US Companies Overpaying for Bonds; Banks May Be to Blame – Reuters
March 31, 2016 \ 12 Comments
Full Article: Reuters
“When banks advise corporate clients, the bonds are systemically underpriced,” said Alberto Thomas, a former fixed income derivatives banker at UBS and now a partner at Fideres. “But when they do their own bonds, they seem to know exactly where to price them.”
At first glance, the data makes the conclusion obvious. Corporate clients of banks are suffering at the hands of dealers. Experience suggests the picture is not so clear. Financial institutions are frequent borrowers. The number one priority for any financial institution is to best value credit risk. It must be able to fund cheaper than its corporate clients in order to have a valuable lending business. That’s a bank’s job 101. The competition for corporate DCM mandates is intense, particularly following the new Basel III requirements that have made secondary bond trading a less attractive business line, given the increased… Read more »
I’d also add it would be interesting to see the definition of the post-issuance secondary price. Is it a screen secondary bid mirage valiation in 250K or is it actually where 5MM to 10MM blocks trades? While it affects both financial and corporate issuers equally the reality of the post-issuance rally is likely muted further by the reality of the secondary markets.
For everyone who knows exactly how the new issue process “works” this accusation is not a shock. What is funny is the willful blindness present in the headline “Banks may be to blame”…..Really? Just the banks? Nobody else? If the mispricing of those deals hurts the issuer, than it must help someone. That someone isn’t the banks as much as it is the few major accounts that consistently get the lion’s share of allocations on these new deals. You know, the one’s that tell issuers that standardizing their bonds would save the issuer money, but then rob them in plain… Read more »
For sure Jester the (large) buyside benefits most from this process. However, it could never be the case that there would be no post-issuance rally. The real issue is that most corporates are non-frequent borrowers where the risk of mis-pricing is a failed deal. When you are reliant on that cash for your business a few cents is a price they may be willing to pay. It is the cost of uncertainty, which can only be overcome by cheapness or an existing credit curve. As I say I suspect GE, Verizon etc. issues behave more like financials. I’m rarely a… Read more »
100% agree with you that you can not eliminate the post-issuance rally. People like shiny new things in this market. My point is not that the article focuses on the wrong issue in the market. It is not the pop, it is who gets the bonds. That is a problem for several reasons
This seems a pretty big leap to blame bankers, given all the variables in the new issue market for corporates. My thought line runs similarly to other comments. Non Frequent issuers coming into an OTC market with few comps to look at can make efficient pricing pretty difficult, and the overwhelming priority is to secure the capital. I am not surprised the bank sector shows the least post deal movement. It’s easily the largest sector with plenty of comps and transparency around current pricing. Certainly some of the now enormous buysiders has a hand in some of the more notable… Read more »
“But when they do their own bonds, they seem to know exactly where to price them.” REALLY? Has Fideres done a robust analysis of the quality of the issuer and the frequency with which the particular issuer comes to market? Are they suggesting that the only reason why banks come to market cheaper is because they are manipulating the process? We are approaching a time when there may be technological solutions to assessing market appetite for an issue and the banks will be less critical to the process. This happened in the equity public offering market for facebook and it… Read more »
Not really surprised by this. As noted prior, less frequently traded names have more risk to price correctly and are likely priced cheaper. Bank names have more data points to price, so less pricing risk. At the same time as there are less data points to price less frequent issuers, there is a natural benefit of banks to price these deals cheap. As this arguably puts “guaranteed money” in the coffers of its’ best clients, the bigger issue is the arcane allocation process. Cheaper deals spur more interest and as a result, a more concentrated allocation towards the biggest accounts.… Read more »
You guys/gals are making me laugh defending the banks by arguing how much harder it is to price infrequent issuers so the ‘concession’ must be greater. How hard do you think is was to price Microsoft’s or Apple’s first issuance? One could easily argue that it is the frequent issuers that should be paying a bigger concession as investors are often full in their names and you need to make it attractive to get them to open up more lines or for others to position and work off. One could easily see demand for an infrequent issuer to be very… Read more »
I don’t think it’s necessarily difficult to price these issues. Clearly an AAPL or MSFT first issuance is much different than say, a $100MM low triple B infrequent issuer with some structure. With the latter, there is more pricing risk, though easily remedied. That said, of course banks are playing a game. It’s in their benefit to do so. Buyside firms play games too with large orders vs actual allocations. As you noted, issuers are lying back for other services and am sure “games” are played as well. My issue isn’t so much as how they price deals. Instead it’s… Read more »
I traded off-the-run secondary markets and judging the spread premium for the illiquid was a definite skill, all while in competition. I wasn’t getting paid by anyone so not only do I rarely sympathize with banks but even rarer do I sympathize with syndicate desks! The non-frequent borrowers in primary are a direct analogy for my own experiences.
Cougar, I would agree with you if this were an actual underwriting process like in the old days where if you priced the deal wrong…. But for a long time now pretty much all deals are negotiated. Syndicate desks are order takers just trying to keep as many people (think largest buy side clients as per Mustang) happy as possible so they can still print risk-free money.
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