Buyside frustrations with European corporate bond
allocations are simply a feature of the excessive demand in a
maturing market. It means regulators’ suggestions
to create a fairer and more structured process are misguided
and will achieve little.
Low interest rates and record issuance levels have lured a wave of
investors to the corporate bond market in the post-crisis
years. Demand is outstripping supply many times over, with up
to 10 times as many orders received pre-crisis.
It’s prompted some investors
– particularly new ones accustomed to prescribed
syndication processes in other asset classes – to
query the extent issuers or underwriters are controlling and
owning order books.
The division of authority changes depending on the
size and experience of the issuer. But issuers are adamant that
even in today’s hypercompetitive market, they have
the ultimate say on who buys their bonds.
"We are pretty clear that we own [the order book],
but we choose to delegate the allocations to the banks," said
Gary Admans, manager of BP debt capital markets, speaking at
the International Capital Markets
Association’s (ICMA) Primary Market Forum this
month. "We don’t have any specific input, but we
do have general guidelines that all our banks know how we
expect the book to be allocated."
- High investor demand
for European corporate bonds has created frustration among
some buyside participants over allocation
- But it’s
temporary and a natural problem in an unbalanced market. It
will only be resolved when it returns to more sustainable
- Newer investors in
particular, who are used to more structured processes in
other capital markets, are querying the extent that issuers
or underwriters control the sales decisions;
- UK and EU
regulators’ suggestions on how to address the
issue through pro-rata, public, auctioned, fully automated or
first-come-first-serve allocations are misguided and are not
expected to work.
Fellow speaker Michael Gower, head of treasury at Rabobank,
has even heavier input into syndications.
"We have always been very diligent to go line-by-line
through every single allocation and approve it," he said. "We
expect banks to help distribute and underwrite. But they cannot
maintain the relationship we have with investors without our
Panellist Ketish Pothalingam, senior vice-president and
portfolio manager at Pimco, agreed that bonds and order books
belong to the borrower/issuer. But he does value the fact that
banks, and as an investor the relationship with banks, are
European and UK authorities are looking to increase
regulatory oversight of allocations. But their suggestions have
received a lukewarm response by the buyside community, as well
as issuers and banks.
Mifid and FEMR
Given they are responsible for obtaining the best
allocations, it’s natural for investors –
both new and experienced – to scrutinise how bonds are
sold, particularly in an unbalanced market. And for some to be
unhappy once in a while.
But ICMA panellists agreed this shouldn’t be
attributed to the process.
Accomodating buyside concerns, authorities are nevertheless
looking at ways to change the process.
The UK’s Fair and Effective Market Review consultation,
launched last month, asks whether auctions or otherwise public
syndication processes would improve the situation and mitigate
The European Securities and Markets Authority’s
(Esma) May consultation on the Markets in Financial
Instruments Directive (Mifid) II considered allocation
issues in the context of conflicts of interest.
Other solutions proposed by these two papers, or other
initiatives over the years, include allocations based on
pro-rata, fully automated processes, or first-come-first-serve.
But a range of market participants agrees that these
"We’ve suggested regulators might require banks
to have an allocation policy – which they do anyway
– rather than mandating prescriptive allocation rules.
As they would risk getting it wrong," said ICMA senior director
Mandated allocation processes overlook the fact that
underwriters receive guidance from issuers on their order
"We expect banks to have good sophisticated polices in place
and an understanding – from the issuer’s
perspective – of what the hierarchy is," said Ewing.
"But beyond that, it is art not a science"
In addition, investors value the human contact with the
syndication desks, and appreciate verbal confirmations. It adds
weight to arguments that the best approach is to ensure all,
particularly newer, investors understand the process by which
allocations are made, so that no one feels unfairly
"We expect banks
to have good sophisticated polices in place…but
beyond that, it is art not a science "
Any investor frustrations are a temporary feature of a
maturing market experiencing high demand. It suggests that
regulation isn’t the solution, and that
participants must simply persevere with best practice. "I think
the big answer will come when the market shifts and demand
moderates to the (more sustainable) pre-crisis relative
levels," said Ewing.
Even without further allocation regulations, the growing
scrutiny on bank conduct means they are paying strict attention
to syndication processes – both as issuers and
"There are a number of questions around the way allocations
are done and executed," said Gower. "So we must be very, very
sure as an issuer that our behaviour is appropriate, and that
we are comfortable with the allocation process."
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