for bond transactions to polarise opinions. So it only makes sense for one of the most notable deals in recent years – the €17bn two-tranche trade from the European Union – to do just that.
What is perhaps surprising when it came to this opener for the EU’s SURE social bond programme is that the weight of opinion is clearly on one side – that those involved had got it about right.
And that is despite an extraordinary tightening in the region of 10bp on both tranches thanks to overwhelming demand in the form of a €233bn book. For an SSA deal, it felt remarkably like a tech unicorn IPO.
And yet there was an air of relative harmony about the process all the way through and dissenting voices were few. The market really was navigating uncharted waters, and the consensual response acknowledged that.
The EU will raise at least €87.4bn by the end of next year (if not €100bn) and quite possibly another €800bn in the five years after that. That is a considerable amount by any measure.
There are some who say that these are proto-eurobonds (in the sense of joint and severally liable bonds issued by the eurozone) and should therefore trade much, much tighter – and they have a point. But there are also those who note that the EU is just another supranational, and often more fractious than most, and that the bonds have already tightened too far for what the credit actually is, rather than what it might become – and they might be right too.
But one thing is certain: the EU will have to return time and again over the years. Just what the right pricing is and how the credit is viewed – these things will settle down. They always do. But what had to be avoided from the outset was failure. It was simply not an option – at any cost.
Lasting damage
After five years of slow-burn reputational damage and US$5bn of financial penalties of one sort or another, Goldman Sachs will hope that its US$2.9bn settlement with the US Department of Justice and parallel resolutions with various overseas regulators will finally bring its long 1MDB nightmare to a close.
There may even be some residual smugness in the executive suite that the latest indignities won't make much of a ripple days away from the US presidential election.
It is hard, though, to overstate the harm this tawdry tale has done, and will continue to do, to the most cocksure of Wall Street firms. In an industry where time and focus are the most precious commodities, how many opportunities were wasted while management engaged in years-long, and ultimately futile, stonewalling to deflect blame and avoid meaningful recompense?
For sure, Goldman has avoided a group-level guilty plea that would have crippled its business. But its foot-dragging and hardball tactics only hardened the resolve of regulators. Had the bank been more forthcoming earlier, it is likely that it would have escaped more lightly.
The board's decision to recoup US$174m in compensation from top executives, including the current and previous CEOs, sends the right signal to shareholders, but the bank will need to ensure that this display of accountability does not have a chilling effect on the animal spirits of the firm's dealmakers. And that will be easier said than done.
A vital takeaway from the scandal is that there are no safe havens or obscure parts of the world where bankers can get away with misconduct – the “Wild East”, as Western bankers used to call Asia, is no longer out of sight and therefore out of mind of the bosses in London and New York. Cutting corners in a remote part of South-East Asia gets you in big trouble in places where you have a lot more at stake.
This is a particularly potent lesson at a time when some of the biggest capital market opportunities arise in countries where authoritarian regimes go hand in hand with crony capitalism. The need to steer clear of ethical minefields in those markets while competing against less fastidious local players is an issue not just for Goldman but for the rest of the financial industry.
Time for change
There are new signs that some companies – at least those in the US – are putting action to their words.
Following the killings of George Floyd in Minneapolis and Breonna Taylor in Louisville, which sparked nation-wide protests for racial equality over the summer, companies vowed to do better in their diversity efforts.
PepsiCo, for example, laid out detailed steps for how it would increase its business with Black-owned suppliers and business partners and earlier this month showed how those efforts are impacting the capital markets space.
PepsiCo priced a US$750m three-year bond issue on October 5, which was its first to elevate eight different Black, Hispanic, veteran and women-owned investment firms to the status of active bookrunner.
On Friday, Citigroup announced a social bond offering that will use four D&I firms as active bookrunners.
Allowing these diversity and inclusion firms to serve lead roles on bond transactions provides real financial benefits to these experienced market participants by engaging more diverse investor groups.
But while it is encouraging to see a resurgence in these D&I bonds, they are too few and far between.
Citigroup identified just 14 deals from six companies since 2012 that have included multiple D&I firms as lead bookrunners – five of which were priced this year.
The last time the market saw four of these deals in a year was 2013 – in the aftermath of the killing of Treyvon Martin and the same year the Black Lives Matter organisation was formed.
In the intervening six years just four more D&I bonds made their way to the market.
More companies should follow the example set by PepsiCo and Citigroup to make a concerted effort to include D&I firms in their bond deals consistently – not just as a response to specific events.
As a syndicate banker at one of the D&I firms said: “I hope the moment doesn’t pass and that this is more of an inflection point rather than just a snap reaction to what’s happening around us.”