Ever heard the shout: “WHAT’S IN THE DOCS!” – Jon Shaw SGDA
I was an Illiquid Credit trader at Barclays. A pre-crisis label for the desk that priced any of the 325,000 bonds outside of the 5,000 market-made by the bank’s flow desks. It could have been an off-the run $250MM US issuer, a €10MM private placement, a structured note, a CLN etc.
When asked for a bid we needed the underlying prospectus – we couldn’t blindly trust the Bloomberg DES page. I’d read the prospectus and structure the data in my head to form an opinion of the contractual terms: covenant strength, calls, puts, makewhole, change of control strike, fallaway covenants, coupon step-ups on rating changes, seniority, form of guarantees etc.
Investment grade paper, let alone high yield or bank capital, see prices materially differentiated after an event by previously overlooked language: Lehman Brothers, Sino-Forest, VW, Co-operative Bank, Puerto Rico, Detroit, BP, Tokyo Electric, AIG. Cue the shout “WHAT’S IN THE DOCS?”.
Trading desk analysts appeared 10-15 years ago to specialise in finding hidden gems or dangers in documentation – now it’s a risk function. Each bank, asset manager and hedge fund reads the same docs to eke out extra information because there’s no central source they wholly trust resulting in non-standardized, duplicated work.
The interesting, important language, at best, often ends up as notes in Excel spreadsheets listed by ISIN rather than in risk systems for the whole firm’s benefit.
Three years ago SGDA was formed to materially improve the accuracy and speed of risk understanding. Our team includes former board members from Markit, Bloomberg, Allen & Overy, LCH.Clearnet, Boston Consulting and credit traders.
It took us three years to ‘structure’ the data of any bond to a greater level of detail than has previously been achieved – identifying all possible terms and storing the information in a standardized method. The variables were diverse: thousands of issuers, 20 major law firms, 50 global banks, various languages, issuing debt at different times in the economic cycle. Each of these variations causes differences in the legal wording – but is stored in a consistent manner in our database. We paid particular attention to high yield covenants.
Any term currently manually searched for in a pile of prospectuses can now be instantly searched and verified. A full understanding of even high yield documentation used to take 1 hour, now it can be done in 4-5 minutes and then instantly compared in a standard way to other bonds. Our quantitative comparison tool shows why there’s a 15bp pickup switching from a GE ’28 to GE’29 when the curve should be 3bps.
There’s about a 130 individual terms in a simple document, and about 750 in more complex ones. Each of those in turn has additional permutations and each having different impacts during events.
Over those three years we read everything (in various languages) from Canadian provinces to Australian High Yield to US municipal issuers to Swiss CoCos.
Our data accrual processes and the Oracle system was what we needed as traders and risk appraisers. From the outset the we sought to solve:
- No opinions or qualitative views – just quantitative facts.
Your job is to decide what to invest in, based on all the facts. That’s not the role of a third party.
- No desire to blindly trust a data provider – instant self-checking to the underlying sentence.
All data fields’ cited sentences can be instantly viewed as highlighted sentences that our London-based analysts read during processing. Darting from the relevant highlighted line on page 34 to another on page 311 is a huge time save.
Our vision is simple: on entering a trade, you should know every possible outcome for a given event.
This detail and understanding has never previously been available. From cleansing your portfolio of any southern European risk (paying agents, all governing laws etc.), creating strong and weak covenant high yield indices, 11 different negative pledge attributes, covered bond LTVs, laxity of cross-acceleration quantum, various Event of Default grace periods, Reg S Category 1 or 2, or preventative corporate actions (knowing the last notification day and methodology for events, such as options).
We have the capability and the data to change the way credit is traded, and reduce market and operational risk.